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The most fascinating economic experiment in ages is now taking place in Spain.

Spain is in deep doo-doo.

A huge property bubble, Brits and Germans and Swedes buying vacation condos on the sunny coast, busted. The Spanish government had not been profligate - it was balancing its budgets and doing all those things conservatives say you should do - but as part of Europe it still paid a price.

The Spanish people and politicians have been resolute. The progressive government cut spending, and cut it some more. The people demanded even deeper cuts, and replaced it with a more conservative government, which has given them what they wanted. More cuts, deeper cuts - tea party heaven.

The result, so far, is another recession, Spain's second in four years, the first having come in the initial burst of borrowing to deal with the housing mess' shortfall of tax receipts. Spain's "regions" (the equivalent of states) are in deeper trouble than the national government. One in four workers is now unemployed - many are sleeping in their cars. The cost of financing all that debt is up over 6%, making payment even more difficult.

Germany's answer to all this misery? You're not piling on enough misery.

As if all this were not enough, Argentina decided this was the week it would become Venezuela. In nationalizing its YPF oil company, it's stealing value from Spain's Repsol (OTCPK:REPYF), which holds 51% of it. Companies that invested in Repsol fell as a result.

Despite some here at Seeking Alpha pounding the table for Spanish ETFs (EWP) they're down 20% in the last two months. The economy will take many years to fix.

Spain's problems are coming home. Spanish defaults will be felt by American banks.

But there's a deeper story here, an inconvenient truth a lot of people are ignoring because it would make them politically uncomfortable.

Austerity does not work.

Wisdom in this case is coming from those Swedish socialists, in the form of finance minister Anders Borg. To survive, Spain needs to grow.

Yes, when you're facing a massive budget deficit, spend. Spend wisely, making investments that will gain a return, on infrastructure, on increasing workers' skill levels. But when the economy is parched let it rain.

Mellonism is killing Spain. Time for some Keynes.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: The Inconvenient Truth About Spain