Wall Street Journal Europe
November 30, 2009
by Irwin Stelzer
Because its housing boom took the economy on an especially giddy ride, the world-wide bust in house prices hit Spain even harder than it did other European countries. Construction investment has declined for eight consecutive quarters to 18% below its peak, according to Bank of America Merrill Lynch—a "deep retrenchment," according to Goldman Sachs.
Unemployment is officially reported as 19.3%, and is headed toward 20%. And likely to prove very difficult to bring down, for several reasons.
First, the Spanish unemployment rate was between 16% and 23% for many years (1984-1998), and hasn't been below 9% for the past 30 years. So "the Spanish population has gotten used to unemployment. Many people have the impression that unemployment is like a Spanish 'pandemic,'" I am told by Jaime García-Legaz, an economist-member of congress and secretary general of former Prime Minister José María Aznar's think tank, Fundación para el Análisis y los Estudios Sociales (+AES). Mr. García-Legaz says this impression is incorrect: during his term in office (1996-2004), Mr. Aznar "brought the unemployment rate from 23% to 11%."
Spaniards' impression that unemployment is a natural condition isn't the only factor in the relatively calm acceptance of a 20% rate. There is also the generous benefits system that for two years pays 80% to 90% of the wages last earned, making the unemployed reluctant to accept almost any job offer. Which compounds the unemployment problem: employers are reluctant to hire people who have been content to be out of work for two years, especially since if they are subsequently laid off the employer has to pay the equivalent of 30-to-45 days' salary for every year worked.
Finally, there is the black economy, providing income for many who are also collecting unemployment benefit. García-Legaz and others with whom I have spoken estimate the output of the black economy comes to between 20% and 25% of GDP.
Adding to the unemployment picture is an equally bleak fiscal situation. Falling tax revenues are combining with an €8 billion public-works stimulus to produce a deficit on the order of 10% of GDP, up from 3.8% in 2008. That has forced prime minister Zapatero to ignore OECD advice that he defer fiscal tightening until 2011, and promise a 2010 austerity budget that includes a 4.5% cut in government spending (€8.6 billion) and tax increases equal to 1.5% of GDP (€15 billion), with the usual sin taxes and an increase in the capital-gains tax the most likely candidates. But unless Mr. Zapatero overcomes his trade-union backers' opposition to labor market reform, which he has shown no inclination to do, continued increases in labor costs will put robust growth beyond his grasp. Some people, the prime minister told the press, "want to deregulate workers' rights, deregulate social rights…. I do not dance to that tune…. Spain is not … going to take a single step back in terms of rights that we have conquered." The OECD is expecting the Spanish economy to decline at an annual rate of 0.3% in 2010, while the euro-zone area as a whole grows at a rate of 2.5%.
But that hasn't damped investor enthusiasm for shares in Spanish companies. Data provided by Goldman Sachs show that so far this year total returns on Spanish shares included in Spain's IBEX 35 exceeded those in the FTSE 100, the Stoxx 600 for euroland, and the S&P 500. This is probably due to the success of leading Spanish companies in offsetting the decline at home with successful expansion.
BBVA, with a strong balance sheet, is expanding banking operations throughout Asia. Telefónica has become the third-largest phone company in the world in terms of customers, and is moving into China, Germany and Brazil. Repsol has made a promising discovery of light oil in the Gulf of Mexico. The Zara fashion brand is achieving world-wide fame. Iberdola Renovables is America's second-largest wind developer, devoting the $2 billion proceeds of a recent bond sale to support its U.S. expansion.
And then there is Banco Santander, the euro zone's biggest bank by market capitalization (€90 billion), its 170,000 employees serving 90,000 customers. With the exception of the unfortunate purchase of Sovereign Bancorp in the Northeast U.S. four years ago, Santander has avoided many of the problems faced by other banks around the world by remaining committed to plain vanilla retail and commercial banking.
The cajas de ahorros, the small regional savings banks, are less fortunate. About a third are in such difficulty that the central bank is arranging their acquisition by stronger institutions.
Spain's rulers hope to cut unemployment and convert their nation from reliance on the cyclical construction industries into a 21st century knowledge-based economy. It will take more than wishes and speeches if Spain is to avoid becoming el enfermo de Europa.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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