Chart of the Week: The Pain in Spain

Appropriately naming themselves "the Indignants", Spaniards took to the streets to show their government what they think of austerity measures imposed by the overlay of Brussels bureaucracy on their elected government. These charts sum up what is happening to the Spanish economy:

Spain's dire straits are different from the Greek.  Spain is not overly indebted as Greece is; its public debt is below the EU average of 84% of GDP. It has less government debt than the UK. The key difference is that the UK never joined the European monetary union; therefore the UK central bank still controls the relative value of the pound sterling in the last resort; and so the UK cannot be forced into a liquidity crisis. The European economic slow down has hit Spain hard, the chart above shows a return to contraction. Spain's good times in the earlier part of this decade were fueled by a real estate development boom. Real estate prices tripled between 1996 and 2007. This sector is now contracting rapidly as this construction employment chart--often these jobs held by young people--shows:

Unemployment is at a multi-decade high and at 50% for young workers. Loss of monetary sovereignty means the austerity pain in Spain falls mainly on unemployed workers. But the other major problem confronting Spain is the high level of bad loans held by Spanish banks:

The conservative Spanish government was forced to take over the nation's fourth largest bank, Bankia, which itself had been cobbled together from seven failed cajas.  It was given a €3 billion capital infusion and still failed.  Only about half of its real estate loans were performing according to public figures.  The possibility of a run on Spanish banks makes German investors very nervous because Germany is the major lender to Spain:

Investors are demanding a premium (4.95% vs. 2.05% for Germany) to continue lending to Spain which makes the government's problem of paying off debt and financing deficit spending of 5% of its GDP more difficult. Because it is locked into the Eurozone, Spain cannot simply devalue the paseta thereby making its idle labor force and exports more competitive. To compound the problem of no economic growth, the government has swallowed the austerity pill by agreeing to one of the biggest program of spending cuts and tax increases in its history. It is like watching an entire nation do the Michael Jackson moonwalk--all forward motion, but he goes backwards. In future, Spain's leaders may be asking themselves the same question Greek leaders are asking now, "is there life beyond the Euro?"