MADRID, SPAIN, JUNE 13, 2012: Since I covered the Madrid Indignant Protests eight months ago, Spain has experienced some major changes. In November, 2011, during Spain’s financial upheaval, about four months earlier than anticipated, a general election was held. The ruling Spanish Socialist Workers Party was thrown out and replaced by the more conservative Peoples Party led by Mariano Rajoy who became Prime Minister in December.
Since October the scope and magnitude of Spain’s and its banks’ dire financial condition has come into glaring focus. For months, the banks and the government have been denying that the banks were having financial difficulties. Over time, the credibility of this public posturing became more and more suspect. Finally, the truth came out, Spain has a bank crises. To save its banks, the government has been negotiating with the European Union (EU) for a bailout.
This week, the EU announced that it would provide Spain with a 100 billion euro life line to help recapitalize the ailing Spanish banks. The life line comes with two major conditions: 1) Spain’s economic policies will be receiving more outside scrutiny from the EU thereby losing some of its national independence to set its own budgets and 2) Spain is expected to continue to expand its austerity measures. Ireland and Greece who have also received EU bailouts are looking at Spain’s deal with some envy. Their deals with the EU were for lesser amounts and, from their perspectives, called for more draconian austerity terms. There is a good chance we might see them going back to the EU looking for better terms and/or more funding.
The likelihood of the Spanish government successfully instituting increased austerity measures is very doubtful. Austerity measures are political mine fields in Spain likely to explode into increased social unrest, violent protests and riots. Recently, as part of the government’s austerity drive, it announced it was cutting subsidies to the coal industry. In reaction to this, union coal miners violently protested and mass rallies were staged. Things got so bad that the transportation unions struck in sympathy with the miners resulting in more violence, more injuries and more arrests.
On top of this, it remains to be seen how the bailout will improve the Spanish economy. During the housing boom, Spanish banks made a lot of real estate loans which have turned sour. Unlike the United States banks which have slowly/reluctantly written down their real estate assets and/or unloaded their shaky mortgages for 100% on the dollar to the US taxpayer, the Spanish banks have not been able to do so. They are still carrying their bad loans on their books at unrealistically high valuations.
It doesn’t take a wizard to know that the Spanish real estate bubble has burst. In traveling around the country, in town after town, I have seen construction projects which have come to a halt. New housing complexes and houses are left partially completed. Perfectly good apartment building shells are left with no windows to protect against weather/vandal damage. As in the US, people who are “under water” have stopped paying on their mortgages and are abandoning their properties.
Aside from the real estate crash, it also remains to be seen how the bailout will help the average person. Spain has a “killer” unemployment rate in the 24-26% range. As I reported in October, many companies have been and are still leaving Spain for cheaper labor markets to manufacture their goods. The Spanish economy is contracting so even if the banks have new money to lend who are they going to lend it to?
In walking the streets of Madrid, you can see many young/middle aged people hanging around public areas during the day. At night, I witnessed many unemployed young people socializing in the cafes along the Calle Gran Via and partying to the wee hours of the morning. At least some seem to be having a good time while unemployed. This is not the case for those just trying to get by, raising a family or caring for loved ones.
Spanish unemployment has been so pernicious and long lasting that many of its talented people have given up and are leaving the country. An illustrative case in point is a young Spanish couple I met in Madrid who have one young child and one on the way. Both are professionals with advanced degrees and both were laid off about two years ago. Since then, after a lot of stressful effort, they have been unable to find employment and their financial condition has steadily worsened so they are moving to Sydney, Australia this August. Compared to Spain, they feel that the Australian economy is robust and offers greater opportunity for advancement to those with talent and ambition.
What Spain is going through with its austerity measures is a harbinger for the rest of the PIIGS countries (Portugal, Ireland, Italy, Greece, Spain) and ultimately all of the European Union. Alone, austerity budget policies mean more social unrest, strikes, protests, violence and arrests. To modulate and ameliorate this backlash, what is needed are coordinated policies of gradual austerity and growth where the elimination of illegal behavior/waste/abuse is the first item under austerity and job creation is the first item under growth. Key to the success of this whole process will be the European Central Bank (ECB). With the backing of the EU, the ECB must make it clear that it backs countries like Spain and that it will not permit its economic demise. Once this is made clear to all, then the process of regenerating Spain’s and the European economies will truly have commenced.
