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Until pretty recently, Spain was the biggest job creator among the 16 European nations that use the euro as their common currency. But the world financial crisis has dealt a devastating blow to Spain's economy. The country now has a 20 percent jobless rate, the highest in the eurozone, and drastic cuts in government spending are only adding to anxiety about the future. As part of our series this week on the challenges to European unity, NPR's Sylvia Poggioli reports from Madrid.

SYLVIA POGGIOLI: In the Moratalaz neighborhood, lines start forming outside the local unemployment office at 7 a.m. - two hours before the doors open.

Thirty-year-old Gloria Morigosa just lost her job as a secretary.

Ms. GLORIA MORIGOSA: The situation is very hard.

POGGIOLI: And who do you blame?

Ms. MORIGOSA: (Italian spoken)

POGGIOLI: Consumerism?

Ms. MORIGOSA: (Through translator) People who had not many resources -financial resources spent a lot of money, more than they had. They asked for a lot of credit, and with the real estate boom, they thought they could spend a lot of money.

POGGIOLI: Over the last decade, Spain was the European Union poster child. It had it all: great weather, movie star Penelope Cruz, and the trendiest cuisine. It was all part of the boom that followed adoption of the single currency, the euro, in 1999, that was hailed as a major step in European unity.

Economist Juan Jose Dolado explains some of the euro's effects on the Spanish economy.

Mr. JUAN JOSE DOLADO (Economist): All of the sudden, we adopted German interest rates, single currency, single interest rate. We became like the Germans. So interest rates went down a lot. So investment became very profitable. So it made sense to specialize in bricks as we say. Sun and bricks: This is our industrial specialization.

POGGIOLI: Foreign capital flowed in, especially from Germany and the U.K., and the construction boom was unprecedented. Spain had a budget surplus for three years in a row and created five million new jobs.

In 2006, there were more housing starts in Spain than in the U.K., Germany, France and Italy combined. Cheap money brought a burst of self-confidence and a consumption binge. But the economic crisis in 2008 burst the bubble, and two-and-a-half million jobs have since been wiped out. Spaniards found themselves with more than a million unsold new housing units and no manufacturing base to fall back on.

(Soundbite of crowd chatter)

POGGIOLI: Nowhere is that more obvious than at the household appliance floor of Madrid's big department store, El Corte Engles.

Look at the names we see here: Bosch, Siemens, Miele, Smeg, AEG. They're all German names. I can't find one appliance made in Spain.

Economist Dolado says that prior to adopting the euro, Spain - like many other countries on Europe's periphery - never had a strong export industry. But it could sell easily abroad by devaluing its local currency.

With the euro, that's no longer possible. And so, while southern Europeans focused on untradeable goods, like housing and services, they lost competitiveness. And the heavily industrialized and efficient Germany became the biggest exporter in Europe.

Mr. DOLADO: So the rest of the countries lost ground. They couldn't export so much. They incurred big current account deficits, et cetera.

POGGIOLI: The European Union has so far been unable to establish a unified fiscal policy to control its unified currency, with each country following its individual financial policies. National debts have ballooned, now threatening the stability of the euro.

In response to the crisis, EU countries have announced radical budget-cutting measures. Spain aims to cut more than $18 billion over two years.

The IMF is also demanding a radical overhaul of the Spanish labor market. It's a two-tier system - like those in Italy, Greece and Portugal - where full-time employees enjoy nearly job-for-life guarantees, and a second-class group of workers - mostly poorly paid young people - have short-term contracts with few or no benefits.

In Spain, they're called the ni ni generation - they have neither money, nor homes, nor career. Unemployment among Spanish young tops 40 percent.

Unidentified Man: (Italian spoken)

POGGIOLI: These young men gather at a youth center in a working-class section of Madrid. Like most Spanish youth, they live with their parents. It's a system called the cushion the unofficial safety net for the younger generation. Raul Rivas is 20 and has been in and out of many jobs.

Mr. RAUL RIVAS: (Through translator) We all want to be independent and have our own place. But the conditions don't exist. We cannot dream of renting a room with five other people. We just can't afford it.

POGGIOLI: Spain's big construction boom attracted large numbers of young males. Thirty percent even dropped out of high school in order to start making money. Most of them are now jobless. Twenty-year-old Manuel Rodriguez is the only one here still studying at university.

Mr. MANUEL RODRIGUEZ (Student): (Through translator) Today, a degree doesn't mean a thing. It doesn't guarantee you a job. It doesn't matter if you study or not. I certainly feel like I'm part of a lost generation.

POGGIOLI: Across southern Europe, this lost generation has trouble entering the job market, has insecure jobs with few chances of improving skills, and has to postpone starting a family.

A recent Spanish newspaper headline - "From Baby Boom to Baby Crash" -announced that Spain's birth rate, already low, had dropped 5 percent in 2009 over the previous year.

Today's young will be carrying the burden of an aging society.

Sociologist Antonio Lopez Pelaez says Spain, like other Mediterranean countries with low birth rates, is no country for young men.

Professor ANTONIO LOPEZ PELAEZ (Sociologist): (Through translator) The welfare state in Spain focuses on health and the elderly. It's families that support young people, and there are more resources for the elderly than child care centers.

POGGIOLI: This is the trend throughout the eurozone south, where patriarchal societies still count. Majorities of young people up to 34 years of age still live with their families.

In Portugal, youth unemployment, like in Spain, is twice the national average. And in Italy, two million young people between 15 and 29 did not work or study in 2009, making it the European country with the highest number of inactive youth.

Economist Dolado says if southern Europe is to remain a player in the European Union, it must learn from its northern partners, where there is good job training for the unemployed and young people.

Mr. DOLADO: Education and labor market are the two key reforms that this country needs. The power is in the brain these days, not any longer in the hands, as it used to be in the past.

POGGIOLI: But the path to recovery and growth will be long and difficult. And the legacy of having adopted the euro straightjacket for many on the European periphery could prove to be hardships for an entire generation.

Sylvia Poggioli, NPR News.

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