Tag Archives: Spain

No Way Up

Luxury Spanish high-rise forgot to install an elevator

No Elevator

The Intempo skyscraper in Benidorm, Spain—standing proud in this image—was designed to be a striking symbol of hope and prosperity, to signal to the rest of the world that the city was escaping the financial crisis. Sadly, the builders forgot to include a working elevator.

In fairness, the entire construction process has been plagued with problems, reports Ecnonomia. Initially funded by a bank called Caixa Galicia, the finances were recently taken over by Sareb – Spain’s so-called “bad bank” – when the mortgage was massively written down.

In part, that was a function of the greed surrounding the project. Initially designed to be a mere 20 storeys tall, the developers got over-excited and pushed the height way up: now it boasts 47 storeys, and will include 269 homes.

But that push for more accommodation came at a cost. The original design obviously included specifications for an elevator big enough for a 20-storey building. In the process of scaling things up, however, nobody thought to redesign the elevator system—and, naturally, a 47-storey building requires more space for its lifts and motor equipment. Sadly, that space doesn’t exist.

Perhaps unsurprisingly, the architects working on the project have resigned, and it remains unclear exactly how the developers will solve the problem. Can we recommend the stairs?

Can Spain be saved?

Spain is done.  This is bad.

Spain is in a great depression, and it is one of the most terrifying things I have ever seen.

Five years after its housing boom turned to bust, Spanish unemployment hit a record high of 27.2 percent in the first quarter of 2013. It’s almost too horrible to comprehend, but 19.5 percent of the total workforce has not had a job in the past six months; 15.3 percent have not in the past year; and 9.2 percent have not in the past two years.

Here is why it is so bad

Spain is in a great depression, and it is one of the most terrifying things I have ever seen.

Five years after its housing boom turned to bust, Spanish unemployment hit a record high of 27.2 percent in the first quarter of 2013. It’s almost too horrible to comprehend, but 19.5 percent of the total workforce has not had a job in the past six months; 15.3 percent have not in the past year; and 9.2 percent have not in the past two years.

In other words, unemployment is a trap people fall into, but can’t fall out of. Indeed, the rate of new unemployment has stabilized at a terrible, but not quite-as-terrible, level, as you can see with the flat blue, red, and green lines. But the steadily rising purple line shows us that the rate of job-finding for the jobless has collapsed.

That is what a permanent underclass looks like.

What happened?

Why has Spain’s jobs depression been so great? After all, its GDP is “only” 4.1 percent below its 2007 level, compared to 5.8 percent below for Portugal, 7 percent below for Italy, and 20 percent below for Greece. But despite this better (negative) growth, unemployment is higher in Spain than the others. In other words, Spanish unemployment isn’t just about inadequate demand. Part of it is structural.

Spain’s labor market problems fall into two big buckets: too much regulation, and not enough education. It’s almost impossible for companies to get rid of older workers, which creates a horribly bifurcated labor market. There are permanent workers who can’t be fired, and temporary ones who can — and are. Indeed, as Clive Crook points out, about a third of Spain’s workforce are temporary workers who enjoy few protections and fewer opportunities. Companies go through these younger workers without bothering to invest much in their human capital, because why would they? These temporary workers will be let go at the first sign of economic trouble. Young people get stuck in a never-ending cycle of under-and-unemployment since firms are always hesitant to hire permanent workers who will always be on their books.

But it gets worse. The housing bust hasn’t just cast a shadow over household and bank balance sheets; it’s cast one over young people’s educations too. At its peak, building made up a whopping 19 percent of Spain’s economy, which, as Tobias Buck of the Financial Times points out, lured many young men into dropping out of school for well-paying construction gigs. But now that building has gone into hibernation, all of those young men are left with no work and no education to fall back on. And, again, even if they can find temporary jobs, it’s not as if the companies will spend money to develop their skills.

