Tuesday, 15 February 2011

FEATURE: The spanish economic hangover

Source: Reuters

August 27th, 2010. Sergio wakes up. He feels tired. As an editor and technical director, he has been working in the design of the new show that the TV channel where he works will offer from September. But he also feels worried. Yesterday night he received a phone call. The director of the TV wanted to meet all the workers the day after. Today. In the last months the TV has been struggling to survive the economic crisis. Up to ten workers have been fired. Wages have been reduced.

Sergio arrives. All his colleagues are already there. He can see their worrying faces. Juan, the Director, comes with another guy. He must be one of these important persons who take serious decisions. Juan starts speaking. He stops. He struggles to continue. "The owners just decided to close this TV. It was the only way to balance the accounts. We are all sacked. All of us".

EU figures show that Spain is currently the Eurozone's fourth biggest economy. According to the Spanish Statistics Institute, its unemployment rate peaked at 20% during this year, the highest rate among all the European Union states. Its national debt rose to 64,4% of its GDP at the end of this year and its Public Sector has a debt of over a 50% of the GDP , according to the Spanish Savings Banks' Association. Three years after the advent of the economic crisis, Spain's economy hasn't found the way to recovery.

"The forecast for our budget deficit is 10%. We have an unemployment rate of 20%. Our pension system is bankrupt. We can't have our own monetary policy. We have almost 3 million civil servants and 17 different public administrations. Our building industry is collapsing and tourism is in its lowest peak. The Spanish economy is going wrong, without initiatives, with dreadful perspectives and without a stable structure" , says Carlos Sánchez-Cutillas, Spanish economist and member of the Valencia School of Economists.

Sergio is just one of the 4 million Spaniards that can't find a job in their own country. Whereas the rest of the Eurozone slowly starts growing up again, Spain is unable to overcome the crisis. Is one of these peripheral countries which have been badly hit by the financial crisis. But why does the situation in Spain remain so severe?

"We are in a bad situation because we don't have a proper industrial structure. We never stimulated investigation and development... What happened is that when we joined the European Union in 1986 we found a rich Europe which was keen to fund our development, because they needed new markets. They gave us millions of pesetas before and euros later to stimulate our industry, our services, to build roads... But now these funds are over, and Spain has wasted these 25 years of free money" , explains Sánchez-Cutillas.

Source: Seeking Alpha / Instituto de Crédito Oficial

Carlos Alfonso, Income Tax Inspector at the Spanish Ministry of Economy, points out that the building industry was one of the engines which boosted Spanish economy. "Spain relied an important part of its economic growth on a speculative sector. Any normal income generated in Spain by an economic activity was taxed by a 45%. But benefits derived from buying and selling flats were taxed by an 18%. That created a huge speculative activity. For example if I earned €1.000.000 in my job, I had to pay €450.000, whereas if I bought five flats and then sold them for €1.000.000 each, I would only have to pay €180.000 per flat, making fast money" , says Alfonso.

Property prices have fallen 22.5% since 2007, and 1.4 million homes remain unsold, according to Seeking Alpha . Tourism, the other economic sector in which Spain based its growth, was badly hit during the crisis. Although Spain is one of the leading touristic destinations in the world, Spanish and foreign tourists started cutting their spendings and saving money by not going on holiday. For over 4 million Spaniards -a 20% of the whole Spanish workforce and a 40% of young people, according to Seeking Alpha - holiday trips are a luxury they simply cannot afford right now because they are unemployed. Like Sergio.

"It is not coincidence that charity institutions such as Casa de la Caridad or Cáritas have registered a vast increment of people who come to these institutions in search of aid. Families that a few years ago didn't need any help are queueing at the entrance of these institutions asking for food" , states Spanish Sociologist Óscar García. However, García warns that we shouldn't only blame on politics or economists: "Many people preferred closing their eyes and believing that everything was going well, that the Spanish economy was rising very fast. Then they decided that they would ask for a loan and go on holidays to an exotic destination, or they bought a fancy car while they actually were paying mortgages they couldn't assume" .

Spaniards look forward to the future. The Government's forecast for 2011 shows a tiny recovery, with an economic growth of 1,3% for the first time in the last three years. But the European Commission lowered this forecast to 0,7% in 2011 and 1,7% in 2012; and also forecasted an increment in the unemployment rate, which will reach 20,2% in 2011 before lowering to 9,2% the following year, showing that Spanish Prime Minister Zapatero will have to work harder on the matter.

The Government has just launched a special package of measures in order to cut spendings and boost the economy, such as ending the monthly €426 wage for unemployed people and selling parts of public-owned companies and institutions -airports, national lottery...- but they will prove insufficient, experts say. Spanish public spending reached €350,213 millions in 2010, 20,317 more than in 2009 and 35,691 more than in 2008, according to the Ministry of Economy and Finance.

Source: Seeking Alpha / Instituto de Crédito Oficial

"The Spanish government has been giving public aids and funding to everybody, has increased the public spendings without taking into account the principles of efficiency and economy that should be regarded in every important decision. Because of this, the Public Debt has reached a peak of 9,2% in 2010, which will lead to an increment of taxes and cuts" , explains Alfonso Pérez-Pretel, Spanish economist and President of Iberaudit auditing association.

The current situation of some EU peripheral countries such as Greece, Ireland and Portugal has raised the topic of a possible bailout for Spain. Greece and Ireland had to be saved by the EU. Portugal seems to need a bailout. It is not that clear in the case of Spain. Spanish economy is two times the size of Ireland, Greece and Portugal's economies combined.

"Europe can't save us. Our economy is much bigger than Ireland's, Portugal's and Greece's. But what is rather likely to happen is that the EU will fund our economy, because we are in debt with Italian, German and french banks, and therefore they can't let us die. What Spanish economy needs is a change in the Spanish society", states Sánchez-Cutillas.

"We need a political agreement to restructure the Public Sector, axing those organisms and institutions which aren't strictly necessary. We would avoid duplicities in the different administrations and unnecessary spendings, decreasing our deficit and being able to invest in generation of employment" , says Pérez-Pretel.

November 19th, 2010. Sergio wakes up. He hasn't found anything yet. Anything related to his former job position. He is now open to anything. He has gone to few interviews for a job position as a waiter. He hasn't been selected. He is the face of the economic crisis in Spain. He is just one of the over 4 million Spaniards victims of an economic turmoil which will take years to overcome.

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