SPAIN AFTER TWO DECADES : PROBLEMS

In Spain,after two decades of dizzying growth,the party is over.


For most of the last decade, Spain kept its fiscal house in strict order, running small deficits or even surpluses. The country enjoyed a long boom after joining the euro zone, as low interest rates fueled a surge in construction. The boom, while it lasted, gave Spain the world’s highest rate of homeownership — with more than 8 of every 10 Spanish households owning the places they lived.

But it came to an end with the 2008 financial crisis, and the resulting recession sent Spain’s unemployment rate soaring. Spain has also seen its deficits swell and has been forced to pay high interest rates as investors worried about its solvency. Given the size of the Spanish economy and the weakness of its banks, Spain has become the biggest worry facing the European Union.
Since 2010, Spain has pushed through a series of austerity measures meant to rein in its deficit. Unhappiness over the economy brought down the center-left government of José Luis Rodríguez Zapatero, and in November 2011, the conservative Popular Party, led by Mariano Rajoy, won a parliamentary majority in new elections.

Mr. Rajoy had the benefit of a freshly elected, single-party majority behind him, which his counterparts in Greece and Italy have lacked. But the country slid into its second recession, sending deficits and unemployment ever higher, forcing Mr. Rajoy to admit that his government would miss its deficit reduction targets.
In April 2012, Spain’s unemployment rate reached 24.4 percent, the highest in Europe and an especially stark figure given that the government had not yet begun to lay off public sector servants in any significant number.

In May, Bankia, the nation’s largest real estate lender, requested an additional 19 billion euros in rescue funds from the country, far beyond initial government estimates. In June, Mr. Rajoy performed an about face, and Spain agreed to accept a bailout of up to $125 billion for its troubled banks. Fiscal woes in its largely autonomous regions have also added to the debt burden and uncertainty facing the central government, leading the markets to keep interest rates at punishing levels.
But investments and savings continued to leave Spain at a rapid rate. According to a research note from Nomura in August, capital departing the country equaled a startling 50 percent of gross domestic product over the previous three months — driven largely by foreigners unloading stocks and bonds as well as Spaniards transferring their savings to foreign banks.

Background: Promise and Plunge

In May 2012, Jonathan Blitzer, a journalist and translator, wrote an essay for the International Herald Tribune headlined “Spain’s Yearnings Are Now Its Agony’' that traced the roots of the crisis. Here is an excerpt:
Spain is stuck in a fateful holding pattern. According to a European Commission forecast, Spain will be the only country among the currency union’s cast of 17 to remain in recession in 2013. The government’s plans to recapitalize Bankia, Spain’s fourth-largest bank, have reinforced concerns about a generalized banking crisis and costly bailouts. Spaniards, meanwhile, will have to endure the effects of $34 billion worth of cuts slated for the rest of the year.
All of this adds up to the inevitability of future hurt, and it is embittering Spaniards’ taste for the democracy they craved just a generation ago.

Spain’s fall from heady promise to Celtic gloom tells a story of democratic expectation gone sour. This tale is a profound blow to the European Union itself — a symbol of the continent’s shifting political prospects. Spain was not only one of the chief protagonists of 20th-century Europe, it also tilled the bloody soil from which the union later sprang. The Spanish Civil War was the staging ground for the defining existential drama of the century: a gory crucible of democracy, fascism and communism in conflict. Its fate entwined with Germany’s, Spain was at the center of Europe.

Spain sat out World War II, but afterward, its Axis-addled associations and blustering dictator sidelined it while Marshall Plan aid and democratic reconciliation transformed the continent. Eventually it emerged into that new Europe — only to find itself, at the cusp of a new century, again bound to Germany, now by bankers rather than bombers. And again, this seemed a boon at first.
When Spain joined the European Community in 1986, after nearly four decades of dictatorship, euphoria reigned. Finally, the country was gaining its rightful place intellectually, culturally and economically in the social democratic mainstream of Western Europe. “For Spaniards, Europe was the solution,” said Álvaro Soto Carmona, a history professor at Universidad Autónoma in Madrid. “We were no longer different,” he said; membership “opened the door to hope.”

Propping open that door was money: structural funds from the union to finance much-needed infrastructure projects. At the heart of the financial power was a rejuvenated and economically vibrant Germany. The future looked secure; as had been the case in Germany, Spain’s renewed surety was wrapped up in its sense of belonging to a free and optimistic Europe.