The Germans are losing patience

From the Economist

The Germans are not yet openly angry. That would be out of character in a people who have, since the second world war, been eager to atone for the past and be good European partners. In one recent poll, 34% of Germans even said they empathised with the wrath of the southern Europeans. But the mood is shifting. The southerners may see Germany as forcing excessive austerity on them and showing insufficient solidarity, but Germans have a different view.

First, they feel they have already shown solidarity. Almost a quarter of a century after the fall of the Berlin Wall they still pay a solidarity tax to eastern Germany. Some also transfer taxes to weaker German states such as Bremen. Many conclude that, once in place, solidarity ceases being voluntary and instead becomes a yoke. They also bear much of the risk of euro bail-outs, even though a study released this week by the European Central Bank showed that the average German household has less wealth than the average Spanish, Italian and Cypriot one (though this is partly because German households tend to contain fewer adults and are more likely to be in rented accommodation).

Second, they argue that Germany recognised a decade ago that it was not competitive and undertook painful reforms that are now paying off. The crisis countries should follow suit. And third, Germans think the euro crisis was largely caused by rule-breaking (even by Germany itself), which must not be repeated. As one diplomat puts it, “solidarity is important, but it should follow rules. It is not just ad hoc giving.”

300,000 babies have been kidnapped in Spain

It was a form of “political cleansing”

From the beginning of the Spanish Civil War, in 1936, until well into the 1990s, more than 300,000 children were reportedly taken from their biological parents and passed on to adoptive parents.

In regions captured by the anti-communist Nationalists during the war, doctors and nuns felt it was their patriotic duty to take newborns from "red parents" and give them to other families. There, they were to be raised in accordance with Nationalist and Catholic beliefs.

After the victory of the rebels under General Francisco Franco over the Republicans, the organized theft of babies became a political tool, a way of depriving leftists of their offspring. In 1941, Franco enacted a law that made it permissible to erase evidence of the ancestry of such children by changing their last names.

Most of these stolen children were entrusted to the care of Catholics loyal to the regime. The aim behind this was to rid an entire people of the "Marxist gene," at least according to the theories of Antonio Vallejo-Nájera, the national psychiatrist of Francoist Spain, that were widespread at the time.

Why Spain’s problems this week are even bigger than Greece’s

From Forbes

Local debt is the big untold story of the Euro crisis and, if that was not apparent before, it became glaringly so when Catalonia’s President this week told the world his autonomous Catalan Government would struggle to meet its bills at the end of this month.

Looked at from afar it might be difficult to interpret what this “local” problem means for Europe and those countries dependent on European consumer markets – but we’re always talking about a Euro problem when in fact it is a thousand local crises too. Put in American terms Catalonia’s problems are probably best likened to a successful area in the USA, like Austin, Texas, asking for a bailout.

The capital of Catalonia is, of course, Barcelona and Barcelona has a global reputation for excellence that stretches back to its management of the 1992 Olympic games.

A succession of charismatic mayors has turned Barcelona into a poster for regional economic success. Barcelona has done pretty much everything that the text book says a regional economy should do. It did “clusters” – it has a very strong cluster of companies in global logistics, it maintained regional manufacturing and grew a strong service infrastructure, it has a strong creative economy, the ESADE business school has a global reputation for management education, it has a very strong, competitive culture. And it has the world’s best football club, which gives the city global exposure week in, week out. Catalonia accounts for a quarter of Spain’s GDP. It is a success story.

But local indebtedness in Europe should come as no great surprise either. Germany and France bother have large local debt problems that are anything but transparent. In fact in the case of France much of the local debt was inherited from the central Government, which “delegated” the debt to localities where national funds were spent, effectively reducing the national debt headline figure.

Here is the big picture

In April last year the Economist also warned of all the mini-Greeces in Germany:

Germany’s 11,000-odd municipalities had a deficit of €7.7 billion last year, the second-highest ever…. in NRW( North Rhein Westphalia) local social spending rose by 274% between 1980 and 2006, whereas revenue went up only by 104%.

