Why the Economic Outlook for Spain Is Positively Dismal

The country saw its first crisis-linked suicide in late October. And there is little good news to buoy the spirits of everyone else

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Juan Medina / Reuters

Nigerian Robinson Ogunseri Imafidon, a member of the Platform for Mortgage Victims who is awaiting an eviction order, stands under an umbrella outside the Bankia headquarters in Madrid on Oct. 30, 2012

On Oct. 25, Spain’s economic crisis came home to Miguel Angel Domínguez. Owner of a small bookstore in the southern city of Granada, the 53-year-old was due to be evicted from the shop and the apartment connected to it, a place where he had lived and worked for the past 30 years. But just hours before police showed up to turn him out of his home, a brother found Domínguez dead, his body dangling in the patio out back. For Spain, it was the first known case that the crisis had provoked a suicide. Faced with the loss of his home and livelihood, the bookseller apparently believed he had reached rock bottom.

The same cannot be said for Spain as a whole. With every turn of the market and the news cycle, the urgency of the big questions — will Spain take a bailout or won’t it, will the euro as a whole survive or collapse — advances and retreats. But when it comes to how the crisis is being experienced by ordinary Spaniards like Domínguez, the needle moves in only one direction, and that is from bad to worse. The question now is, How much worse can it get?

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Quite a bit, apparently. Released on Oct. 26, new statistics for the third quarter of 2012 put national unemployment at 25.2%, with over 5.7 million members of the workforce out of a job. That’s the highest in Spain’s democratic history. Yet in some regions like Andalucia, the figures were even worse. There, unemployment neared 35%. That dire piece of news was followed by word, three days later, that retail sales in September fell by 10.9% over the previous year. And just this morning the National Institute of Statistics announced that the country’s GDP had fallen by 0.3%, making July-September 2012 the fifth quarter in a row in which the Spanish economy had shrunk. It is perhaps an indication of just how grim things have become that the GDP’s failure to fall an additional 0.1%, as predicted by the Bank of Spain, was greeted as good news.

Certainly for the average Spaniard, the situation continues to worsen. “The problem isn’t just that unemployment keeps growing,” says economist José García-Montalvo, of Barcelona’s Pompeu Fabra University. “But that the cushion that has kept people from going under — having a spouse who works, a pension, unemployment benefits — all those are eroding too.”

Indeed, the number of households in which all adult members who want to work but are unemployed is now at 1.7 million — or 10% of the total. And the erosion mentioned by García-Montalvo is happening while the cost of living rises. Inflation is up by 3.5% over the previous year and an increase in the value-added tax on goods and services, which went into effect on Sept. 1 (and accounts for part of the sharp fall in retail sales), has raised prices on everything from milk to movie tickets anywhere from 2% to 13%. According to the Platform for Mortgage Victims, 159 Spanish households are evicted each day from their homes for failure to meet mortgage or rent payments.

How is anyone surviving? Family support plays a large part, making up for much of what the government’s 400 euros ($520) a month to those who have otherwise exhausted their unemployment benefits cannot. “But by themselves those things are not enough to keep people afloat,” says García-Montalvo. “The rest comes from the underground economy.” One study, published in April by the Tax Research Institute in the U.K., found that 22.5% of Spain’s GDP came from work that was off the books.

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As that percentage grows, fewer and fewer people are paying taxes. “It explains why we don’t have complete social upheaval,” says economist Manuel Angel Martín, president of the economic commission of the Confederation of Businessmen of Andalusia (CEA). “But it’s a vicious cycle. The more people working in the underground economy, the more state debt grows. And if that grows, it means more austerity and fewer resources to jump-start the economy.”

A new law, which goes into effect on Oct. 31 and prohibits cash transactions of more than 2,500 euros ($3,200), is designed to reduce tax evasion. But neither it nor other measures the government has taken so far will be enough to stop the bloodletting. “The government instituted labor reform, making it easier for companies to fire permanent workers,” says Ignacio García Pérez, an economist at the Pablo de Olavide University in Seville. “But it left the biggest problem, which is the temporary contract, as it was.” Noting that companies frequently let employees go just because their contract is up, he argues, “What we most need is a single contract, with the same conditions for everyone. One in which the penalties for firing aren’t as high as they are now for permanent workers, nor as low as they are for temporary ones.”

Others contend that the problem is largely out of the government’s hands. “Overcoming the crisis will only happen because of the private sector,” Martín says. “It’s only business that can solve the growth problem. But for that to occur, businesses have to have access to credit. Right now, even though rescue funds are going to the banks, the banks still aren’t giving credit.”

Whatever the solution, it seems clear that there is still more suffering to come. None of the economists consulted for this story see an end to the downward trend before the summer of 2013, and all believe that real growth will not begin until 2014. “We have at least two or three quarters more where things are going to get worse,” says García Pérez. “Six million unemployed? We’re going to get there easily.”

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