Spain’s economy has wrested some of the headlines away from Greece, whose political turmoil and fiscal woes has put its future as a member of the Eurozone in doubt. The two countries are among the southern European countries, which include Italy and Portugal, that share not along a Mediterranean climate but also generous social security schemes as well as unemployment. Both Greece and Spain have been faced with indignant citizens taking their grievances to the streets, but it is the latter that appears to be taking effective measures to trim its sails to the wider Europe’s fiscal and financial demands.
Under the government of Prime Minister Mariano Rajoy, of the center-right Popular Party, government spending has been slashed even while taxes have been raised so as to bring Spain’s budget into line with EU targets. In a speech to his party, Rajoy appealed for fiscal responsibility, saying “The first that has to be done…and besides this is a good rule for life …is to not spend what you don’t have. That is what Spain’s government must do, and it is what the local governments must do.”
Spanish politicians are calling for cooperation and austerity on the part of all levels of government so as to reduce spending. Spain, which had seen a real estate boom over the last decade, has experienced a huge labor surplus as workers joined the ranks of the unemployed following the world economic crisis of 2008. Spain has become the center of attention in Europe as it attempts to sort out its fiscal malaise whilst experiencing a sharp downturn in the general economy.
Just as the need for social welfare spending has soared, the Spanish government is being called upon for austerity. Salaries are falling, unemployment is increasing, and the general economy is softening. Mobs of ‘indignados’ – indignant protesters closely resembling the Occupy Movement in the U.S. – have descended time and again at Madrid’s landmark Plaza del Sol to protest against unemployment, austerity, and disagreement with the current government. Appearing on television was the heir to Spain’s throne, Prince Felipe of Asturias, who appealed for “solidarity” between people of all classes and generations, while also saying that what is needed is “jobs.” Unemployment in Spain has climbed to almost 25 percent, while unemployment among the young (ages 18-35) has now surpassed 50 percent.
Spanish households and companies reined in spending in the first three months of the year, causing Spain’s economy to contract 0.3% from the fourth quarter. Spain has the fourth-largest economy in the Eurozone, and retains strong connections to its former colonies in the Americas. Nonetheless, exports decreased (olive oil, for example) after several quarters of strong growth, reflecting the slowdown in Europe. Previously, exports had been a bright spot during Spain’s economic crisis.
Gross domestic product shrank 0.4%, on an annual basis, according to data from Spain’s National Statistics Institute (INE) released on May 17. In the fourth quarter, the gross domestic product dropped 0.3% on a quarterly basis, but rose by 0.3% on an annual basis. This would confirm that the country’s austerity measures are having an ill effect on the economy.
Government spending on goods and services in Spain fell 13% on the year, while the INE declared that administrative outlays were down 5.2%. In the fourth quarter, they had fallen 3.6% on the year. Household consumption fell 0.6% on the year, while gross fixed capital formation—a barometre of business investment --contracted 8.2% on the year. This was the fastest decline in two years. Exports grew at the slowest pace in at least two years. They were up 2.2% on the year in the first quarter. For their part, imports also shrank, contracting 7.2% on the year in the quarter.
Budgets for all of Spain’s Autonomous Communities, except Asturias, were approved on May 17 by the national government. The national Council on Fiscal and Financial policy approved, for example, Andalucía’s proposal for a budget modification of 3.5 billion euros for 2012, which would mean an increase of 1 billion euros in revenue coupled with 2.5 billion in actual cuts. However, Asturias’ proposal was tabled by the end of the 2 ½ hour meeting. Cataluña, awash in debt, has reached a deal with the Madrid government on spending cuts worth 1.5 billion euros this year. Cataluña accounts for 20 percent of Spain’s economy.
Moody’s adjusted its bond ratings for four Spanish regions, including Cataluña. For example, Extremadura dropped from ‘A3’ to ‘Baa1’, and Andalucía dropped from ‘A3’ to ‘Baa2.’ Borrowing costs for Spain soared at a May 17 bond auction, following confirmation of the general recession. The Spanish Treasury is now paying 5.106 percent to holders of its three- and four-year bonds, representing a jump from the 3.374 percent paid previously. London-based observers see this as an unfavorable trend that will continue a ratcheting-up of bond rates if outside intervention is not secured. Prime Minister Rajoy, besides his pleas for austerity, sounded a tocsin by saying that his government may find it difficult to fund itself affordably on the bond market unless the pressure eases.
Finance Minister Cristobal Montoro met with the finance chiefs from all of Spain's 17 Autonomous regions to review their budgets which are crucial in the drive to lower public debt. Most of them widely missed their fiscal targets last year. The European Commission has warned that high debts in the devolved regions - which account for about half of overall public spending - and Spain’s welfare system would prevent the Iberian country from meeting its deficit goal of 5.3 percent of GDP this year.
At the top of Spain’s worries is its banking sector. That industry is saddled with bad loans that emerged from the property boom that went bust in 2008. El Mundo newspaper reported that there was a run on the Bankia bank, with an outflow of more than 1 billion euros ($1.3 billion), which is equivalent to about 1 percent of the lender's retail and corporate deposits, over the past week. As a result, the bank’s stocks closed down 14 percent on May 17, following sharp losses over the past week. The new president of Bankia, felt called to say that account holders should feel “very confident, very secure” as he opined that the bank is “tremendously solid.” Said Jose Ignacio Goirigolzarri, “And it is not only we who are saying so, we who work at Bankia, but it has also been defined and declared by the Bank of Spain and the government.”
According to a report by Reuters, Stuart Gulliver, head of Europe's biggest bank HSBC, said "It's absolutely how the euro zone plays out and whether Greece stays in, and/or whether firewalls are high enough to protect Spain and frankly whether markets take things into their own hands before (Greek elections on) June 17." In Greece, the results of government austerity in the form of increased taxation and decreased public employment have been made patently clear as people have taken to the streets in violent and deadly clashes over the last year. Leftist and Nazi-like parties have come to the fore in the recent parliamentary elections who give voice to voters’ frustrations with measures imposed on the Balkan country from Brussels and Berlin.
The future of Greece in the Eurozone is now questioned, just as Spain’s ability to both decrease its public spending yet increase employment has put it in the hot seat. Should the condition of Spain’s economy become more dire, its polity could also become fractious. And even if Spain can somehow get its act together, the prospect of a hard default by Greece and its departure from the Eurozone may prove to be Spain’s undoing as well. Reuters reported the dim view shared by John Bearman, the chief investment officer at Thomas Miller Investment, which manages $4.8 billion of assets. Said Bearman, "It's not Greece leaving the euro that is the major issue, it's the domino effect."