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By William Chislett

The good news is that Spain has finally come out of a five-year recession that was triggered by the bursting of its property bubble. The bad news is that the unemployment rate remains stubbornly high at a whopping 26%, double the European Union average.

The scale of the property madness was such that in 2006 the number of housing starts (762,214) was more than that of Germany, France, and Italy combined. This sector, to borrow the title of a novel by Gabriel García Márquez, was a Chronicle of a Death Foretold. There are still an estimated more than one million new and second hand unsold homes.

The excessive concentration on the property sector, as the motor of an economy that boomed for a decade, created a lopsided economic model and fertile ground for corruption. When the sector crashed as of 2008 and house prices plummeted, 1.7 million people lost their jobs in construction out of a total of 3.7 million job losses in the last six years, households were left with mortgages they could not pay and property development companies unable to service their bank loans. This, in turn, severely weakened parts of the banking system which had to be rescued by the European Stability Mechanism with a €42 billion bailout programme. Spain exited the bail-out in January, but bad loans still account for more than 13% of total credit, up from a mere 0.7% in 2006.

Spain has emerged from recession thanks largely to an impressive export performance, achieved through an “internal devaluation” (lower unit labour costs stemming from wage cuts or a wage freeze and higher productivity). As a euro country, Spain cannot devalue. Merchandise exports rose from €160 billion in 2009 to €234 billion in 2013, an increase equivalent to more than 7% of GDP. This growth has been faster than the pace of powerhouse Germany, albeit from a smaller base. Exports of goods and services rose from 27% of GDP in 2007 to around 35% last year. The surge in exports combined with the drop in imports and a record year for tourism, with 60 million visitors, turned around the current account, which was in surplus for the first time in 27 years. In 2007, the current account recorded a deficit of 10%, the highest in relative terms among developed countries.

Unemployment is the most pressing problem. The depth of the jobs’ crisis is such that Spain, which represents 11% of the euro zone’s economy and has a population of 47 million, has almost 6 million unemployed (around one-third of the zone’s total jobless), whereas Germany (population 82 million and 30% of the GDP) has only 2.8 million jobless (15% of the zone’s total). Germany’s jobless rate is at its lowest since the country’s reunification, while Spain’s is at its highest level ever.

Mariano Rajoy

Young Spanish adults, particularly the better qualified, are increasingly moving abroad in search of a job, though not in the scale suggested by the Spanish media which gives the impression there is a massive exodus and brain drain. One thing is the large flow of those who go abroad, especially to Germany, and return after a couple of months; another the permanent stock of Spaniards abroad (those who stay beyond a certain amount of time), which is surprisingly small. According to research conducted by the Elcano Royal Institute, Spain’s main think tank, between January 2009 and January 2013, the worst years of Spain’s recession, the stock of Spaniards who resided abroad increased in net terms by a mere 40,000, which is less than 0.1% of Spain’s population, to 1.9 million. These figures are based on official Spanish statistics cross-checked with data in the countries where Spaniards reside. The number of Spaniards living abroad is less than one-third the size of Spain’s foreign-born population of 6.4 million (13.2% of the total population). Immigrants in Spain are returning to their country of origin, particularly Latin Americans.

Spain’s crisis has also resulted in a long overdue crackdown on corruption. There are around 800 cases under investigation, most of them involving politicians and their business associates. Spain was ranked 40th out of 177 countries in the 2013 corruption perceptions ranking by the Berlin-based Transparency International, down from 30th place in 2012. Its score of 59 was six points lower. The nearer to 100, the cleaner the country. Spain was the second-biggest loser of points, and only topped by war-torn Syria. The country is in for a long haul.

William Chislett, the author of Spain: What Everyone Needs to Know, is a journalist who has lived in Madrid since 1986. He will be talking on his book at the Oxford Literary Festival on 29 March. He covered Spain’s transition to democracy (1975-78) for The Times of London and was later the Mexico correspondent for the Financial Times (1978-84). He writes about Spain for the Elcano Royal Institute, which has published three books of his on the country, and he has a weekly column in the online newspaper El Imparcial. He has previously written on Spanish unemployment and Gibraltar for the OUPblog.

