The perfect storm that dragged Spain to the bottom of advanced economies

The cocktail seems simple enough: a handful of unresolved structural problems, conveniently shaken in combination with the tremendous restrictions caused by an unexpected pathogen that is invisible to the naked eye.

All indicators are warning that the mixture has ignited: in 2020, Spain’s gross domestic product (GDP) will shrink by 12.8%, the biggest contraction of all advanced economies, according to the International Monetary Fund (IMF). The country is also headed for a record-high deficit and soaring unemployment.

This begs the question of why the economic situation is so bad in Spain.

Strict confinement and second wave

While Spanish citizens camped out on their balconies for months, confined to their homes under a strict lockdown, other Western countries were living in a much less claustrophobic reality. The Spanish government almost completely halted all non-essential activities in order to flatten an unbridled contagion curve. “Immobility was introduced earlier and it was more severe than in the average of advanced countries,” confirms Emilio Ontiveros, the president of the consulting firm Analistas Financieros Internacionales (AFI).

Then, an early second wave of the coronavirus broke the fragile summer truce, bringing with it tougher restrictions. The latest measure was Catalonia’s decision to close down all bars and restaurants for two weeks. Spain is no longer the European country with the highest coronavirus caseload, but the extensive media exposure has not helped relaunch investment.

Reliance on tourism

There is almost complete consensus among the half a dozen experts consulted by this newspaper: Spain has been hampered by its excessive reliance on tourism, which in pre-crisis days contributed around 14% of GDP and employed three million people. “Spain’s productive structure adapts very badly to a crisis situation,” says José García Montalvo, who teaches economics at Pompeu Fabra University in Barcelona. “We’ve been talking for years about how the sun-and-sand model is not sustainable. We’ve been talking about industrialization, investing in renewables or in electric batteries, but the fact is that it’s very difficult to change anything in a system that is so rigid and where education levels are not what they should be.” Spain is the EU country with the highest school drop-out rate, and Spanish students routinely perform below average on the PISA report, an international assessment that measures teenagers’ ability to apply their math, reading and science skills to practical problem solving.

But María Jesús Fernández, a senior economist at the think tank Funcas, disagrees with this view. She believes that the Spanish economy has tanked simply because of the higher coronavirus incidence. She says it is normal for tourism to play a larger role in Spain because it counts on 8,000 kilometers of coastline and more sunlight than other countries. “A few years ago, the auto industry experienced a considerable slump and it affected Germany more than Spain. But nobody said that the auto sector had too much weight in the German economy,” she notes.

In France, the country with the highest number of tourist arrivals – nearly 90 million a year – GDP will contract 9.8%, three percentage points fewer than in Spain. In 2018, tourism represented 7.8% of France’s GDP, according to French government data. Ontiveros says that the key to the tourism industry lies in diversification and spending. “We shouldn’t complain about the fact that we are the world’s second tourist destination, but we do need to generate more value per visitor.”

Small businesses geared toward services

In difficult times, a company’s margin for survival will often depend on its size. This was clearly seen with the sudden disappearance of actors in the banking sector. In Spain, more than 90% of businesses have five or fewer workers, and that means they are less well equipped to deal with adversity. “Their defensive capacity is very reduced and their financial structure is vulnerable to a fall in demand,” warns Ontiveros. Larger companies generally resist better, as they export more, are more productive and have a more highly educated leadership, he says. They also have access to resources that the small players do not. “[Energy company] Iberdrola can borrow from the bond market, it doesn’t need the banks, but a local bar from Jerez or Málaga can only turn to the bank for credit,” he adds.

Why don’t Spanish companies grow bigger? José Ignacio Conde-Ruiz, the deputy director of the think tank Foundation for the Study of Applied Economics (Fedea), believes this is an open question. “Fiscal laws affect size. If you are a small or medium enterprise [SME], you pay lower corporate taxes, but it’s not the only explanation,” he says. The weight of the services sector, particularly accommodation, food and drink, which does not require a lot of personnel, might play a role. In any case, the predominance of SMEs has not benefited the economy, not even after the confinement. “People’s habits are changing. Remote working means they no longer go to the office and have lunch at a nearby bar. People are saving up because of the uncertainty,” says Conde-Ruiz, who also teaches at Madrid’s Complutense University.

Temporary jobs

The coronavirus crisis axed more than one million jobs during the 99-day lockdown. The dark paradox is that the pandemic reduced Spain’s systemic over-reliance on temporary jobs. But it was for all the wrong reasons: there were no more long-term contracts, and more people fell out of work as their temporary contracts expired and were not renewed. “When there is a drop in demand, we kick large amounts of people out of the job market. That makes recessions even worse,” says Ontiveros. “Temporary workers are kicked out right away. And that is not the best in a situation like this one, because they can’t even apply for the ERTE [furlough scheme],” adds Conde-Ruiz. Young people are particularly vulnerable as they hold many of the precarious jobs, which has brought the youth unemployment rate to 43.9%, more than twice the EU average.

Limited fiscal space for spending

Spain ended 2019, a boom year, with a public deficit of 2.8% of GDP and a public debt of close to 100%. Nobody in the government was anticipating a global pandemic, and spending cuts were being put off for later. When the coronavirus crisis hit, the government responded with measures such as furloughs and the guaranteed minimum income scheme. Still, experts feel that the stimulus has been smaller in Spain than in other advanced economies. “We arrived at this point with a very small spending margin both in terms of the debt and the deficit, and that prevented us from adopting more aggressive measures like other countries, such as offering equity injections for businesses or paying the rent for restaurants,” says María Jesús Fernández, of Funcas.

Montalvo agrees that Spain’s stimulus measures against the crisis have been small, compared with things like US President Donald Trump’s decision to send millions of Americans checks for $1,200 regardless of their income level. “The proportion of GDP that’s being used in Spain is significantly smaller, and consumer spending is not recovering among lower-income households. France, Italy and Germany are a world apart. Here, we place all our faith in the European funds,” he notes, alluding to the €140 billion allocated to Spain by the EU coronavirus recovery fund. On the other hand, this expert does not feel that the high debt and deficit levels are a barrier, as Brussels has placed fiscal rules on hold because of the pandemic. He also cautions against using the European funds for political means, considering the historical precedent of money being wasted on “desalination plants that are not used and training courses without any students.”

Ontiveros is less skeptical. “Spain relies on Europe more than any other country. Without its funds and the aggressive attitude by the European Central Bank, the fate of its economy would be complicated,” he says. The head of AFI believes that Spain has taken the same steps as Germany to contain the fallout: helping businesses with state-guaranteed financial assistance, and helping workers through furlough schemes. There is one notable difference, however: “The amount of resources allocated by Germany is much higher, because our own space for maneuvering is reduced.” On Wednesday, the IMF released research showing that out of Europe’s five largest economies, Spain offered the smallest amount of guaranteed loans but on the other had the highest take-up by applicants.

English version by Susana Urra.