Magazine article Business Credit

Hot Spots: Spain

Magazine article Business Credit

Hot Spots: Spain

Article excerpt

On January 1 this year, Spain assumed the rotating presidency of the European Union and became the first country to hold the reins under the new Lisbon Treaty, ironically a set of institutional reforms designed to strengthen the bloc's decision-making procedures and - in many ways - to downgrade the role of the rotating president. Odder still, Prime Minister Jose Luis Rodriguez Zapatero's main theme for the six months of Spain's EU leadership is that the European Commission should be granted new powers to police compliance with a new ten-year plan to improve economic competitiveness, known as the "2020 strategy," while his own country will run into serious difficulties trying to comply with the (long-established) so-called Stability and Growth Pact, a fiscal rule book according to which the 16 nations sharing the euro as their common currency (including Spain) are, in theory, subject to financial penalties if they ignore instructions from the Commission to keep their public-sector deficits under a ceiling of 3% of gross domestic product.

In fact, no government has ever been punished according to these guidelines, and policy makers in the European Union are having a devil of a time trying to uphold the credibility of this pact, especially now that virtually all of them are overshooting the deficit limitation to help their economies pull out of recession. This is true, in particular, for Spain, which lost its triple-A credit rating with Standard & Poor's in January last year and has recently had its outlook downgraded to negative from stable because "reducing Spain's sizeable fiscal and economic imbalances require strong policy actions, which have not yet materialized."

Real gross domestic product fell by an estimated 3.5% last year. The result for 2010 will probably also be negative, albeit by a lesser 0.5%-1.0%. And growth, when it returns in 2011, will be tentative and fragile at first. Curiously, any stroll through the streets of Madrid or any other major Spanish city will show that, while the troubled real estate sector is in the doldrums, restaurants are still full and people are still shopping, even in upscale establishments. This jibes with the observation of one noted Spanish economist, who made headlines by stating that "two-thirds of Spanish society has never had it so good."

He is referring to the people with jobs, who are benefitting from stable or higher salaries, falling prices and euro-interest rates at all-time lows, which make mortgage payments exceptionally cheap. The problem lies with the four million people - over 19% of the work force - who have no jobs. Unemployment rose in December to its highest level in more than a decade, dealing a blow to PM Zapatero and his team, who had made job creation the main focus of their economic policy. The number of Spaniards officially listed as unemployed rose by nearly 55,000 in December, to reach 3.92 million, making Spain's jobless rate by far the highest among large Eurozone economies (the average for the bloc is 9.8%). Commenting on the numbers, officials insisted that they showed unemployment growing at a progressively slower pace for the past nine months, but this does not change the facts that one in five breadwinners is idle, that the jobless rate among people younger than 25 is over 40% and that fewer than half of those without jobs are still receiving their contributions-based benefits, which expire after two years. …

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