How the 2008 crisis compares with the coronavirus fallout in Spain

Twelve years after plunging into a protracted economic crisis, Spain is reeling from a new and unexpected economic shock caused by the coronavirus pandemic, which has brought the economy grinding to a halt. Jobless claims are already soaring and experts estimate that the cost of the first four weeks of confinement alone could be in the range of €49 billion.

As it looks into the mirror, what Spain sees is a country that has yet to fully recover from the previous economic crisis: its debt and deficit levels are higher now, and so is unemployment. But on the other hand, its exports sector is stronger than it was in early 2008, there is hardly any inflation, and Europe seems to be (more or less) listening.

The origin

“The fundamental difference is the origin: in the first case it came from within the system itself, and in the second it was an outside shock caused by a pandemic,” notes José García-Montalvo, an economics professor at Pompeu Fabra University in Barcelona.

Juan Antonio Gómez-Pintado, president of the real estate industry association APCE, underscores another dissimilarity: “The difference is that in the current financial situation, lenders are much less exposed to our sector and a lot more under control.”

But the fact that this is not a financial crisis by nature does not mean that it could not become one. “If no mechanisms are created to stop the banking sector from feeling the final impact of the shock, the consequences could be similar,” warns García-Montalvo.

Debt levels

A comparison of the situations in early 2008 and in late 2019 yields some other remarkable differences. In 2008, the government had a surplus of nearly 2% of gross domestic product (GDP) to work with, while public debt was at a historical low of 38% of GDP and the jobless rate had dropped to 8% in a country accustomed to double-digit unemployment. These were the days when the economy was growing on the back of a property bubble.

Over a decade later, the government has a much smaller margin to deal with the present crisis: the public deficit was over €33 billion late last year, or nearly 3% of GDP, while the debt-to-GDP ratio was close to 100% and unemployment remained above 14%.

Interest rates to finance borrowing are at historical lows, and Brussels is preparing some artillery of its own

On the upside, Spain’s export sector has grown from around 24% of GDP to 35%, which has helped generate a current account surplus. And inflation is under control, which prevents a loss of purchasing power and improves competitiveness.

Right before the coronavirus crisis, the Spanish economy was growing, albeit at a slower pace than in early 2008. “Indicators show that the slowdown was being caused by the economy’s most powerful engine of growth, which is household consumption,” says Paloma Taltavull, a professor of applied economics at Alicante University.

In late 2019 Spain was growing, but this growth was beginning to slow down. And macroeconomic indicators were far from what they were in 2007, when GDP was growing at a pace of close to 4%. In absolute terms, today’s GDP is higher: €1.2 trillion compared with €1 trillion, an indication of the relative effort that the state will have to make to get out of this crisis.

EU support

Another difference between then and now is the degree of support that Spain is seeing from the European Union. During the previous crisis, the European Central Bank (ECB) took four years to provide backup for debt-laden member states, with then-president Mario Draghi making his famous speech about doing “whatever it takes to preserve the euro.”

On this occasion, ECB boss Christine Lagarde has taken around 10 days to make a move. Interest rates to finance borrowing are at historical lows, and Brussels is preparing some artillery of its own. And even though Spain would like to see bigger tools rolled out – namely the so-called “coronabonds” – the European Commission is working on a lifeline for the countries hardest hit by the pandemic. In other words, European authorities are reacting a lot faster now than they did during the 2008 crisis.

Liquidity

“The big question now is how the public sector will be able to digest all the money it is going to need,” says Jaime Pascual-Sanchiz, CEO of the real estate consultancy Savills Aguirre Newman.

The solution, everyone agrees, will depend on how long the health emergency lasts. But it is important to act early and guarantee liquidity for the productive sector. “Within the next three months we need for the government to be very clear with the banks about how it wants to turn on the [liquidity] tap,” says Guillermo Llibre, head of Housell, a tech-based online real estate service.

The National Market and Competitiveness Commission (CNMC), a government watchdog, is already investigating claims that some lenders are forcing applicants of state-guaranteed loans to acquire additional products such as insurance or credit cards, a practice that is not allowed.

Real estate and tourism

“In the short run, we will see a big slowdown in the property sector,” says Beatriz Toribio, director general of the homeowners association Asval. “For the average citizen, access to a home will be even more difficult.”

“If realtors need to stay closed much longer, a lot of them will go under,” adds Anna Puigdevall, manager of the Association of Real Estate Agents of Catalonia.

But it’s the tourism industry, which accounts for around 11% of GDP, that’s going to feel the biggest impact. “It’s the sector that’s going to lose out the most,” says university professor Taltavull. “And it will drag down the rest of the economy to a greater or lesser degree.”

English version by Susana Urra.