(Reuters) – Belt tightening in the board room and the living room, deep public budget cuts and anaemic bank lending may be setting Spain up for years of economic stagnation that could eventually force it to seek a bailout. Under pressure to chop Spain’s deficit to the European Union limit and stick to new fiscal rules, Prime Minister Mariano Rajoy has promised to present a budget on Friday that will be “very, very austere”. With the economy on the verge of its second recession in three years, soaring unemployment and rising borrowing costs, some economists are predicting a lost decade of growth such as the one experienced by Japan in the 1990s from which it has never fully recovered. Others, including Italian Prime Minister Mario Monti, say Spain could drag the euro zone back into a deep crisis. “We’ve signed a suicide pact in Europe by agreeing that we all need to make cuts,” said Luis Garicano economist at the London School of Economics and head of Spanish think tank Fedea. “Europe has to recognize that this is a downward spiral that’s not helping anyone.” With public debt at almost 70 percent of gross domestic product and one of the highest levels of private debt in the euro zone, Spain has been a focus of investors since Greece first appealed for international help in early 2010. The economy is more than twice the size of Ireland, Greece and Portugal combined, and is seen as too large for the euro zone to let it fail.
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