Spain's Battle against the Clock Madrid Is Saving to Save the Euro, But Will It Be Enough?
Spain's economy has hit bottom, with unemployment soaring past 20 percent, as speculators bet the country will require an EU bailout. Prime Minister José Luis Rodriguez Zapatero is undertaking mass austerity measures, and he has been praised for his action by German Chancellor Angela Merkel. The stakes are high: If Spain goes bust, the euro could collapse.
Eva Reina López couldn't have dreamed of a nightmare like this a few years ago. After finishing her college-prep high school degree, the Madrileña moved to northern Spain, where she began working as a welder for a company that assembles towers for wind turbines. A euphoric mood prevailed in the country at the time; prosperity grew and spread to large swaths of society. Prime Minister José Luis Rodríguez Zapatero declared that Spain would surpass Germany's pro capita income within "two, three years."
Today, two or three years later, Reina, 21, is unemployed and living back in the bedroom she grew up in at her widowed father's home in Madrid. What once appeared to be an economic wonder has now become a burst bubble. Growth had been based largely on low interest rates and a construction industry that had flourished to an absurd degree. After the bubble burst during the course of the financial crisis, unemployment swiftly rose from 8 percent to 20 percent.
Spain Would Be One Bailout Too Many for Rescue Fund
The scale of the crisis not only threatens families like Reina's; it is also a danger to the entire European currency union. That's because financial markets continue to speculate that the country will have to seek protection under the umbrella of the euro rescue fund of the European Union and the International Monetary Fund.
The uncertainty had been driving borrowing costs for bonds higher in December, with interest rates at times climbing above 5 percent. On Thursday, Spain had to pay less, but still had to offer a 4 percent interest rate on five-year bonds in order to secure fresh capital for the government on the financial markets.
Greece and Ireland have already been forced to accept aid from other euro-zone countries. Portugal is continuing to reject the support, but it is considered to be the next candidate in line. And what happens then? Will things stop there, or will the euro-crisis contagion spread to Portugal's neighbor on the Iberian Peninsula?
That scenario would be nothing less than a nightmare. Spain's needs would surely surpass the 750 billion ($1.02 trillion) of the rescue fund that has already been set up; and the development could well send the euro crisis spinning entirely out of control. "Everything will stand and fall with Spain," says Christoph Rieger, an analyst with Commerzbank, Germany's second largest private bank.
Against that backdrop, German Chancellor Angela Merkel's visit with Prime Minister Zapatero in Spain on Thursday was a special one. In addition to several government ministers, the German delegation also included Michael Sommer, the head of the influential DGB trade union federation, and representatives of major companies, including engineering multinational Siemens, energy utility RWE and Deutsche Telekom. They traveled there to talk to their Spanish colleagues about how Germany dealt with high unemployment and the economic crisis in the early 2000s, when for years it was not possible to drive down the soaring jobless rate.
Spain's Wild Years
Zapatero could certainly use some good advice. The leader, a member of the center-left Socialist Party, has undertaken painful austerity measures. He is completely restructuring the country's social system as well as forcing the country's savings banks to undertake radical reforms. Despite these efforts, traders in international finance centers remain skeptical about Spain's prospects. Some are simply eschewing all bonds from states on the periphery of the euro zone that have been caught up in the maelstrom of the crisis. "It is hard to make a difference between the countries," says David Scammell, a fund manager for European bonds at the London asset management firm Schroders, which manages an investment portfolio worth more than 200 billion.
But it was actually the introduction of the euro that laid the foundation for the very developments that are now threatening to bring down the entire common currency. Spain entered into the monetary union with a peseta that had been seriously undervalued. Interest rates, which from then on were linked to developments in the entire euro zone, were far too low for the country.
The result was an unbridled construction boom. During the wild years that followed, 800,000 new apartments were built annually in Spain, more than the combined total in Germany, Italy and France. Even simple laborers were in a position to not only purchase their own homes, but even additional ones as gifts for each of their children -- or simply as an investment. Depending on the location, real-estate prices rose by between 150 and 300 percent.
The consequences aren't just to be seen in the concrete jungle of holiday apartments dominating stretches of Spain's Mediterranean coastline. The capital city of Madrid is also skirted with ghost towns of abandoned or half-finished residential complexes that were conceived for tens of thousands of commuters. So far, only a few thousand pioneers have moved in.
- Part 1: Madrid Is Saving to Save the Euro, But Will It Be Enough?
- Part 2: Insane Construction Projects, Bad Loans and Brutal Reforms