Economic slump hits Spain hard after 14-year boom (Feature)

By Sinikka Tarvainen Aug 14, 2008, 2:09 GMT

Madrid - 'Clearance sale for closure.' - 'To let.' Signs in Spanish shop windows reflect the deepening economic crisis that has shocked a nation accustomed to high growth rates and the good life.

'We have been spending beyond our possibilities, without undertaking the necessary structural reforms,' economist Juan Delgado said grimly.

That reality is increasingly sinking in as economic figures go even further into the red.

Growth is expected to drop from 3.8 per cent in 2007 to near zero this year. Inflation is running at about 5 per cent and unemployment is likely to soar past 10 per cent, up from 8.3 per cent last year.

About 10,000 shops have closed, hundreds of companies have declared bankruptcy and families are struggling to pay mortgages and debts, with some women even going into prostitution to make ends meet.

'The worst is still to come,' the autonomous workers' federation ATA warned, predicting the closure of more than 80,000 shops or 10 per cent of the total.

'The economic situation is worse than we all expected,' Economy Minister Pedro Solbes admitted recently, after the government had downplayed the problems and refused for weeks to use the word 'crisis.'

The shock is proportionate to the economic boom that went on for 14 years and was the envy of many other European countries.

The growth was, however, largely based on the overheated real estate sector, which has contributed 18 per cent of the gross domestic product (GDP).

Spain built up to 800,000 homes annually, as many as Germany, France and Italy combined.

Nearly 90 per cent of Spanish families are home owners, and the property boom was also fuelled by the construction of second homes as well as hotels in tourism areas.

Rising interest rates and the global credit crunch have now burst the real estate bubble, with more than 500,000 newly-built homes unable to find buyers.

Another growth engine, the tourism sector, is not expected to grow much more as cheaper destinations have emerged to compete with Spain.

After years of a growth based largely on cheap credit, Spanish companies and families are among the most indebted in the world.

The paralysis of the property sector is spreading through the economy, with industrial production dropping by 9 per cent in June compared with the same month in 2007, its steepest fall since April 1993.

Multinational companies investing in Spain have warned of problems in a wide range of sectors, with for instance car sales plunging by nearly 30 per cent in three months.

Unemployment has hit especially immigrants from Latin America, Africa and eastern Europe, many of whom worked at construction sites.

Spain now has some half a million unemployed foreigners, one-fifth more than three months ago. Thousands of them are preparing to return home with the help of financial incentives offered by the government.

The government blames the slump largely on international factors such as the weak US and European economies and high oil prices, but analysts point out that the crisis is hitting Spain harder than many nearby countries.

Relying on the fast and easy money turned over by the construction sector, Spain failed to diversify its economy and to favour the creation of large export-oriented companies, experts say.

'Nobody is interested in technological innovation, research, or the quality of the educational system ... They are our weak points,' European Economic Affairs Commissioner Joaquin Almunia warned his home country already in 2006.

The government has now adopted measures ranging from financial facilities for small- and medium-sized companies to more public works, but few people expect them to do more than to slightly ease the crisis.

Spain needed nothing less than a 'radical change in the growth model,' the daily El Pais said in an editorial.