Students are protesting on Barcelona’s elegant boulevards, public-sector wages are being cut for the second time in three years, and resentment is growing against the central government and beneficiaries of bank bailouts.
Such is the daily fallout from the euro zone’s debt crisis. Like the rest of Spain, Barcelona is looking at several years of hard grind as the country adjusts to living within its means after the collapse of a debt-financed housing bubble that has brought much of the banking sector to its knees.
Yet unless the most pessimistic projections of the cost of rescuing the banks prove right, the signs are that Spain faces corrosion, not collapse.
Spain is representative of the generally insidious, demoralising nature of the crisis: austerity is sapping trust in politicians across the euro zone and fraying the social fabric as the bills for years of economic mismanagement are shared out. “The problem is social. What are we going to do when we have 25 percent unemployment? It’s dramatic,” said Joan Ramon Rovira, the head of economic studies at the Barcelona chamber of commerce.
Even though every fourth Spaniard is unemployed, job protection is being eroded. In Barcelona, the capital of the north-eastern region of Catalonia, hospital wards are being closed, class sizes are growing and university fees are rising.
The crisis has ratcheted up political tensions with Madrid, as supporters of Catalan independence increasingly begrudge helping to bankroll the central government, which they feel treats them with disdain. “Spain is a backpack that is too heavy for us to keep carrying. It’s costing us our development,” said the spokesman for Catalan president Artur Mas, Joan Maria Pique.
Rovira is optimistic that Spain will pull through.
Spain’s exports rose 11 percent last year as it gradually restored the competitiveness lost when wages spurted after the launch of the euro in 1999. The government expects the current account deficit to shrink to less than 1 percent of gross domestic product (GDP) this year from a peak of 10 percent in 2007.
The priority now, according to Catalonia’s economy minister, Andreu Mas-Colell, is for firms in the region to bulk up. “The bright spot in our economy is exports,” he said.
“But our firms are too small. In an export-oriented economy size is important. We are too fragmented.”
In contrast to progress on external economic rebalancing, Spain is dragging its feet on reducing its budget deficit and is being punished by investors. Ten-year government bonds yield about 6 percent, a level that is unsustainable in the long run, on concerns that Madrid will have to spend tens of billions of euros to stop the rot in its banking system.
Spanish banks have more than e180 billion (R1.9 trillion) of sour property assets on their books, and analysts fear there is worse to come.
The Spanish government sought to boost investor confidence on Friday by ordering banks to set aside a further e30bn in loan-loss provisions, two days after taking control of Bankia, one of the leading banks. But the financial markets were unimpressed.
Morgan Stanley’s base case is that banks will need e25bn in capital.
Roubini Global Economics sees losses ranging from e130bn to e300bn.
The urgency of stabilising Spain’s fast-growing stock of debt is shining the spotlight on its 17 autonomous regions.
The regions accounted for 55 percent of last year’s government deficit of 8.5 percent of GDP, according to JP Morgan, and Madrid has passed a law threatening to take direct control of their budgets unless they rein in spending.
Seen from Barcelona, though, things are not so simple. Catalonia and other regions are responsible for managing public services, but Madrid retains most regulatory and tax-and-spend powers. This is a recipe for friction when times are tough: the tax take plummets but demand for health and education does not.
Barcelona frequently finds itself going cap in hand to Madrid even though Catalonia transfers more than 8 percent of its GDP in net taxes to the central government.
“We understand that Spain is going through a crisis and reforms are needed. We are all in the same boat,” Mas-Colell said. “What irritates us is that the crisis could be used as an opportunity to limit our self-government or to not honour commitments made in the past.”
Catalonia wants to negotiate a new fiscal deal that gives it more autonomy. But, saddled with a debt approaching 22 percent of regional output, its political hand looks weak. – Reuters