In Spain, Crisis Stays Undercover

In Spain, Crisis Stays Undercover

By Jonathan House
The Wall Street Journal, April 29, 2010

Madrid — Spain's worsening financial crisis remains a strangely low-key affair. One in five people here are out of work, but generous unemployment benefits, strong family support networks and a bustling informal economy are helping maintain people's lifestyles. Bars and restaurants in the city center are doing brisk business.

'It seems to me the situation here is less bad than in Greece,' says Manuel Herrera, a 30-year-old Peruvian immigrant, who has seen the recent images of angry mobs protesting in Athens. 'Here in Spain, the crisis is not so noticeable: People still go out for beers, to buy cigarettes, whatever.'

But the Asian-restaurant chain he works for as a cook has closed down four of its 12 restaurants, and Mr. Herrera says he sees a sense of hopelessness setting in that could point to prolonged economic stagnation.

'The Spanish were not ready for this crisis,' he says. 'The situation's not getting any worse, but it's not getting any better either.'

For years, Spain was one of the euro zone's biggest success stories. Membership in the common currency in 1999 brought historically low interest rates that fueled a credit and construction boom, which transformed the country into one of Europe's chief growth engines. Through 2007, Spain created more than one-third of all euro-zone jobs and absorbed four million immigrants.

The global financial crisis brought that crashing down. Spain is grappling with 20% unemployment and a double-digit budget deficit that threatens to land the country in a Greek-style financial crisis.

Though the government expects the economy to return to growth in the first quarter, that follows contractions in six consecutive quarters.

On Wednesday, Standard & Poor's cited low growth prospects resulting from mounting banking-system stress, high household debt levels and low export capacity as primary factors behind its decision to downgrade Spain's sovereign debt.

Thirty-year-old Eduardo lost his job as a computer programmer a year ago and says many of his friends are also out of work. He still isn't ready to take just any job: 'There are jobs out there, but most of them don't pay to well, or they require higher levels of experience.'

Until recently, the government of Socialist Prime Minister Jos Luis Rodrguez Zapatero has focused on anticrisis measures to cushion the pain of the unemployed by extending benefits, cutting taxes and taking measures to create short-term jobs for construction workers. It has gone to great pains to maintain good relations with unions.

But the government has changed gears amid mounting pressure from international investors to show it can pull the economy out of the doldrums and get its debt levels back on a sustainable path. It has announced plans to cut the public-sector wage bill, push back the retirement age and reform Spain's rigid labor market. The plans are vague thus far and have yet to ruffle many feathers.

The government is counting on a quick agreement on a support package for Greece to contain the euro-zone financial crisis and buy Spain more time to get its fiscal house in order. In an interview, Deputy Finance Minister Jos Manuel Campa said Spanish bond spreads have been blown out to 'exceptional' levels that he believes are temporary. 'Considering that they have been affected by the Greek situation, the sooner it is resolved, the better,' he said.