Spain waves goodbye to prosperity

YOU HAVE to feel sorry for the Spanish. Since casting off decades of Franco's dictatorship in 1975, they have democratised, modernised, and generally worked extremely hard to create what looked until recently an enviable country. But what to many in ADVERTISEMENT

Scotland looked highly desirable - the decentralised political system and especially the tax autonomy enjoyed by the Basque country - now looks a severe handicap to Spanish attempts to right its struggling economy.

Over the weekend, the European Central Bank's decision to buy the bonds of the Spanish and Italian governments brought those countries back from the brink of having to default on their debts. It remains to be seen whether the move is enough to prevent the need to extend the bail-out loans given to Greece, Ireland, and Portugal to Spain and Italy. But for the moment a breathing space has been bought.

That this should have happened to Spain is all the more astonishing given that in 2007 it looked like a model economy. Spain had a balanced budget (unlike the deficit financing of most of Europe including the UK) and its total public debt, as a percentage of GDP, was only about half as large as that of Germany and less than half the size of Britain's national debt.

The big banks were sound and survived the financial crisis well enough for Banco Santander to become a vital rescuer of troubled British mortgage banks such as the Alliance and Leicester. Big companies, such as Iberdrola, purchaser of ScottishPower, were, and still are, major players on the European corporate stage.

On some pre-crisis forecasts, Spanish GDP per head, a measure of the wealth being produced by the average citizen, was set to surpass that of Germany's by the end of next year.

What went wrong was the recession that followed the financial crisis. Fuelled by cheap interest rates following adoption of the euro, and other Europeans' lust for a summer bolthole, the construction industry boomed. At its peak, it employed 14 per cent of the workforce (in Scotland, building employs about 6 per cent).

The recession, as in Ireland, brought building to a halt which has been a major factor in Spanish unemployment rising to just over 20 per cent. Government tax revenues, a high proportion of which came out of property also took a hit, throwing Spanish public finances into the red.

 

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