Spain's government has announced sweeping new austerity measures, amid clashes between protesters and police.

Prime Minister Mariano Rajoy says sales tax will rise from 18 to 21 percent, while local authorities will have their budgets slashed. It comes after Spain was yesterday given an extra year to reign in its public debt, to below EU limits.

Further doom and gloom for the people of Europe.

Spanish miners took to the street on Wednesday protesting against cuts in subsidies, just as Prime Minister Mariano Rajoy announced a swathe of new taxes and further austerity measures.

Rajoy hope to to slash 65 billion euros from the budget deficit by 2014 as recession-plagued Spain struggles to meet tough targets agreed with Europe.

He also proposed an increase in VAT and outlined cuts in welfare.

Rabobank's Jane Foley says that European austerity could be the biggest threat to the region's recovery.

Jane Foley, Rabobank Currency Strategist, said, "More austerity will slow down the GDP and of course as long as you slow down GDP, it's more difficult to get your deficit as a percentage -- as a percentage of that GDP - back in order, so certainly there is an awful lot of people in Spain who are going to be reluctant to absorb this and of course it's going to make the political outlook for this government even more rocky as well."

Ireland's Finance Minister said on Tuesday he wanted the ESM to shoulder the cost of his country's bank bailout.

Michael Noonan said he wanted to break the link between taxpayers and bank debt.

Barclays' Will Hobbs says the banking deal agreed by euro zone policymakers won't be enough on its own, though it is a step in the right direction.

Will Hobbs, Barclays Wealth Equity Strategist, said, "Certainly if we get the single bank regulator that they've talked about it would represent a very important regional ceding of power, and a collection of centralised power for the banks and that's really what we need to see I think."

Mario Monti has also gone on record to say Italy might want to tap into the euro zone rescue fund as the country faces increasing market pressure.

Italian and Spanish government debt prices dropped in early trade on Wednesday.

Where the crisis will lurch to next though is anyone's guess.