Spain's Economy Is Now as Bad as Greece's
For most of us, the Great Depression is a distant abstraction most relevant as the last time the economy was worse than it has been lately. But for some unhappy Europeans, Depression-style living is a thing of the present.
[AP: Spain's Jobless Rate Above 6 Million For the First Time]
The unemployment rate in Spain recently hit an astounding 27.2 percent for the first quarter of 2013, which is the highest it's been in decades and higher than unemployment was in the United States during the Depression. Spain's unemployment rate now matches that of Greece, which is basically insolvent and dependent on European bailout aid. It's more than twice the European average of about 11 percent.
More astonishingly, Spain's unemployment rate was less than 8 percent at the beginning of 2008, which means it has soared by nearly 20 percentage points since then. "Spain lacks the tools to break free from the recessionary spiral," economist Raj Badiani of IHS Global Insight wrote in a recent research note. "The downturn is evolving depression-like characteristics."
In the United States, unemployment rose from 5 percent at the beginning of 2008 to a peak of 10 percent in 2009. It has since settled back at 7.6 percent. The unemployment rate in Spain and several other European countries is usually higher than it is in the United States, because of a broader social safety net and a less dynamic economy. But a spread of nearly 20 points is unprecedented.
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Spain's economy is collapsing as it deals with a property bust fueled by excessive bank lending, similar to what happened in the United States--except that the Spanish economy is still shrinking while the U.S. housing bust ended last year. Spain's economy has shrunk for seven straight quarters, compared with four quarters of consecutive decline during the U.S. recession in 2008 and 2009. Moody's Analytics predicts that Spain's economy will continue to contract throughout 2013.
Spain is plagued by familiar problems, with both the federal government and the private sector drowning in debt. The government has taken over several insolvent banks, but hasn't yet required its own sovereign bailout, the way Ireland did in 2010. While the government has improved its finances, however, it has still missed debt-reduction targets set by the European Commission, and its bonds are rated close to junk status.
Spain has an unusual labor market that allows unemployment to rise much more sharply during recessions than in other countries. For one thing, it relies much more heavily on temporary labor than other industrial economies, making it easy for firms to lay off workers at the first sign of trouble. The Spanish economy is also more dependent on construction jobs than other nations, which is obviously a crushing vulnerability during a real-estate bust. A 2012 study by the Federal Reserve Bank of St. Louis found that job losses in Spain were clustered among temporary workers and construction, which explains the soaring unemployment rate.
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As with many such miserable episodes, the retrenchment of Spain's labor force ought to yield some benefits once the adjustment is further along. Sky-high unemployment, for instance, has pushed labor costs down sharply, making Spain more competitive with high-output nations such as Germany. And the companies that abruptly fired temporary workers during the downturn will probably be quick to hire again once things look brighter. In the meanwhile, unfortunately, there's a depression to endure.
Rick Newman's latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.
