The Spanish Inquisition

What are the reasons for Spain's imminent collapse? Here are my thoughts:

The Numbers:
The European Commission has projected that domestic demand in Spain is expected to contribute-1.2% to the GDP in 2010, and have revised their forecast for 2011 down to -0.4%. Its private sector surplus projected to decline from -11.9% in 2007 to 4.5% in 2010. These numbers are indicative of the fact that there is very little the government can do at this stage in efforts to shore up demand domestically. With German exporters coming to the party and taking advantage of being in a single currency union, Spanish companies face stiff competition. Spain's Automobile sector which accounts for about 3.4% of GDP (the largest contributing sector in the economy) will certainly need to see better domestic demand in order to propel economic growth. The European Commission has also predicted a debt to GDP ratio of 69.7%  and deficit of 6.4% in 2011 which are both above the Stability and Growth Pact requirements of 60% and 3% respectively but well below catastrophic projections (In comparison the Congressional Budget Office predicts USA's debt to be at 90% of GDP in 2011).

The Psychology:
I have had many a discussion about the psychological factors coming into play with my Spanish friends and colleagues, and they all seem to agree on one point more often than not. They all agree that the Spanish have an inherent mentality of wanting to own a property to call home. This need to buy a house  is something that is instilled in the minds of the Spanish people from an early age, though none of my friends could put a finger on the exact reasons for the same. This "need" to own a house as oppose to rent a house until savings permit one to buy a house without being in eternal debt (its not uncommon for banks to offer 50 year mortgages), is one of the central reasons for the real estate crisis that has fueled this downturn in Spain (The residential real estate bubble has seen the real estate prices move 201% between 1995 to 2007). It is not unusual for psychological factors to come into play in economics and the way economies function, and it reminds me of the HSBC advertisement projecting a deeper understanding of different cultures in order to be able to locally do business better.

The Cajas:
Clearly there cannot be smoke without a fire, and the reason the cultural and psychological aspects have been allowed to shape a real estate crisis are because of the callous "thrift" lending agencies in Spain. The Cajas (pronounced Cahas) are small savings banks which are experiencing a big crisis since the global downturn. There have been numerous mergers in this past year between different Cajas which has scared investors. These mergers have been made in order to preserve liquidity base for writing off the huge amounts of bad assets held by these banks. These assets are mostly in the form of property and resembles the problem in Ireland. The Cajas are also highly politically controlled bank. They have been used to finance many an unsuccessful infrastructure and housing projects (backed by toxic assets) and the behest of politicians looking to garner votes.

The Structure of Labour:
Spain's unemployment numbers are truly "quotable" statistics in the scheme of unemployment numbers in the developed world. Standing tall at just over 20% and projected to remain that way until 2012 by the European Commission, Spain's unemployment figures are truly baffling for a country which is listed as the 9th biggest economy in the world on Wikipedia. However, there is a very simple reason behind the high unemployment in Spain. The reason is that about a third of all Spanish labour is contractual workers. These are workers who can be fired without any severance packages, and are easily hired as well because there are big numbers of such workers flowing in and out of employment. In the aftermath of the global economic crisis, there are no prizes for guessing which workers were fired first. Spain also has a very high rate of immigration, with estimates placing it at 2% of total population per annum. Indeed it is not uncommon to be walking the streets of Barcelona and hearing someone calling out to you in the distance in Hindi asking if you want to buy some pirated Estella or San Miguel! Catalonia has famously lax approach to dealing with illegal immigrants, and as a result there has been a huge influx from India, and Bangladesh in the past decade, most of whom are finding it increasingly hard to sustain a living in the current situation.

Zapat -Euro:
Jose Zapatero, the current Prime Minister has been a confused leader over the past year. Recently declaring that the crisis afflicting Spain is over, he seems to be over eager to assuage the bond vigilantes at the cost of ignoring the structural problems that are increasingly exacerbated by his asymmetrical  reforms. Being a part of a currency union, and at the same time fighting a country like Germany for competitiveness of exports, is certainly not fun for him. Zapatero comes from a minority Socialist party (so he cant take on unions), and he has been able to consolidate his leadership with the support of the Basque Nationalist party by allowing for devolved employment and training powers for the Basque regional government. He is involved in a give and take relationship with too many factions pulling in different directions for him to govern effectively. He has put in place tax increases on the rich (who earn above 120,000 Euro), but this will only effect about 200,000 people, most of whom will be able to evade the tax collector as is so often the case in Spain.

In conclusion, it will be interesting to see if the austerity measure put in place by the Socialist party will be able to achieve the target of reducing deficits to 6% in 2011. It will certainly be hard, and things can get really tricky for Spain if the numbers are not sorted out before markets set their sights upon attacking it head on. This will be very likely to happen if Portugal is bailed out in the near future and then the sustainability of the European Monetary Union will be in question.