Then came plans for the adoption of the euro in the late 1990s, and again the prospect of an ascendant Europe offered a gilded opportunity for Spain. Borders were disappearing. The euro helped inflate a booming real estate bubble, as capital migrated south from northern Europe. Banks lent liberally, and the construction industry surged. As private debt mounted, homeownership soared.

Unlike some of their European counterparts, Spanish banks were relatively well protected against the initial collapse of the American financial sector in 2008. But the global recession that followed, coupled with the bursting of the real estate bubble at home, soon devastated Spain’s economy, which had longstanding vulnerabilities that were no secret but had been overlooked in the boom years. They included chronically high unemployment, for which economists blame unwieldy labor laws. Those have now come in for an overhaul. But even in better times, Spain also lagged behind the European average in spending on research and development. Now there is talk of a worsening brain drain.

The principal remaining force driving jobs and taxable revenue is tourism, as it was in the times of Francisco Franco. It is “uniquely dispiriting,” lamented the novelist Ernesto Pérez Zúñiga, that so little has changed. Spain’s economy once was consigned to depression by Franco’s autarchic policies; now it is subjugated by the tyranny of the markets.

These days, a raft of illicit practices, crafted from old excesses, have become a rickety means of sliding by. In the years when construction and real-estate markets boomed, transactions conducted underground exceeded 20 percent of gross domestic product. Spain acquired the dubious distinction of having the highest concentration — nearly one-fifth — of all the 500-euro bills on the continent. Called “Bin Ladens” — everyone knows they exist but no one has ever seen them — they are vestiges of corruption, bribery and money laundering in the fat years.

While that bustle has cooled, many desperate Spaniards still work under the table — in some cases supplementing unemployment relief with money from ad hoc jobs. This helps explain why Spain’s deep despair has not exploded in quite the rage felt on the streets of Athens.

The Problem of Regional Debt

In January 2012, in an attempt to solve the problem of regional debt, Spain’s central government moved to shore up the finances of its 17 regional governments — some of which were having trouble paying their bills — while taking steps to tighten control over their spending.
Budget Minister Cristóbal Montoro said that the government would create a credit line and advance about $10 billion to the regions, money they were not scheduled to get until later in the year.
The regions needed the cash to pay suppliers, many of them small businesses that had not been paid in months, even years. But at the same time, Mr. Montoro said that Madrid would also seek new legislation to set penalties for regions that failed to comply with strict budget targets.

In August 2012, the most economically important region of Spain, Catalonia, asked the national government for more than €5 billion in emergency financing. The request by Catalonia followed rescue pleas by the Valencia and Murcia regions. Both said in July that they would need help from the €18 billion, or $23 billion, fund set up by the Spanish government.
While Catalonia, the home of Barcelona, has traditionally been among Spain’s most prosperous and industrial regions — accounting for almost a fifth of the country’s economic output — it had accumulated debt of €42 billion, the highest among Spanish regions. In addition, Catalonia had suffered credit rating downgrades and had been shut out of the debt markets.

Spain’s system of autonomous regions was developed in the aftermath of the dictatorship of Francisco Franco. After years of repression, regions pressed successfully for as much freedom as possible.
They are generally in charge of administering schools, universities, health and social services, culture, development and, in some cases, policing. And the central government has had little ability to interfere.
But in recent years, the regions have been faced with some intractable problems. Education and health care have been particularly problematic, because those costs have been growing. At the same time, some main sources of financing — taxes on real estate sales and building permit fees — have dried up with the collapse of the housing boom.

The Jobless Increasingly Rely on Family

As the effects of years of recession pile up, more and more Spanish families — with unemployment checks running out and stuck with mortgages they cannot pay — are leaning hard on their elderly relatives. And there is little relief in sight — employment statistics released in late July 2012 showed that the jobless rate had risen to a record 25 %.

Pensions for the elderly are among the few benefits that have not been slashed, though they have been frozen since 2011. The Spanish are known for their strong family networks, and most grandparents are eager to help, unwilling to admit to outsiders what is going on, experts say. But those who work with older people say it has not been easy. Many struggle to feed three generations now, their homes overcrowded and the tensions of the situation sometimes turning their lives to misery.
In some cases, families are removing their relatives from nursing homes so they can collect their pensions. It is a trend that has advocates concerned about whether the younger generations are going too far, even if grandparents agree to the move or are too infirm to notice.

