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The Spanish crisis is no such thing: it is in fact three big problems rolled into one huge and enduring mess
What economists and policymakers sometimes call the Spanish crisis is no such thing: it is in fact three big problems rolled into one huge and enduring mess. There is the financial collapse within the eurozone, in which over the past year the governments of first Greece then Ireland have been blocked from borrowing from financial markets at any but exorbitant interest rates. There is the meltdown of the Spanish property market, which has in turn triggered a crisis for both the cajas (regional savings banks) and the government treasury. And finally there is the long-run problem of Spain's labour market, where one in five workers are officially out of a job.
These are three discrete areas, and they require different solutions to be implemented over varying periods. The problem is that the Spanish government has not had the opportunity to deal with those latter two domestic problems on its own timetable because of the first Europe-wide crisis. In his efforts to beat back the eurozone's financial bushfire and stop it from swallowing up Spain, the prime minister, José Luis Rodríguez Zapatero, has been forced to bin election pledges and to concentrate on the ultra-short term.
No one should expect that pressure to ease up any time soon. Yesterday the eurozone came under more pressure, as Standard & Poor's slashed its ratings on Portuguese and Greek sovereign debt. According to the credit rating agency, Portugal now stands on the brink of junk-borrower status. The reason for this, S&P's second downgrade of Portugal in less than a week, is that the likelihood is rising that Lisbon will have to be bailed out by the rest of the single-currency club. At the moment, this has all the hallmarks of a self-fulfilling prophecy: the interest rate on 10-year loans to the Portuguese state shot up again yesterday, taking the yield above 8%. That puts Lisbon far closer to the sovereign intensive-care ward of Dublin and Athens (where market interest rates are now over 10%) than it does to the likes of Berlin (which can get away with paying 3.3% on its 10-year loans).
For the past year, Mr Zapatero has been desperately trying to prove to investors that Spain should not be lumped in with Portugal, let alone Greece and Ireland. His government has made sharper and faster spending cuts than it originally planned; after a delayed start, the central bank has launched a speedy clean-up of the troubled cajas. So far, the effort seems to be paying off – the interest rate on loans to Madrid is 5.2%, which indicates that the market judges its creditworthiness to be somewhere between Berlin and Lisbon. But if Portugal does call it quits and apply for a bailout (although how it will do that without a functioning government in place is an interesting thought experiment), traders and investors will once again ask if Madrid is next.
The shame of all this is that Spain's problems, while large, are nothing like those of other southern European states. Its government did not go on a borrowing binge in the past decade; its households and companies did. True, public borrowing has risen sharply during Spain's severe recession – but that is largely because tax revenues have naturally collapsed. If Madrid does manage to keep the bond-market vigilantes from its door, that will still leave its policymakers with the huge job of rebuilding a broken economy. Going by the official figures, joblessness in Spain is the highest in the eurozone, while two in five young people are out of work. Officials refer to its "dual" labour market, in which a select group of workers have jobs for life, effectively, while the rest are on short-term contracts. Then there is the problem that much of Spanish industry is uncompetitive, with very low productivity. The sad reality is that even if Madrid is not dragged into the eurozone financial bushfire, it faces a long, slow haul to fix its economy.