Local debt refinancing in Spain this year, though, is Euro 36 billion with Euro 13.5 billion of that falling to Catalonia. The reality is that, at this local level in Catalonia, the failure to refinance debt will lead to real wealth destruction and impair Spain’s prospects for years to come. When a success story like Catalonia hits the skids like this, you know the problem runs deep, very deep, but Catalonia also symbolizes something about Europe right now. It is not just a financial crisis but an existential one.

The same thing is happening in the United States.  I’d love to see the Canadian numbers.

The real cause of Spain and Italy’s debt problem

Paul Krugman in the New York Times.

So why is Spain — along with Italy, which has higher debt but smaller deficits — in so much trouble? The answer is that these countries are facing something very much like a bank run, except that the run is on their governments rather than, or more accurately as well as, their financial institutions.

Here’s how such a run works: Investors, for whatever reason, fear that a country will default on its debt. This makes them unwilling to buy the country’s bonds, or at least not unless offered a very high interest rate. And the fact that the country must roll its debt over at high interest rates worsens its fiscal prospects, making default more likely, so that the crisis of confidence becomes a self-fulfilling prophecy. And as it does, it becomes a banking crisis as well, since a country’s banks are normally heavily invested in government debt.

Now, a country with its own currency, like Britain, can short-circuit this process: if necessary, the Bank of England can step in to buy government debt with newly created money. This might lead to inflation (although even that is doubtful when the economy is depressed), but inflation poses a much smaller threat to investors than outright default. Spain and Italy, however, have adopted the euro and no longer have their own currencies. As a result, the threat of a self-fulfilling crisis is very real — and interest rates on Spanish and Italian debt are more than twice the rate on British debt.

Which brings us back to the impeccable E.C.B.

What Mr. Trichet and his colleagues should be doing right now is buying up Spanish and Italian debt — that is, doing what these countries would be doing for themselves if they still had their own currencies. In fact, the E.C.B. started doing just that a few weeks ago, and produced a temporary respite for those nations. But the E.C.B. immediately found itself under severe pressure from the moralizers, who hate the idea of letting countries off the hook for their alleged fiscal sins. And the perception that the moralizers will block any further rescue actions has set off a renewed market panic.

When do you stop spending?

Jim Flaherty said today that he would spend to defend Canada from another recession

Under questioning from opposition MPs, Flaherty said for the first time that the Conservative government would move in with another round of stimulus spending if the world economy suffers a double-dip recession.

“We would obviously do what is needed” if there was a “dramatic deterioration” in the economies of the United States and Europe, he told the committee.

But for now, Flaherty said, the government is not changing its budget plan despite the turmoil on financial markets and debt crises in the United States and Europe. The plan calls for spending cuts of $4 billion a year to eliminate the annual federal budget deficit — now $32-billion annually — in a few years.

Pressed by opposition MPs about how Ottawa would react to a renewed global slowdown, Flaherty said he would change course and develop a pro-growth spending plan as the Conservatives did during the recent recession.

Here is my problem with this problem.  Do any of us think that the United States/Europe is going to fix their problems in the next recession.  I am not saying Flaherty is wrong but does this look like it’s going away.  Jeff Rubin points out that with global demand the way it is, as we come out of a recession, prices will increase and drive the economy back into it which means, how many of these recessions will we be able to afford to ride out until we are looking at Mulroney-esqe debt loads and Devine type deficits again.

We are looking at a default or massive bailouts for Greece, Italy, Spain, Portugal, and the too big to fail banks in Germany.  There is a dysfunctional governance system in the United States, and even China has some long term economic problems.  Does anyone think this next recession is going to be a quick one or we won’t be experiencing a triple or quadruple dip recession before this is all said and done?  No, me neither.

I know Jim Flaherty has been seeking out the advice of economic experts like former Calgary Flames captain Jim Peplinski but may the alternative might be figuring out ways to reinvent Canada’s economy to thrive in a world where recessions will be the norm, not the exception.