Spain lags behind rest of EU in recovering from crisis (News Feature)

By Sinikka Tarvainen Aug 28, 2009, 10:30 GMT

Madrid - While several European countries appear to be emerging from the economic downturn, Spain remains mired in its worst recession in six decades, with the full recovery expected to last years rather than months.

The worst has passed, officials said recently, as figures showed the contraction of the economy to have slowed down from 1.6 per cent in the first quarter to 1.1 per cent in the second quarter.

However, the recovery is being made more difficult by problems which are more serious than in other countries, such as a high unemployment and budget deficit and sagging consumer demand.

Conscious that Spain's difficulties lie deeper than in the global crisis, Prime Minister Jose Luis Rodriguez Zapatero's socialist government is seeking a more sustainable economic model.

Many experts feel a labour reform should form part of that model, but employers and unions are at odds over such moves, and a 'hot autumn' with union protests is expected.

The first signs of the crisis became apparent in the summer of 2007, after a decade of spectacular growth at an average rate of more than 3 per cent, which made Spain one of Europe's big economic success stories.

While the going was good, few questioned the often speculative construction of record numbers of new homes - 800,000 in 2006 - and many people did not hesitate to live partly on credit.

The crisis, however, has revealed that Spain's boom was based too largely on labour- or service-intensive sectors with a low-qualified work force.

Two of the main pillars of the economy have now suffered, with the overheated construction sector undergoing a spectacular meltdown and the number of foreign tourists expected to decline by 10 per cent this year.

The housing and tourism sectors each contributed around 10 per cent of gross domestic product (GDP).

The government now expects the economy to shrink 3.6 per cent in 2009. Unemployment has soared to 18 per cent, the highest rate by far in the European Union, with the construction sector alone shedding some 700,000 jobs in 12 months.

Spain's heavy dependence on domestic demand rather than exports has aggravated the crisis, with Spanish households consuming 6 per cent less than a year ago.

'In no other western country has internal demand fallen as sharply,' financial analyst Sara Balina said.

While France, Germany or Portugal have begun emerging from the global crisis, the Spanish government does not expect the country to come out of the recession before the second quarter of 2010. Analysts predict that unemployment will continue growing for four more years.

Spain's recovery will be 'slower and full of obstacles,' economist David Martinez warned.

The government has adopted dozens of measures to combat the crisis and to stem unemployment, including extensive public works and extra unemployment benefits.

Spain is spending more than 2 per cent of its GDP on such measures in 2009 and 2010, double the EU average.

Critics say the measures have been belated, inefficient and costly, with the public deficit expected to rise to an unprecedented 10 per cent of GDP in 2009.

The government is now planning to raise taxes, reversing a decade- long trend of tax cuts, in an attempt to fill state coffers.

The Zapatero government has also begun adopting some measures aimed at favouring a more competitive, high-tech and export-oriented economic model, but many experts are calling for a simultaneous labour reform.

One of Spain's main problems, they say, is a labour market divided between employees with indefinite and temporary work contracts, with the latter making up nearly a third of the work force.

Employees with strong contracts are more difficult to lay off than in many other European countries. That encourages many employers to prefer temporary workers, who are much more vulnerable to the fluctuations of the labour market.

'Spain cannot afford ... a dual labour market, with a group of shielded employees and ... young people with ridiculous salaries and hardly any rights,' the daily El Pais wrote in an editorial.

Many experts are calling for a more flexible and egalitarian labour market, but unions fear that employers would use such measures to undermine workers' rights.

The government's attempts at promoting a social consensus on related issues have failed so far, with the conservative opposition accusing Zapatero of siding with the unions.