Choose A or B:

A: Spain is in a recession, which will end. For instance, this story reports: “The OECD on Tuesday predicted more pain for Spain over the next two years when the economy will remain mired in recession with a quarter of the population out of work.”

B: Spain is in a self-cannibalizing downward spiral, as Greece was and is. It will not end until there is, at the bottom, an absolute and total crash.

I choose B, noting that I wrote most of this post a few days ago and already A does not appear to be a serious answer. You add up the required deleveraging, the provincial debts, the shaky state of the banks, the shaky accounting at the banks, the productivity problems, the European-wide political uncertainty, self-defeating fiscal adjustments, the broken real estate lending technology, once-again spiraling yields, broader deflationary pressures, unsatisfactory ngdp performance, the drying up of credit for small and mid-size businesses, disappearance of quality collateral, and the de-europeanisation of the capital markets, and you have B. Oops, I forget to mention the massive proliferation of have-to-pay-them-back-first governmental senior debt claims; why wait in that line?

The fact that you are not used to seeing the credit institutions of an advanced economy unravel before your eyes — “going entropic” — should not blind you to this reality. Nothing new bad has to happen for Spain simply to go “pop,” rather the ticking of the clock will suffice.

Note that a sufficiently large bailout plan, starting with debt forgiveness and reflation, could convert B to A, but right now we are in B.

If you chose A, you think life will be (relatively) easy. I have spoken with numerous intelligent Europeans who believe in A, but because — in my view — they cannot grasp the terribleness of the alternatives, or the magnitude of the error of their previous attachment to the euro, not because they have strong macroeconomic arguments for pending recovery and capital market survival.

If you chose B, there are three more options:

B1: It is a political economy problem. If the Spanish could simply institute the right policies, whatever that might mean, they could convert the destructive spiral into a mere recession.

B2: It is fundamentally a problem of aggregate demand and credit contraction. Without a European-level major bailout and stimulus, Spain will go splat. Yet sufficient stimulus could bring Spain back to its PPF frontier relatively easily.

B3: There is a major problem of aggregate demand and credit contraction, and a political economy problem, and this is paired with multiple equilibria. Investors are judging whether Spain is still a major European economic force, as they had thought for a while, but perhaps had not thought back in 1963. The equilibrium which obtains will depend upon the Spanish response to the crisis, but the best bet is to expect Spain to revert to something, in economic terms, resembling 1999 + Facebook. The institutional quality and level of trust in Spain will receive a semi-permanent downgrade, most of all in the eyes of Spaniards, and it will look very much like an output gap but will not be remediable through traditional macro remedies.

The real euro pessimists are the multiple equilibria people.

Germany and Austria also have multiple equilibria, but those equilibria are not so far apart. For Greece the multiple equilibria are extreme — “Balkans nation,” or “European nation”? Or should I say were extreme?; probably we are down to one of those options at this point.

For Spain, if a truly major bailout does not arrive, the roller coaster ride down will be extreme and terrifying. But still, we must put this in perspective. I was in Spain in 1999 and it was very nice, the large fiction sections of the bookstores most of all, the Basque restaurants too.

I am arriving in Madrid as you read this, perhaps I will have more to say.