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In recent weeks, jittery investors had demanded higher interest rates on Spanish bonds. If Spain had tried to borrow money in the bond market to rescue its banks, investors would have demanded a much higher interest rate than the favorable deal the banks are getting from their euro neighbors. The rising fears come at a time when nearly half the countries that use the euro are in recession. At 11 percent, unemployment in the euro zone is at the highest level since the single currency was introduced in 1999. Europe's weakest countries aren't all alike. Spain and Ireland, like the United States, were crushed by a collapse in the housing market, which left their banks with huge losses on housing loans. The Irish government was forced to slash government spending to pay for a bank rescue. The austerity has pinched the economy; Irish unemployment exceeds 14 percent. Greece ran up vast budget deficits it couldn't sustain and smothered its economy in regulations designed to protect favored industries. Italy and Portugal are desperately in need of economic growth that will provide the tax revenues they need to pay their bills. But deep spending cuts in both countries are threatening their economies. The rising fears come at a time when nearly half the countries that use the euro are in recession. At 11 percent, unemployment in the euro zone is at the highest level since the single currency was introduced in 1999. Europe's weakest countries aren't all alike. Spain and Ireland, like the United States, were crushed by a collapse in the housing market, which left their banks with huge losses on housing loans. The Irish government was forced to slash government spending to pay for a bank rescue. The austerity has pinched the economy; Irish unemployment exceeds 14 percent. Greece ran up vast budget deficits it couldn't sustain and smothered its economy in regulations designed to protect favored industries. Italy and Portugal are desperately in need of economic growth that will provide the tax revenues they need to pay their bills. But deep spending cuts in both countries are threatening their economies. The troubles in Europe also are causing economic problems for the United States and developing countries such as China and Brazil, which rely on Europeans to buy their exports. So the plan unveiled Saturday eases pressure on the United States and the rest of the world economy as well. European economic troubles pinch U.S. businesses. U.S. companies send 22 percent of the goods they export to Europe and have more than $2 trillion invested in factories, offices and businesses there. A bigger fear is that Europe's financial troubles could cross the Atlantic. When banks lose confidence in each other, they refuse to lend each other money. Credit dries up, depriving economies of the fuel they need to grow. A financial crunch can wreck the economies on both sides of the ocean as it did in 2008. "Anything that calms European markets is good for the United States," says Tufts' Drezner. The Spanish deal also gives European policymakers more time to strengthen the euro. They are already planning to create a "banking union" with a centralized regulator, a bailout fund and deposit insurance that covers savers across Europe. Europe still needs to find a way to stimulate economic growth across the continent so that European countries can begin to grow their way out of their debt problems. Despite the bank deal, Spain's grinding economic misery will get worse this year, Prime Minister Mariano Rajoy said Sunday. The conservative prime minister said the economy will shrink by 1.7 percent this year and more Spaniards will lose their jobs, even with the help. "This year is going to be a bad one," Rajoy said.
[Associated
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