Investors Flee Spain As Economy Spirals Downward
The news keeps getting worse for Spain. This week came word that the country has fallen back into recession. Meanwhile, Spain's unemployment rate is the highest in Europe. Investors are once again fleeing the country and interest rates on government debt are climbing.
The numbers coming out of Spain these days are stark. The economy contracted at a 0.3 percent rate during the first part of this year. Housing prices are down 21 percent from their peak, and unemployment is nearly 25 percent.
"There's no doubt that from an objective labor market point of view, it's a disaster," says Jacob Kirkegaard, a research fellow at the Peterson Institute for International Economics. "This was simply the levels that we had at the bottom of the Great Depression in the 1930s."
Spain's economy has fallen further and faster than any European country but Ireland's.
In the mid-2000s, armies of British and Dutch people flooded into the country to buy property, and Spain experienced a massive property bubble. Countless Spaniards found jobs building and selling condos. Now the bubble has popped and Spain is having to rebuild its economy. Juan Rubio-Ramirez, professor of economics at Duke University, says Spain has long had a competitiveness problem.
"But the problem is that we are not selling anything that the world is interested in," he says. "For a while we're building these houses that the people were interested in buying. But the world is not interested in those anymore."
The Spanish government has taken steps it says will make businesses more competitive. It ended nationwide collective bargaining, and it made it easier for companies to fire people. Whatever the long-term benefits of that move, in the short term, it's only made the unemployment problem worse.
As the economy shrinks, so too do government revenues. And investors are growing worried about the country's ability to pay its debts. Rubio-Ramirez says part of the problem is the decentralized Spanish government. He says Madrid collects taxes and funnels revenue to regional governments, which get to spend it.
"These guys more or less have total freedom to spend whatever they want," Rubio-Ramirez says. "They don't pay the political cost of taxing for those things."
He says this has complicated efforts to control spending. Spain has lower debt levels than many countries including the United States. But investors have grown more skeptical that Spain can pay off the debts it does have.
'A Fair Amount Of Denial'
There are also fears that Madrid will have to bail out the country's banks. Kirkegaard says many are still loaded with bad real estate loans.
"They have not been willing to engage or act forcefully enough on this issue," he says. "There has been a fair amount of denial going on here."
As investors have fled, interest rates have risen and the cost of borrowing has gone up. Madrid has also agreed to spending cuts but it recently said it would have trouble implementing them. That caused interest rates to spike.
But not everyone is so pessimistic. Nicolaus Heinen, an economist at Deutsche Bank, says Spain has made some important reforms that will benefit the country in the long run.
"Spain has to reach a balance between austerity measures on the one hand and growth-oriented policies on the other hand," he says. "Spain is in a good way but some investors have not realized that and they are still skeptical."
Spain is trying hard to address that skepticism and assure investors it can pay its debts. But the road ahead is long, and no one doubts that the next few months will be challenging ones.
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