Still, the government predicts domestic demand, including spending by public administrations, will shrink 3.1 percent, more than four times the pace of last year. Spain's unemployment rate, the highest in the European Union, increased to 24.6 percent in May. More than half of Spanish youth are jobless.

The International Monetary Fund forecasts output will shrink 1.8 percent this year. Exports, which the government is relying on to spur the economy, dropped in April for the first time since 2009.

Cash-strapped regions and town halls are now stepping up austerity as they seek to cut their deficits in half this year. In Madrid, the price of metro tickets has jumped 29 percent.

Water prices are set to rise for the second time in six months and students will pay more to go to university.

Spain registered its first negative savings rate on record in the first quarter as households' income fell 1.8 percent, the National Statistics Institute said July 4.

Eoin Treacy's view My view – The proposed European banking union can only be viewed as a positive for Spain since it will allow the recapitalisation of the banking sector without increasing the sovereign's debt burden. However, the question is whether it will happen soon enough to ease pressure on the Spanish economy. One of Spain's greatest problems is persistently underestimating the depth of its domestic recession amid the fallout from its burst housing bubble.

Spanish government bond yields on the other hand highlight the inherent problems of a currency union without fiscal cohesion. Absent the ability to borrow at preferential rates or to devalue its currency, yields have returned to the psychological 7% area and hit a new high of more than 575 basis points when spread over Bunds. It is looking increasingly likely that the ESM will need to become an aggressive lender of last resort for Spain. In that eventuality, pressure on yields should ease.