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Spain in the Doldrums

with Alex Fernandez de Castro Krings

Spain’s Current Scenario

AF: Spain’s unemployment rate reached 21.3% in March 2011, according to EPA (Encuesta de Población Activa), i.e. 4.91 million people are without a job. The jobless rate is 45% among the youth. Rigid Labour Laws (firing of employees too expensive, power of working unions too strong) also partially share the blame.

1. Besides, Spain’s accumulated debt as of today stands at 61% of its GDP. Due to this, the Spanish Government will have to pay a heavy interest of 6.7% to any investor buying 10 year bonds (Italy pays 7%).
2. Education is at an alarmingly low level in Spain, especially the indices for reading comprehension, mathematical and scientific aptitude. Drop-out figures among 18 to 24 year-old students are much higher in Spain (30.8%) and Catalunya (34.1%) than in other European Countries. Teaching at Elementary or Secondary Public Schools is not well paid or considered socially prestigious. Parents can hardly help children with their homework after spending long hours at the office.
3. Drug consumption viz., cannabis, cocaine are the highest among European nations.
4. Low fertility rate (1.32 / woman as against the EU population replacement level of 2.1) among Spanish women is making it hard for them to adjust to heavy influx of immigrants. According to the UN, the immigrant population in Spain has grown 304% between 2002 and 2006.
5. Among the Spanish youth, around 51% of them are dependent on parents due to unstable jobs and low salaries.

AF: Apparently not. Mirroring the ‘Occupy Wall Street’ Movement in the US, the 15M movement kicked off in different Spanish cities demanding for ‘Real Democracy’. Some of the others that call for immediate action by the Spaniards are the Government’s below moves:

1. 5% average cut on salaries of Public Servants
2. 6,000 million Euro cut on Public Works
3. 600 million Euro cut on Foreign Aid
4. Yearly increase of Retirement Pensions suspended
5. State allowance for parenthood suspended

Government Spending or Systemic Factors to Blame?

AF: As you pointed out, since most Spaniards seek a living out of the construction sector, employment was worst hit by the housing bubble burst. I would hence say the factors are more systemic. However, regional tension such as the constant battling for an independent nationhood or a new fiscal deal for Catalunya and the Basque are also to blame. A black economy i.e, undeclared income by the affluent class has also contributed to the reduced Government’s tax revenue.

AF: The former Spanish premier, Zapatero announced that the Spanish Government would lower taxes for small and mid-size companies, privatize Barcelona’s and Madrid’s Airports, 30% of National lotteries, and 49% of AENA (leading airport operator). The Spanish Government is trying to restructure and recapitalize savings banks. By early 2011, Spain had spent 15 billion Euros to stabilize its financial system. The number of “Cajas” (savings banks) had already been reduced from 45 to 17 through obligatory mergers. The Spanish Government, main Worker Unions CCOO and UGT, and CEOE (biggest Business Association in Spain) signed an agreement to postpone retirement age from 65 to 67. On August 30th last year, the Spanish Parliament also changed the 1978 Constitution to include debt limitations in order to guarantee budget stability.

Spain in the Pipeline after Greece and Italy?

AF: Though the situation in Spain is not as grim as those of Greece and Italy, Spain’s current issues including its unemployment rate, wage cuts, suspension of pensions, school drop-out figures call for massive Government spending with a view to stimulate its economy. Default hence cannot be ruled out.

AF: It seems unlikely that the EU will be in a position to be able to deal with Spain because the size of Spain in terms of geography and economy is at least six times that of Portugal. Moreover, regional tensions need to be overcome first, otherwise fund allocation to different regions could stall effective implementation programs.

Any Breather At All for Spain?

AF: I believe the below measures would help revive the Spanish economy:

1. Spain should move from a low added value Economy to more investment on R&D.
2. Banks should grant loans to business once again.
3. Smaller companies should be well equipped to compete globally.
4. Spain should improve its education system: it currently has a drop-out figure of 30% amongst less than 16 year old students, more than double the EU average (15%).
5. Low productivity at workplaces need to improve; some factors behind it are our long working hours, part-time, temporary contracts and a slow, expensive and monopolistic access to the internet, abuse of sickness leaves, low R&D.
6. Spanish companies should become more international, with more efforts focused on improving our ability to speak foreign languages. As of now, only 1.6% of our exports reach China.
7. Some of the jobs lost in the past two years should have been diverted to growing industries such as health services for our aging population, green economy, technology and tourism offered to emerging economies (China, India).

AF: Of course the Spanish Government would need to borrow, possibly from the ECB (European Central Bank), to meet the above measures. However more immediate level concerns are overcoming the unemployment problem: part-time employment also should be encouraged. A blessing in disguise for the Government has been the announcement of the terrorist group ETA’s giving up of the use violence for good.

Conclusion

Though Spain doesn’t occupy much of the news columns today, it is likely that if the Government does not act immediately in reviving its economy, default is imminent. Unemployment can be systemically rooted out by reforming the education system and hence job profiles and the types of industries in which to seek employment.

Profile

Mr. Alex Fernandez has been teaching Spanish for Foreigners, Recent Spanish History, Spanish Art and Culture and Japanese Corporate Culture at ESADE Business School since 1999. After a graduation with a degree in law Universitat de Bareclona in 1990, he moved to Tokyo, Japan, where he lived until early 1996. While at Japan, he hosted NHK’s Spanish TV program, and worked as a correspondent for Catalunya Radio and Avui Newspaper. On returning to Barcelona, he pursued an MA to become a certified teacher of Spanish for Foreigners (Universitat de Barcelona, 1998). In 2002, he published his first book, a biography of the Spanish Cult Pop Band Nacha Pop.

• Problems
• Public Disgruntlement

• Is the Government to Blame
• Steps Taken by the Government

• Probability of Default
• Role of the EU

• The Road Ahead
• Funds