Spain announced the results of a stress test of its banks, finding a €60 billion shortfall, in line with estimates.

It’s important to understand that there are two bailouts as it pertains to Spain. The bank bailout, meant to cover this €60 billion shortfall, has already been requested and approved. Europe has reserved around €100 billion for this purpose. The other bailout, a bailout for Spain’s sovereign debt, has not yet been requested, much to the consternation of top European officials.

The EU Commission welcomed the results of the stress tests in a statement, saying that state aid will be determined in the coming months and that banks now need to file recapitalization plans.

The EU went on to say that the banks will be required to either restructure or recapitalize, and that it sees the recapitalization of the first Spanish banks by November [...]

Spanish officials asserted that the scenarios employed in the stress tests are very unlikely to play out – deputy finance minister Fernando Jimenez Latorre said Spain may only need 40 billion euros from the EU to shore up its banks.

Spain may be too optimistic even in its adverse case scenario, actually. So I would err on the side of more, not less, money being needed.

So European officials are generally pleased over the bank bailout terms; now they want to see the conclusion of a sovereign debt bailout. That would be the wrong way to go, according to Paul Krugman. Protesters demonstrated against more austerity in these countries, the eventual result of any bailout, for the right reasons.

Much commentary suggests that the citizens of Spain and Greece are just delaying the inevitable, protesting against sacrifices that must, in fact, be made. But the truth is that the protesters are right. More austerity serves no useful purpose; the truly irrational players here are the allegedly serious politicians and officials demanding ever more pain.

Consider Spain’s woes. What is the real economic problem? Basically, Spain is suffering the hangover from a huge housing bubble, which caused both an economic boom and a period of inflation that left Spanish industry uncompetitive with the rest of Europe. When the bubble burst, Spain was left with the difficult problem of regaining competitiveness, a painful process that will take years. Unless Spain leaves the euro — a step nobody wants to take — it is condemned to years of high unemployment.

But this arguably inevitable suffering is being greatly magnified by harsh spending cuts; and these spending cuts are a case of inflicting pain for the sake of inflicting pain.

Reducing the debt through budget cutbacks only exacerbates the economic situation. And that in turn reduces investor confidence even more than a reduced ability to repay financing would. Employment is the real disease and austerity is no cure.