Italy's premier, Mario Monti, fed the concerns last weekend when he told business leaders that Spain "is giving the EU concern because the interest rates have risen, and it doesn't take much to re-create contagion that could spread" to the rest of Europe.
Spain is essentially caught in a vice. Some investors and European leaders question whether Spain is committed enough to fiscal responsibility and will follow through with its commitments to remain a member in good standing in the eurozone.
Others worry that overly hasty cuts in a country that used to one of the continent's top fiscal performers will further batter an economy whose downfall was largely triggered by the collapsing real-estate boom.
The origins of Spain's troubles can be traced to the euro's creation more than a decade ago. The new currency not only brought down interest rates even in countries that had previously been seen as more risky, but also sent billions of euros in outside investments to booming economies like Spain. Spanish companies and families binged on cheap loans, which fueled a real-estate boom that came to dominate the economy.
The global credit crunch of 2008 burst Spain's property bubble, triggering a steady rise in unemployment, and reducing government spending will likely put more people out of work, forcing them to fall behind on their mortgages.
That, in turn, could leave Spain's struggling banks with even bigger bad loan burdens and toxic property assets and push them to seek financial assistance from the state. Some economists fear that further bank bailouts could drive up Spain's debt much faster than a few years of higher government deficits.
Complicating the picture is the political risk of how angry Spaniards will get about rising unemployment — which is already forcing many to seek jobs abroad.
Thursday's general strike will be seen as a key measure of Spanish discontent, and young Spaniards under 25 who face joblessness of nearly 50 percent are expected to turn out in force.
Spain saw an unprecedented outcry last year among young "indignados" ("indignants" in English), and several protests this year over education cuts have turned violent after the groups clashed with police.
The sheer scope of the anticipated cuts and the recent labor reforms are expected to push the unemployment rate beyond 25 percent, putting Spain's economy at risk of sputtering or contracting for an extended period, economists say.
"There is a risk of greater economic depression and a drop in revenue, but it is true that you have to correct public spending and get rid of some inefficient parts, even though that involves layoffs," said Juan Carlos Martinez, an economics professor with Madrid's IE Business School.
Many Spanish companies had been holding off from shedding workers until the labor reforms were passed last month, and will probably soon start letting employees go, said Gayle Allard, an economist who specializes in labor market issues.
Spaniards themselves will probably see their vast social welfare systems cut back hard — especially at the local level, said Antonio Moreno, an economics professor at the University of Navarra.
The regional governments that function like U.S. states control education and health care funding, their biggest expenses. Some regions may follow the lead of northeastern Catalonia, which recently started charging residents part of the cost of prescription medicine.
Spanish governments are prohibited by law from laying off public servants, but schools rely heavily on temporary teachers — some of who have already lost their jobs with many more at risk of being targeted, Moreno said.
While Rajoy said this week federal government ministries will face budget cuts of about 14 percent, Moreno doubted that the prime minister would do away with any of his ministries. However, he said the government could close down underused airports, and a massive freeze on most infrastructure projects is almost guaranteed.