For Americans, a trip to Spain often entails eating dinner with other Americans – for those who can still afford to travel – at 7:30 or 8 in the evening. Spaniards eat late, snack in the afternoon, and for those who have not been forced into an internationally-based workday, take a very long post-lunch break that can involve an afternoon nap (the infamous siesta). But more internationally recognized business hours have crept into the traditionally slow-paced Spanish lifestyle; the post-Franco Spanish economy stayed well behind the standards of neighboring European nations.
Because of heavy support during the Spanish Civil War from Italy’s Mussolini and Germany’s Hitler, Generalissimo Francisco Franco, the dictator who led Spain from 1939 until his death in 1975, kept Spain “neutral” in World War II, resulting in post-War isolation from the rest of Europe. The economy and the culture stagnated under Franco’s leadership. In 1975, Prince Juan Carlos de Borbón became king and nominal ruler of Spain, but he opted for transitioning his country into a pluralistic democracy. Although the transition hit a few bumps along the way, Juan Carlos instituted a peaceful transition from dictatorship to democracy; a new constitution was ratified in 1978.
Spain was forced to play catch-up as its citizens wanted to accelerate their previously repressed and economically stagnant standard of living into the high-growth universe of neighboring Europe. Blessed with a Mediterranean coastline and a moderate climate, Spain seemed to have a lot going for it, although the ravages of over three and a half decades of oppression were a mountainous challenge to overcome. In 1986, Spain joined its neighbors in the European Union, and when the Euro became available to European states in 1999, Spain happily melded its “still behind the rest of Europe” economy into a world with powerful economic forces like Germany and France (the U.K. opted out of joining in the Euro-based economy but still remained an EU country).
Leverage was the primary tool for growth, and both public and private borrowings were already excessive before the high-debt period that plagued the rest of the Western world in the 1990s. Spaniards were just trying to mimic the lifestyle of their neighbors, making up for lost time. Borrowing was the shortcut, and real estate speculation in this sunny nation became a “road to riches” in the eyes of many. Real estate development exploded. Local lenders funded the excess.
To make matter more complex, the country is very regionalized, and local pride often outweighs national interests. Spain places a very emphasis on relative local autonomy – where regional governments account for 57% of all government spending, and it is very difficult to organize national policies when local governments are not on board: “Federal and regional interests diverge on crucial issues, notably labor legislation, the overhaul of which is seen by economists as essential to reducing unemployment and increasing productivity. For instance, the regions of Andalusia and Extremadura in the southwest apply looser rules on eligibility for unemployment assistance than those in the rest of Spain. That assists the seasonal work forces that underpin their large but fragile farming sector.” New York Times, May 4th.
When the global economy crashed and burned, Spain’s excessive debt load hit this country (along with Portugal, Ireland, Iceland and Greece – other PIIGS nations that borrowed heavily and lagged the rest of Europe’s growth and lifestyle standards) particularly hard; the recession lingers with little sign of abatement. Business and bank failures abound. The national deficit shot upwards; in the first quarter of 2010 alone, the government spent 8% more than it generated in revenues. Unemployment skyrocketed to 20%. And a governmental austerity program aimed at cutting government spending by 2.5% of the GDP next year seems to be too little, too late.
As the central Spanish government struggles to take the increasing numbers of bad banks out of the mix, unable to force obvious and necessary mergers of banks to reconfigure the entire financial sector, the inability of the federal government to take the hard steps necessary to begin a road to stability has become a glaring concern to other EU nations… and has resulted in a downgrade (from AA+ to AA) by Standard & Poor of Spanish government debt instruments. Will this rating be further eroded as the financial mess continues? “Among the reasons for its decision, S.& P. highlighted Spain’s private sector indebtedness of 178 percent of G.D.P. and an inflexible labor market that was likely to leave Spain with a jobless rate of 21 percent this year.” The Times.
Is Spain the next Greece? “Investors and analysts say the lack of progress in tackling the banking issue underscores the Spanish government’s shortcomings in addressing its broader problem: crushing fiscal deficits arising from high unemployment and a persistent recession… Spain risks falling into the same trap as Greece, these investors say, unless it takes more forceful action. It could find itself unable to raise money on the private markets at acceptable interest rates — even though its government debt burden, as a share of the overall economy, is only half what Greece carries… ” The Times.
Clearly, the European Union is going to have to take action – probably with IMF help – but the EU also has to prepare for similar infusions, and parallel austerity programs, for the other PIIGS countries that have not already received support. But exactly what is an austerity program in a country with double-digit unemployment; what sacrifices will be required? Spain has found itself in the middle of an economic bull ring… but right now, Spain is the wounded bull. As Europe reacts to shore up its weaker nations, the Euro is likely to remain weak, perhaps grow even weaker, against the dollar. And that means that U.S. exports to Europe – what the administration hoped might be a boost to our efforts to recover – won’t be the bargain we hoped they’d be... one less source of revenue for our own cash-strapped nation.
Posts
No comments:
Post a Comment