Castilian Crisis Bleak Economic Outlook for Spain

The collapse in housing and construction has combined with the global financial crisis to create one of Spain's worst periods in decades.

By Manuel Baigorri

After riding high on decade-long construction boom, the global financial crisis is hitting the Spanish economy hard.

After riding high on decade-long construction boom, the global financial crisis is hitting the Spanish economy hard.

When Romanian-born Ion Lacureanu migrated to Spain five years ago, he found himself in one the fastest-growing countries in the European Union. Spain's booming job market and average annual economic growth of 3 percent were the envy of the region. Soon the 38-year-old Lacureanu was flourishing as a self-employed construction worker in Valladolid, a city of 320,000. He earned €2,200 ($2,975) a month and had so much work he had to hire other workers to help him out.

He doesn't have to hire anyone anymore. "For the past six months I've just worked three or four days a month, and I've earned no more than [$473]," says Lacureanu. "There is almost no work."

Spain's decade-long construction boom began to run out of steam last year, and now the global financial crisis is drying up the international funding that financed the country's huge infrastructure investments. Antonio Argandoña, professor of economics at Barcelona's IESE business school, says the construction industry, which spurred gross domestic product growth in the last decade, is going to stall for the next five to seven years. That in turn will spark unemployment and drag down investment and consumer spending.

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Loss of EU Subsidies

Making matters worse, the European Union also has cut back on its financial support for Spain, since the EU now has to shift subsidies to newer members in Eastern Europe. "We are in danger of a general economic collapse," says Argandoña. "We'll see negative growth within this year…This is a long and deep crisis." During the second quarter of 2008, Spain's GDP increased just 1.8 percent from the same period a year earlier, the lowest growth rate in more than a decade. The International Monetary Fund now forecasts GDP growth this year of just 1.4 percent, and a 2 percent decline in 2009.

The collapse in housing and construction has mingled with the global financial crisis to create one of Spain's worst periods in decades. The Ibex 35, the benchmark index of the Madrid stock market, is down more than 38 percent since January. Although Spanish commercial banks have less exposure to toxic loans than other countries, on Oct. 13 Spanish Prime Minister Jose Luís Rodríguez Zapatero drafted a $136 billion plan to help Spain's banks amid the global financial crisis. Until now, they have largely fared better than rivals in some other European countries, especially surging Santander, which has moved quickly in recent weeks to snap up weaker banks in Britain and the U.S.

Earlier this month, the government approved a $41 billion fund -- which may be extended to $68 billion -- to buy high-quality assets from banks, and raised bank deposit insurance from €20,000 to €100,000 in order to boost confidence.

These bold actions, though, may not be enough to stave off a deep downturn. The IMF recently forecast that Spain will enter a recession in 2009 -- its first since 1993 -- and said it "will be harder-hit than other European countries." The Spanish government's National Institute of Employment has already revealed that unemployment rate reached 11.3 percent in September, the highest level since 1997. The country probably will have more than 3 million people out of work by the middle of next year, and "we'll continue to be the top European country in terms of unemployment," says Rafael Pampillón, professor of economic environment and analysis of countries at Madrid's Instituto de Empresa business school. "Until the market buys all the houses [that have been built] -- and this will take two or three years -- employment won't grow again."

Hurting Everywhere

The housing bust already is spilling over to other industries such as furniture and home appliances, says Argandoña. Elías Muñoz, 55, owner of a small furniture store in Granollers, a city 20 miles north of Barcelona, says furniture sales in Spain have dwindled because of the crisis and the "huge lack of confidence." Thanks to business generated from his Web site, Muñoz has so far been able to offset the weakness in demand.

Other industrial and service sectors also are feeling the pinch. September sales of new cars declined more than 30 percent from the same month a year ago. Seat, a Spanish unit of Germany's Volkswagen, and other major automakers including General Motors and Ford are struggling to avoid layoffs in Spain.

Hotels and restaurants are being hit by lower consumer confidence and slackening tourism. Manuel Díaz-Obregón, 33, director of the Don Fadrique restaurant in downtown Seville, sees the recession at work every day. "About a year ago we used to serve 40 lunches a day, and now we serve just 30 or so," he says. "People think twice before ordering and look more at the price."

Shuttered Factories

The textile industry, too, has been widely affected. Already under enormous competitive pressure from Asia and Eastern Europe (the industry lost 61,000 jobs between 2003 and 2007), it may now see further losses due to Spain's domestic downturn. Case in point: Unión General de Trabajadores, a major Spanish trade union, announced on Oct. 8 that textile company Grupo Sáez Merino, owner of Spanish brand icons such as Lois Jeans, is about to shut its operations down and lay off its 350 employees. An employee who declined to be identified said, "The company is closing down, and nobody is allowed to give any kind of information about it."

Like immmigrant Ion Lacureanu, hundreds of thousands of Spanish baby boomers are now on the brink of losing their jobs. "Things have turned out pretty bad. I don't know how this is going to be fixed," Lacureanu says. Pampillón argues that greater liberalization of labor markets would give companies more incentives to hire people, while further privatizations of state companies could bolster growth. But "the solution is not easy," he adds. "The crisis will continue."


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