As predicted here,  the Spanish socialists lost badly in yesterday's regional elections. While the loss was expected, the over 10% margin exceeded the Socialists worst expectations. As opposed to the previous regional elections where they lost by 150,000 votes altogether, this time they trailed the Popular Party by 2 million votes. Cities and regions that they had held unbrokenly since Spain restored electoral democracy in 1978 fell to the opposition.

Another embarrassment for the government was the surprisingly strong showing in the Basque country by the Bildu (Basque for to gather) Party that has a separatist agenda and which some observers view as a political front for the ETA terror organization. In many localities in the Basque region the party came in 2nd to the more moderate Basque National party, pushing the socialists into 3rd place.

As opposed to the Popular Party the Spanish Socialists have been more favorable towards regional autonomy but now they are vulnerable to charges of strengthening separatism.

Obviously politics is a volatile thing and 2 weeks ago everybody was confident that Dominique Strauss Kahn would be the next president of France. till a hotel room encounter totally altered the dynamics of the French presidential race. Disregarding this shock scenario, there is little prospect for the Socialists to get back into the game before national elections next March. The size of the loss may convince the Socialist party to last pressure Prime Minister Jose Luis Rodriguez Zapatero to resign instead of waiting for the end of his term, thus allowing a new face to engage voters.

The uncertainty over the Spanish political leadership together with the downgrading of Italy's credit rating caused economic jitters in the euro zone. The cost of insuring Spanish debt increased sharply because investors fear that given the voters' rejection of austerity measures, the Socialists, in the run-up to the national elections may loosen the reins thus aggravating Spain's economic predicament. While the bailouts for Portugal Ireland and Greece were painful but seemingly manageable a similar crisis affecting Spain or Italy would be cataclysmic.

There was talk of the euro declining to parity with the dollar to improve European competitiveness. If that happens in we would be dealing with a sharp decline of roughly a third in the value of the European currency. If the worst fears are realized, the very existence of the euro is in jeopardy.