What Went Wrong In Spain But Why It Isn't Greece

On the surface, Spain shares some European problems: It grew too fast, leveraged too much and spent more than it should have. But beneath is a more complicated and uniquely Spanish story. The country grew in the wrong ways, investing too heavily in construction and depending too heavily on labor, especially unskilled foreign labor. Nearly a third of Spaniards under 26 are jobless. But the Spanish economy isn't destined to implode. The construction boom left an improved infrastructure, and Spanish youth are well-educated. Whether Spain manages to escape the same fate as Greece may well determine the future of European unity.

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This is WEEKEND EDITION from NPR News. Im Liane Hansen.

The troubles in Greece have dominated financial news lately, but the future of the European economy probably depends more on what happens in Spain. Its economy is four times larger than that of Greece. Through much of the last decade, Spain was booming. For a while, two out of every five new jobs in Europe were created there. No more, the unemployment rate now is above 20 percent and a quick recovery seems unlikely.

NPR's Tom Gjelten has more on Spain's rise and fall.

TOM GJELTEN: In March 2004, Spain was a "Time" magazine cover story. The headline: Spain Rocks. The economy was on a roll. Consumers were on a spending binge and so was the government.

(Soundbite of trains)

GJELTEN: The metro in Madrid had just been expanded, 25 miles of new train tunnels, 28 new metro stations.

(Soundbite of trains)

GJELTEN: Madrid during those years became a better place to live and work. There was huge demand for new homes. Spain was number one in housing starts across Europe. Mortgages were cheap, banks eager to lend. In fact, all this construction activity was itself driving Spain's economic growth and that was where Spain's problems started: There was too much construction.

Fernando Ballabriga directs the Economics Department at the ESADE Business School in Madrid.

Professor FERNANDO BALLABRIGA (Director, Economics Department, ESADE Business School): I mean, it's unsustainable. The construction sector got to something like 20 percent of GDP at some years, which is - yeah, it makes no sense.

GJELTEN: Construction more typically accounts for about five percent of a country's economy. When it's 20 percent of GDP, trouble follows. Here's why: If you make cars or grow olives, you can sell them at home or abroad, but once a new building goes up it stays right there, whether you need it or not. And in Spain the construction boom petered out about three years ago.

(Soundbite of machinery)

GJELTEN: Three big cranes stand idle at this building site on the far north side of Madrid. Four apartment buildings were going up here but then the construction stopped for lack of demand - a scene reminiscent of suburbs in Florida or outside Las Vegas.

Alejandro Martinez and Paula Rosa, walking with their groceries passed this empty building site, say they're stuck with the apartment they bought here five years ago.

Mr. ALEJANDRO MARTINEZ: (Foreign language spoken)

GJELTEN: The market has collapsed, Alejandro says.

I ask what percentage of the apartments in this neighborhood are occupied?

Mr. MARTINEZ: (Foreign language spoken)

GJELTEN: No more than 60 percent. Less, says Paula.

Ms. PAULA ROSA: (Foreign language spoken)

GJELTEN: There are many empty houses here, she says, a ton.

With the sudden drop in construction here, jobs disappeared. This shows another problem with a growth model built on construction: Employment swings up and down dramatically.

Professor JOAQUIN ARANGO (Director, Center for the Study of Migration and Citizenship, Ortega y Gasset Foundation): The Spanish economy is labor intensive.

GJELTEN: Joaquin Arango, of the Ortega y Gasset Foundation, points out that the economic boom in Spain brought more people into the workforce but mostly in low skill areas, like construction. A lot of the jobs could be filled by foreign-born workers. Arango, a sociologist, has documented the surge in the immigrant population that began with the economic boon in the last 1990s.

Prof. ARANGO: As a percentage of the population, at the beginning of that period, was two and a half percent or so. And now it is over 12 percent.

GJELTEN: Thats dramatic.

Prof. ARANGO: Yeah, spectacular.

GJELTEN: The number of immigrants arriving here during those years, about five million, was second only to the United States. But there's a flipside: Many have now lost their jobs. One out of three foreign-born workers in Spain is now unemployed. And then there's the youth population. For them, it's even worse.

(Soundbite of conversations)

GJELTEN: About 75,000 students are enrolled this spring at the sprawling Complutense University of Madrid. Given the dismal job market there's not much else for young people to do.

Anna Arbulo(ph) and Gerardo Coryaso(ph) relax in between classes, say they have to lower their sights.

Ms. ANNA ARBULO (Student, Complutense University of Madrid): (Foreign language spoken)

GJELTEN: Our hope is to work at Burger King, says Anna.

Mr. GERARDO CORYASO (Student, Complutense University of Madrid): (Foreign language spoken)

GJELTEN: Or just stay in school, says Gerardo, until the situation gets better.

Ms. OLMER ORTIZ Student, Complutense University of Madrid): (Foreign language spoken)

GJELTEN: Their classmate, Olmer Ortiz(ph), notes that since theyve just begun college they won't have to deal with the job world for another three or four years.

Whats missing in their outlook is any sense of promise, opportunity and excitement about their futures.

Mr. CORYASO: (Foreign language spoken)

GJELTEN: There's so many people desperate to find work out there, Gerardo says, so employers can demand experience. For a young person, he says, competing with older people who are themselves desperate, it's just so much more difficult. His friends nod in agreement. I ask Olmer Ortiz what advice her parents give her.

Ms. ORTIZ: (Foreign language spoken)

GJELTEN: To study hard, she says, or get a government job.

This tendency to look to the government for employment, not the private sector, goes to the heart of whats plaguing Spain right now. The economy here has lost much of its creativity.

Fernando Ballabriga, of the ESADE Business School, says Spain needs to develop its entrepreneurial potential - beginning with the young people now emerging from colleges and universities.

Prof. BALLABRIGA: We have the generation with the highest education level ever and we are not providing the opportunities for this generation to contribute to the development of new, more hi-tech, value-added sectors.

GJELTEN: Ballabriga and other critics of Spanish government policy say the country could have a more competitive economy if it were easier for Spanish employers to get rid of unproductive workers during a downturn and hire better-educated, more forward-looking workers when they're ready to expand.

That would require a reform of what are now relatively rigid labor market policies. But with out it, Ballabriga says, the unemployment burden falls disproportionately on young people. Nearly 40 percent of Spaniards under the age of 26 today, he points out, are without work. Of every five young people here, two are unemployed.

Prof. BALLABRIGA: To a large extent these people is suffering the consequences of that judgment, whereas less productive workers are still in place.

GJELTEN: Much attention has been paid on the need for Spain to trim its budget deficit - ditto for Greece and Portugal and other indebted European countries. But the deeper problem here in Spain, but also across Europe, are economies that are no longer structured to grow in sustainable ways and compete globally. Spain has shown already it can be an economic powerhouse in Europe. Now it needs to show it can face its economic challenges and adapt.

Tom Gjelten, NPR News.

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