High unemployment coupled with dropping prices could prove detrimental to Spain’s economy and related exchange traded fund (ETF).

Businesses and merchants across Spain are cutting retail prices to lure in more buyers, but this has only pushed other merchants to further undercut prices, reports Nelson D. Schwartz for The New York Times.

The rate of unemployment, currently at 15.5%, is expected to reach as high as 20%. Joblessness for those under 25 is at 31.8%, similar to levels during the Great Depression, and it is also the highest among the European Union.

When unemployment rises and consumption falls, businesses will cut prices, but this could lead to a cycle of dropping revenue and further cuts in employees or wages. This scenario is similar to deflationary periods during the Great Depression and more recently in Japan’s lost decade.

Spain was the first country utilizing the euro currency that showed a negative inflation rate. The country no longer has a central bank to fix the situation with domestic monetary tools, and now it is at the mercy of monetary policies set by the European Central Bank.

  • iShares MSCI Spain Index (EWP): down 12.8% year-to-date

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