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Image credits: (1) Spanish Falg By Iker Parriza. CC-BY-SA-3.0 via Wikimedia Commons (2) Mariano Rajoy By Gilad Rom. CC-BY-SA-3.0 via Wikimedia Commons

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By Donal Donovan

After many years of extraordinary success the dramatic collapse of the Irish economy in 2008 was unprecedented in the history of post-war industrial countries. Who and what was responsible for the demise of the poster boy “Celtic Tiger?” What lessons can be learned form the Irish debacle and can the Tiger come roaring back?

(1) Until around five years ago, the Irish economy was the envy of the world.

During the nineties, the rise of the Celtic Tiger was one of the most remarkable post-war industrial country phenomena. A relatively poor country on the periphery succeeded in transforming itself into one of the richest countries in Europe. The key was the massive inflow of foreign direct investment, as US and other multinationals sought to take advantage of Ireland’s location and young, well-educated labour force – the only English-speaking country in the common currency euro area. To be sure, sound financial and macroeconomic policies also helped inspire confidence. Ireland experienced annual growth rates of almost 10% at times, living standards soared, and emigration — the hallmark of the Irish – turned into net immigration. Foreigners, especially from Eastern Europe, flocked to take advantage of the booming economy.

Awaiting an upturn in the Irish economy. This section of City Quay between Moss Street and Prince’s Street, surrounded by steel and glass buildings of the Celtic Tiger Era, has been saved from demolition by the severe downturn in the Irish economy. Photo by Eric Jones of geograph.co.uk. Creative Commons license via Wikimedia Commons.

(2) Things then started to go horribly wrong, although it was not recognized at the time.

Starting around 2002, the technology based export led growth began to turn into a property bubble. Fuelled by special tax incentives and unlimited funding at low euro area interest rates, the Irish banks went on a splurge of reckless lending to property purchasers and developers. Government budget expenditures soared, financed by revenues from the artificially booming property sector. House and land prices soared to levels among the highest in the world and the population engaged in a frenzy of borrowing to acquire property before it was too late…

(3) The economy started to collapse around 2008.

In 2008, following the bankruptcy of Lehman Brothers in the United States, the property bubble burst in a spectacular fashion. Almost overnight, prices began to plummet, eventually losing between 60-80% of their value. All the Irish banks became hopelessly insolvent, the budget deficit soared to almost unimaginable heights as the earlier surge in expenditures could not be reversed, and unemployment tripled. The fall in output was probably the largest ever experienced by an industrial country since the Second World War. Ireland quickly found itself unable to borrow on international markets and in November 2010, had to follow Greece and seek ignominious recourse to an emergency bail out from the IMF and the EU.

(4) Much progress has since been made but there is still a tough road ahead. 

Under the strict insistence of the IMF/EU, much — albeit painful — progress has been achieved in righting the financial ship of state in the last four years. The enormous budget deficit has been slowly but steadily reduced, and the massive financial problems of the banks have been addressed. But Ireland’s debt has unavoidably continued to soar, and while the economic decline appears to have bottomed out, unemployment remains stubbornly high at around 14% and large scale emigration has resumed. Moreover, it is not clear that steps are being taken to tackle decisively the major failings in political and economic governance that caused the debacle  in the first place

(5) Can the Celtic Tiger rise again?

It is very difficult to imagine a return to anything near the heady heights of the Celtic Tiger. Ireland’s economy is very heavily dependent on exports and the EU growth outlook remains very clouded. Increasingly, there are questions as to whether Ireland’s preferential corporate tax regime – key to attracting foreign investment over the years — can be sustained in the face of pressures from other countries. Still, even if real incomes in Ireland return to around their 2000 levels, this would still be an enormous improvement compared to the seventies when Ireland joined the EU as its then poorest member.

Dr. Donal Donovan is a Member of the Irish Fiscal Advisory Council, Adjunct Professor at the University of Limerick, and Visiting Lecturer at Trinity College Dublin. He is a former deputy director at the International Monetary Fund with considerable experience in the area of financial crises. He is co-author, with Antoin E. Murphy, of The Fall of the Celtic Tiger: Ireland and the Euro Debt Crisis.

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