Spain's Troubled Economy: Why Europe Is Worried
By Lisa Abend / Madrid in “Time”, Tuesday, Feb. 09, 2010
You know
your country's economy is in trouble when the Finance Minister travels to a
foreign country to seek out that dying breed known as the daily-newspaper
editorial staff. That's exactly what Spanish Finance Minister Elena Salgado did
on Monday: she flew to London to speak with the editors of the Financial
Times. As the economic news out of Spain has only worsened in recent weeks,
the British paper has gone so far as to suggest that the country poses serious
risks for the rest of the euro zone. Now the Spanish government has embarked on
a campaign to convince the paper — and the rest of the financial world — that
the worries are unjustified. (See TIME's
coverage of the World Economic Forum: Davos 2010.)
While other
European nations like France and Germany — and even Britain — are beginning to
show signs of economic growth, Spain remains stuck in recession. Results from
the fourth quarter of 2009, which will be released on Thursday, are expected to
show 0.1% contraction in gross domestic product, which would make Spain the
only G-20 country not to have experienced expansion during that period. In
fact, the International Monetary Fund has predicted that Spain will remain
mired in recession until 2011.
Other
recently released statistics are just as grim. In January, unemployment reached
18.8%, the highest level by far in the European Union, where the average is
9.5%. Although still lower than the E.U. average, the debt-to-GDP ratio has
also doubled in the past year, to 55%. "The are significant problems
in Spain," says Fernando Broner, an economist at
the Barcelona-based Center for Research in International Economics. "And
we may find out there are even more corpses buried. We hear a lot about how
Spanish banks were prevented from purchasing American toxic assets. But they've
managed to create their own toxic assets."
Spain's
difficulties stem from its once disproportionately inflated housing and
construction industry, which has been particularly hard hit by the global
economic downturn. When unemployment skyrocketed in the wake of that industry's
collapse, the government responded by spending billions on emergency
job-creation plans. Now it has a deficit of 11.4% to show for its efforts — one
of the highest in the E.U.
Analysts
say that Spain's deficit, coupled with the debt problems in other Mediterranean
countries (Greece, for one, has a deficit of 12.7%), poses a serious threat to
the stability of the E.U. "The euro zone could drift, essentially with a
bifurcation, with a strong center and a weaker periphery," New York
University economist Nouriel Roubini
warned last month at the World Economic Forum in Davos,
Switzerland. Paul Krugman, a Nobel Prize–winning
economist, didn't help matters when he wrote in his blog for the New York Times
on Feb. 2 that "the biggest trouble spot isn't Greece — it's Spain."
Fears about rising deficits in those two countries and Portugal triggered a
drop in European markets at the end of last week; Spain's IBEX fell to its
lowest level in 14 months. The Dow Jones industrial average also closed below
10,000 for the first time in three months on Monday because of concerns about
the debt loads in the three countries. (Read about
Greece's troubled economy.)
But not all
analysts believe that the comparisons with troubled Greece, whose attempts at
budget reform are now being strictly monitored by the E.U., are fair. Broner says there's an important quantitative difference
between the two countries. "Spain would need six or seven years of
deficits to be in the situation Greece is in," he says. And Sara Baliña, a Spanish economics expert at the Madrid-based
consortium International Financial Analysts, notes that although the markets
are punishing both countries for a lack of credibility when it comes to deficit
reduction, Spain is in a better position to right itself. "It wasn't very
long ago that Spain actually had a surplus," she says. "Its savings
rate is still respectable. It's been able to take measures that are proving to
be effective."
That's
exactly what the Spanish government is trying to prove. Last week, it announced
an austerity plan that would raise the retirement age from 65 to 67 and would
cut 50 million euros ($68.5 million) from the budget
by 2013 — enough, it says, to reduce the deficit to an E.U.-mandated 3%. And in
London on Monday, Secretary of State for the Economy Jose Manuel Campa, who traveled with the Finance Minister and held his
own meetings with the media, assured investors that the government was prepared
to make even more cuts if necessary.
But doubts
remain. Although the International Financial Analysts firm has run simulations
showing that the proposed budget cuts are feasible, it sees the government's
projected income as "optimistic." And after years of rigid job
protection, and with unions already threatening strikes, many question whether
the government will have the backbone to enforce the reforms, and whether, on
their own, they will be enough.
"Those
measures are important to prevent a fiscal meltdown, but they're not enough to
get the economy back on track," says Daniel Gros,
director of the Brussels-based Centre for European Policy Research. "If it
wants to do that, Spain is going to need to either cut wages or increase the
workweek. And because of the oversupply of housing, it's going to have to get
used to the fact that its economy could be weak for a very long time."
Read more: http://www.time.com/time/world/article/0,8599,1962142,00.html?xid=rss-topstories#ixzz0gCq1BY9B