A 2012 survey by Simple Lógica, Gallup’s partner in Spain, found a sharp increase in the number of older people supporting family members. In a telephone survey conducted in February 2010, 15 percent of adults 65 and older said they supported at least one younger relative. In the survey conducted 2012, that number had risen to 40 percent. Data compiled by an association of private nursing homes, inforesidencias.com, found that in 2009, 76 % of its member homes said they had vacancies. In 2011,98 % of them did.
Such numbers, experts say, reflect growing desperation in Spain, which has the highest unemployment rate in the euro zone. According to recent government figures,about 1 in 10 households now has no working adults.

Some experts say they believe that retired people, sharing their pensions and dipping into their savings, have been the silent heroes of the economic crisis, and that without them Spain would be seeing far more social unrest.


Accepting a European Bailout for Ailing Banks

On June 9, 2012, responding to increasingly urgent calls from across Europe and the United States, Spain agreed to accept a bailout for its cash-starved banks as European finance ministers offered an aid package of up to $125 billion. The decision made Spain the fourth and largest European country to agree to accept emergency assistance as part of the continuing debt crisis.

The original plan was for the European bailout fund to provide the money to the Spanish government, which would then use it to prop up the banks. But Spain objected after markets responded by driving up the interest rates the government had to pay, in a reflection of the extra debt it was taking on.
At a summit at the end of the month, European leaders agreed that the bailout funds could recapitalize banks directly. As a condition, though, the leaders agreed that the euro zone’s permanent bailout fund, the 500 billion euro European Stability Mechanism, could act only after a banking supervisory body overseen by the European Central Bank had been set up.

In July, as the markets continued to pummel Spain, European finance ministers announced that the first, $37 billion installment of the bank rescue package would be disbursed by the end of the month, with the rest coming by the end of the year. They also agreed to ease Spain’s deficit targets, although new cuts were needed to meet even the adjusted goals.

In response, Mr. Rajoy released his fourth set of budget measures in seven months, a package intended to reduce the budget deficit by €65 billion, or $80 billion, over two and a half years. It included an increase in the sales tax, a measure his government had previously argued against amid concerns that it would deepen Spain’s recession by stifling consumer spending.
In late August, the Spanish government approved the creation of a so-called bad bank to absorb the most troubled real estate assets of the country’s financial institutions, helping to clear the way for Madrid to receive European rescue money for Spain’s banking industry.
The move is meant not only to let Spanish banks eventually begin to receive money from the €100 billion, or $126 billion, reserve that European finance ministers have approved, but also to restore market confidence in the country’s banking system.

The changes also give the government’s banking agency, known as the Frob, much greater powers to revamp rescued banks, as well as to limit the salaries of their top executives. Under the new rules, senior management as well as board directors of rescued banks will have their annual salaries capped at €500,000.
In the past two years, some of the directors of collapsed savings banks have walked away with multimillion-euro compensation packages, adding to the public’s resentment.

Spain has remained in investors’ line of fire over concerns about whether not only the banks, but the government itself, might soon need rescue money from Europe because of a deepening recession and the weakening finances of the country’s 17 semiautonomous regions.

Suspected Terrorists Arrested

The Spanish government said in early August 2012 that it had arrested three men suspected of having links to Al Qaeda and believed to have been planning attacks in Spain or elsewhere in Europe.

Two are citizens of the former Soviet Union and the third is a Turkish citizen, according to Spain’s interior ministry. The Turkish suspect was arrested in La Línea de la Concepción, a southern Spanish town facing Gibraltar, in a rented house where the police also found a sizable quantity of explosives. The other two men were arrested while traveling by bus near Valdepeñas, in central Spain, likely on their way to France.

The men had long been sought by intelligence services, according to the interior minister, Jorge Fernández Díaz. He said at a news conference that the men had undergone military-style training and described the quantity of explosives as sufficient “to destroy a whole bus.”

Spain had recently arrested several people believed to have links to Islamic terrorist organizations. In July, two Spanish citizens were arrested in Melilla, a Spanish enclave in North Africa, on suspicion of terrorism. In March, Spanish police arrested in Valencia a Saudi citizen described as “the librarian” of Al Qaeda, in charge of its propaganda and recruitment activities.