Greece and Spain Parallels: Same Paths, Different Outcomes

Greece has monopolized the headlines of European news in the last few months, playing a back and forth game of “she loves me, she loves me not…” with the European Union. What’s next for Greece? It could go either way: an unprecedented Grexit may be on the horizon or a third time is a charm bailout will finally be accepted and implemented by EU leaders. Amidst the current Greek drama other EU countries are continuing to combat the legacy of the recession and European debt crisis. Enter Spain. One can argue that the best thing that could have happened to Spain is Greece. Less attention is dedicated to the Spanish economy because of the turmoil surrounding Greece. However, there are similarities between the two countries. Both countries were included in the dubious and unflattering acronym PIIGS: Portugal, Italy, Ireland, Greece, and Spain. Among many factors, one underlying variable that can be attributed to their economic troubles is the gross overspending by federal and regional governments, creating debt levels that seem unsurmountable. Both countries have unemployment rates above 20 percent, and youth unemployment above 50 percent. Spain shares the same troubles as Greece when evaluating current pension levels; both have unsustainable pensions levels that are hurting future growth. When assessing debt vs GDP—the ratio of a country’s debt to its gross domestic product, or the number of years needed to pay back debt—Greece recorded in 2014 a rate of 177 percent, while Spain is at 97 percent. Germany, on the other hand, averaged a 2014 debt to GDP ratio of around 66 percent. In short, Spain—and Italy, Portugal, and one can argue France—are not too far from the problems beleaguering Greece Fortunately for Spain and the EU, there are quite a few stark differences between the two. In the last few months Spain’s economic growth rate has been the fastest in the last seven years. Spanish government official statistics delivered good news in the spring: in the first three months of 2015, Spain’s economy expanded 2.6 percent compared to the same period in 2014; solidifying the consistency harnessing Spain’s growth, tallying seven consecutive quarterly GDP positive gains. The International Monetary Fund (IMF) also released a report stating that by the end of 2015, Spain’s total economy should grow by an impressive 3.1 percent. Not bad projected 2015 GDP figures compared to Holland’s 2 percent, France’s 1.2 percent, Germany’s 1.8 percent, Italy’s 0.5 percent, and Greece, which may end up with negative GDP and flirting with another recession.  However, by no means is Spain out of the woods yet. Certain external factors have been favorable for Spain. The weak euro has made its exports more competitive for existing and new foreign markets. The stronger the U.S. dollar, the more it benefits Spain’s exports. This is important for Spain due to very low domestic consumer demand. From 2010 to 2013, Spain was digging itself out of the recession through exports. And now with the euro being more competitive and affordable, exports are poised to continue its momentum. For example, Spain became the world’s biggest wine exporter in 2014, surpassing France and Italy. Also, it has diversified its exports by sending more goods to Latin America, Asia, and the Middle East. The instability in the Middle East has helped the tourism industry in Spain. So far in 2015, tourists are visiting the Spanish coasts in record numbers. Greece, too, can expect an uptick in tourism but what is preventing many more tourists from visiting is the cap on the amount of euros that can be withdrawn from ATMs. Spain does not have a bank liquidity problem and there is no bad PR stemming the tourism industry. The price of oil freefalling in 2014 has helped keep business costs down for Spain’s enterprises. In addition, when the price of oil drops it’s almost perceived as a tax break, freeing up more money for companies’ operation expenses and cash flow statements, as well as for individuals that desperately need any savings they can grasp to satisfy their daily needs. For Spanish businesses, if they can continue to bring down operating costs, it bears well for the future when domestic demand picks up, which in turn harnesses investment and hiring from Spanish companies. And that is exactly what Spain needs, real long-term jobs. Although Spain is on the right track for growth, unemployment continues to be the most serious ill that is plaguing the country. Currently, there are approximately 5.5 million people unemployed. Since 2007, 3 million jobs were lost due to the economic crisis. Statistics after statistics indicate that more than 50 percent are unemployed between the ages of 16-24. This is more than double the number compared to the European Union average. Even though Spain created approximately 400,000 jobs in 2014, a significant percentage of these jobs were temporary or part-time jobs. The consequence of a high unemployment rate in Spain is that a brain drain is emerging, educated and qualified individuals are emigrating to stronger EU countries, or Mexico, Colombia, and other emerging markets; leaving Spain with little human capital to lift and diversify its economy. Besides unemployment, another high hurdle remains that may not be so easy to overcome—pessimism. Spain has a psychological problem that has emerged from experiencing one of the most damaging economic crises in the country’s modern history. Any positive economic news is received with skepticism. It’s as if the boom years of the past were a mirage, a fickle memory that will never repeat itself in the Iberian Peninsula. If the Spaniards are lucky, they won’t experience an economic expansion similar to 2004-7007, where property values increased at a surging 44 percent, inflating the inevitable property bubble. Spain’s growth model of the past was predicated on cheap debt and a housing and construction bubble. Now, there’s some diversity in the current economic model and there is a necessity to entrepreneurship that can potentially yield dividends in the near future. Also, unlike Greece, austerity has taken a back seat to labor reforms and exports. This makes recovery in Spain real. According to a report by the IESE University, Spain is at 95 percent to where it was in 2008. GDP numbers are up, but still much lower than pre-crisis level. Spain may be on the tail end of a “lost decade” but there are encouraging signs where it can hang its hat on. For example, employment numbers are up, unemployment is inching downward. Consumer confidence is gradually on the rise due to positive GDP and employment figures. Exports are still thriving but the recovery is no longer being solely driven by exports, thus Spain is not putting its eggs in one basket, doing what it can to diversify its economy. The tourism industry is booming again. However, most importantly, the average citizen is not feeling that the economy’s wealth is trickling down to them. According to a Spanish survey, 41 percent of respondents think the economy is bad, while 33 percent think it is very bad. If Greece fails, the EU model will not end with it. However, if Spain, Italy, or France is under the same microscope as Greece is today, then the EU dream will be officially over. This possibility exists, yet it is probably for the best that it doesn’t get talked about much. The progress that Spain is making is extremely fundamental for not only Spain, but also the EU. If the EU reduces its sovereign debt, continues to reform stringent labor laws, cuts red tape and promotes and supports the spirit of entrepreneurship, GDP numbers can grow at a faster rate, and Europe will no longer be seen as old and lethargic. It is vital that Spain’s recovery is a real recovery, not driven by borrowing and inflated asset bubbles that eventually pop and create economic devastation. Now if the latter happened, what exactly would be the consequences? Exit Spain from the EU. Exit EU.