News, July '08

News Theme: The Economy

For the past few years Spain has been hitting headlines for above average growth and very high house price inflation. The end has now definitely arrived for the Spanish economic miracle, with Spain among the worst hit nations in Europe. World economic woes are certainly affecting Spain, but it is suffering more due to local matters. Several billion Euros have now been thrown by the government at the problem, but unemployment is heading for 20% by the end of 2009. We offer our view.

Background. Growth has been high in Spain ever since General Franco allowed economic development in the 1960s. In particular, joining the EU was a major boost for the country, with EU structural funds in particular allowing infrastructure to be brought up to -and in some cases overtake- that available in other EU lands. A later baby boom in Spain meant that there was a plentiful supply of strong young workers until the millennium and since then a major influx of immigrants kept the workforce vigorous. The combination of growing disposable incomes and a growing population has meant that construction has been a major force in overall growth for decades and in addition recent low interest rates, due to Euro membership, meant house prices could rise at apparently no extra cost to those buyers taking large mortgages.

In the 1970s Spanish families reckoned they ate 40% of their (single) income. Today the average younger family spends 80% on the mortgage, with two salaries needed to start balancing the books. The overall figure is 47%. Price warning shots had been made long before the US crisis, but economists claimed 'Spain is different', 'this time is different', etc.. Happily, perhaps in the long term, Spain is not now so different! Even with a still growing population, the number of people with no home, but a disposable income has fallen to almost zero, leaving tens of thousands of new flats, not to mention older housing on offer, with no one to buy.

Housing. The last time a crisis of this kind occurred, in the early 1990s, prices did not fall, but simply stagnated for 4 years. This time prices have taken time to react, but now asking prices on the Costas and in many cities have fallen by up to 20%. More may be to come, followed by several years of stagnation. As elsewhere, economists had been warning of overheating/ overpricing in this area, but the lack of finance and fears for jobs have been the determining factors in the fall in demand for new (or second hand) homes.

Unemployment. Many building workers, mostly foreigners, have lost their jobs. Job losses and temporary lay-offs have then begun to hit industry and services. Many, in fact, will soon have come to the end of their six months of unemployment pay, leaving them with little social support except their extended families. Naturally, this will hurt immigrants most and several offers have been made to allow these to return home with a lump sum or, in the case of Romanians, to collect unemployment pay in their home country.

Money measures. The recently elected government, on 18th April 2008 announced a major economic package to jump start a recovery later in the year. Totalling 10,000 million Euros this year and a further 8,000 million next, the headline items are 400€ tax back later in the year, cancellation of wealth tax and free renegotiation of mortgages to extend terms and lower monthly repayments. Other items included more finance for mortgaging subsidised housing for the low paid, additional public works to take on construction workers, tax incentives for rehabilitation of older buildings and fast track VAT returns to companies, as well as more staff in unemployment offices. To help the package, non-residents are invited to invest tax free in government bonds.
The government confirmed these measures during July 2008 and in addition, as the recession was already claiming many jobs, announced a one-off package for unemployed immigrants who might wish to return home rather than stay on - BBC report; BBC video report. The Social Security ran at a loss in 2008 for the first time since the turn of the century.
More measures have been announced since the autumn and running into 2009, with support for the banks and industry. Yet so far only one bank, The CCM savings bank, has needed emergency rescue finance. (See below on the relative health of the banking system.) However, in late June the government made money available for the rescue of any banks and Cajas which might need it, especially to help finance mergers between local savings banks (Cajas) - <Bank rescue plan launched - BBC report, 26 June '09.

In addition to throwing money at firms, much more money has been made available for local councils to take on temporary workers on road improvement schemes and so on. This has created jobs for up to 280,000 but these may well be unemployed again by the autumn (cf separate article).

Read some BBC News web readers' opinions on how things are: here.
The BBC, here, recommends changes in employment law! (29 Jan '09)

The Globe and Mail reports (30 Jan '09) on the background and current statistics.

Construction workers head for the fields 11 Feb '09

Spain tops EU unemployment league 20 Mar '09

For some really gloomy detail about the construction crisis and its effect on the Spanish and indeed Euro area economy, read The Economist's reports:
The pain in Spain, published 22nd April 08.
Or one from 17th April 08.
Counting the Costa, 24th April 08.
SPECIAL REPORT, 6th November '08 (not that we agree with all they have to say!)
18th December 08 report on financial stimulus measures.
22nd January '09 report on the rise in unemployment, as it hits 14%.
'Spain's Strangely resilient Banks - 12th February '09 - just before Santander defaulted on the repayment of a big property mutual fund, locking 43,000 investors in for another two years!

Why is the Spanish banking system (a bit) healthier than most at present?

In the 1980s all was not well with the banking system. José María Ruiz Mateos was a wine trader who set up a holding company, Rumasa, including a number of banks, failing to do full audits on the banks and refusing to permit inspection by the Bank of Spain. The state took over the firm in 1983 and sold off the constituent parts, giving rise to all sorts of conspiracy theories, etc.. The Economy Minister at that time, Miguel Boyer, claims the take-over was to prevent a banking crisis of the sort now being experienced world-wide. The cost to the state was over 3.3 billion Euros.

Then, on Christmas Eve, 1993, Mario Conde, president of Banesto, was deposed by the Bank of Spain, due to an accountancy hole of 450 billion pesetas. This was the last straw, ensuring that from that time on the Bank of Spain has required all banks to hold large sums of money set aside for the rainy day.. which has now come. On the other hand, the unquoted Cajas, or regional government owned Savings Banks, are the prime source of mortgage finance in Spain and the Valencian CAM is particularly exposed to unfinished seaside blocks of flats, waiting on the next influx of ex-pats. The following article may help: Financial Times recommends Spanish Lessons! 1st October '08 And compare with Potential problems at Savings Banks on Oct 5th.

How is the downturn affecting the Evangelicals? Firstly, many of those with the most tenuous jobs are Evangelicals and Muslims. Latin American, West African or Romanian Evangelicals and North African Muslims are employed widely in construction and many of the Spanish speaking women also work in services, such as waiters and chamber maids. The churches, some of which are completely Romanian, Latin or Nigerian, for example, are being especially hard hit as members lose their jobs. Some, indeed, are among the so-called 'paperless' people, with no ID card, social security or other safety net. They are hard hit from the day they are out. Others have time to recover on unemployment pay. But the income of the churches may also decline.

In addition, although perhaps of another grade of concern, the high Euro is hitting not only the support of Anglo-Saxon christian workers in Spain, whose home churches may be facing similar concerns. Also the new wave of Latin missionaries to Spain is finding their support is worth less every month.

For more information on immigration, see the News Theme on this topic.

For the 'raw figures', see our Statistics page.