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Agustí Bou-Socios, Barcelona

Reinventing Spain

Agustín Bou
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Reinventing Spain

13/12/2012

Àrees de pràctica: Reestructuracions i insolvències

Autors: Agustín Bou

It is absolutely agreed that we are in the middle of a severe crisis of most of the Eurozone Countries, where each of them tries to solve its situation with different measures. Eventhough, in the case of Spain, its crisis has some elements that make it different than the situation suffered by other Eurozone countries and, even its solution, may be more difficult to solve. As to GDP's reduction and high Prime Risk, it has to be added the highest unemployment rates of all EU.

Spain's main economic indicators deteriorated at an accelerated rate during the first half of 2012. The problems in the Finance/Banking sector and the sovereign debt coupled with deteriorating consumer spending rates have negatively influenced the confidence in the economy which, analysts say, will not start recovering until 2014.

Although during 2012 there has been a steady advancement in resolving European governance issues and the restructuring of Spain's financial sector, during Q2 2012 almost all economic indicators have deteriorated at the same rates observed during the previous two quarters:

The Spanish GDP
The Spanish GDP growth rate published by INE shows a contracting economy during the previous four quarters with a -1.3% annual growth rate in Q2 of 2012.

The following chart shows the year on year growth rate of Spain's GDP before and after the August 27th revision of the Spanish National Accounts. The update revised the growth for the year 2011 at three tenths lower, from 0.7% to 0.4% and at two tenths lower for the year 2010.

Regarding the European area, both the European Union as a whole and the Eurozone registered negative quarter-on-quarter growth (-0.2%). Even so, a part of the main European economies presented positive or zero growth, as in the case of Germany (0.3%), Austria and the Netherlands (0.2%) and France (0.0%). Conversely, the United Kingdom and Italy registered negative growth (-0.7%) that was even more intense than in the case of Spain (-0.4%).

Risk Premium
All these financial stress has put under big pressure the Spanish risk premium that has gone from a low of 300 bp in the February to 432bp in October, with an all time high of 639bp at the end of July.

Unemployment
Employment in the economy decreased at a year-on-year rate of 4.6%, one point higher than in the first quarter of 2012, indicating a net reduction of 801.000 full-time jobs in one year. As the labor market keeps deteriorating with the worsening of the economic crisis the Parliament approved on July 6th the Law 3/2012 of Urgent measures for the reform of the labor market.

Reinventing Spain
Spain has suffered one of the strongest revolutions in the developed countries during the last 30 years, with a key starting point with its incorporation to the EU in 1986 and, afterwards, becoming member of the Eurozone. This two elements, had an enormous positive effect in the Spanish economy, but they had also a very negative effect, no one being aware of it, and this was a drastic change in its economic model.

In the early 80's Spanish economic model was based in tourism and industry, and in the less developed regions (placed at the lower rank of the EU regions) an economy based in agriculture, being Spanish labour costs (in Spanish Pesetas) lower than other European countries. Spain was a good place to invest, though its productivity was lower than other places and was suffering also of systemic inflation but this was periodically corrected trough devaluations. Also, the weakness of Spanish Peseta in front of other currencies let Spain to be a place where many retired people decided to stay for living what made the construction sector also a relevant one. 

Entering into the EU, represented, on one side, for the industrial regions having access to a big market with a very positive impact for exporting companies, and for the undeveloped regions, let them to have access to enormous amounts of subsidies from the EU. The Euro added to this situation economic stability, cheap money and a better control of inflation but, as being Spain linked to more productive nations and not being able to compete against emerging countries out of the Euro, Spain was any longer a place where invest with cheap costs, and companies started disinvesting.

But at the same time, and under a period of big expansion and cheap money, instead of trying to reinvent itself seeking for higher productivity, or investing in emerging sectors to replace those leaving the country, Spain entered into a situation of easy money, with a real state bubble where many people decided to close their businesses as it was much easier and faster to make money speculating in the real estate market. At the same time, the undeveloped regions invested the money they were getting from EU subsidies in subsidizing people and creating big bureaucratic structures of public employees. People abandoned the agricultural sector to live from subsidies while, foreign employees where taking their jobs in the agricultural sector.

This amazing situation explains, to some extend the higher unemployment Spanish rate, is more easy for many people to live from the subside than working in unpleasant jobs or trying to be trained for jobs available far from their homes.

When the situation collapsed with the present crisis, this let Spain with two big problems, many industries having been destroyed out of the traditional industrial areas (namely the Catalan, Vasque and some Mediterranean and Atlantic regions) in favour of the construction sector, and many people had adopted a subside culture.

Now neither construction sector exist anymore nor EU subsides, so for many regions, there is no alternative and it will become very difficult for them to find, in the middle of the crisis, ways to reinvent their economy which only may occur eliminating the subside culture and returning to traditional industrial activities, with lower production costs by means of salary reductions what has already started to take place, this can be the only way for Spain to be able to downturn the present situation and being again attractive for investors.

This article was first published in the Winter 2012 issue of RECOVERY. It is reproduced with the permission of R3 and GTI Media.

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