It’s 7am, and the lines have started forming in front of the government unemployment office- Two hours before the doors open. The scene is same at the city’s food banks and churches. No, this scene is not from a sub-Saharan city, but from Madrid, Spain. Spain has become the poster child of the boom to gloom. By the end of today, Spain’s 10 year bonds were going for a record 7% yield.
Not too long ago, Spain was the epitome of economic liberalization. Thanks to the ‘92 Barcelona Olympics, world became familiar with Spanish cuisines, warm weather, beaches, football leagues and of course its cinema (Penelope Cruze, anyone!!). Spain was the prosperous "Iberian Tiger” the biggest creator of jobs among the Euro nations. The adoption of the single European currency in 1999 pushed Spain into the elite league of successful nations. It became ‘developed’. It was on the same level playing field as its much bigger and economically better counterpart, Germany. Spain's financial system came to resemble the Germans' — using the same currency, enjoying the same low interest rates and opening investment opportunities.
Spain’s economic revolution was based on ‘Sun and Bricks’. The warm weather attracted wealthy Scandinavians and northern Europeans. And thanks to the liberal economic policies, miles of pristine beaches were opened up for construction. What followed was a housing boom that makes the US boom meager. English, Germans and Scandinavians flocked the Spanish beaches. They demanded beach front villas and boy did Spaniards provide them. In 2005/06 Spain started to build more homes then UK, France, Italy and Germany combine. 5 million new jobs were created since the inception of Euro. The nation that uses to have over 20-25% unemployment saw it’s out of work population decrease to 10-11%.
And then came the economic crisis of 2008. Northern Europeans started to withdraw their money from Spain. English were not able to make the payments on their beach front properties. Spaniards who owned 2-3 homes started getting laid off. Money started drying out of the system. Greece’s problem didn’t help either. Investor started to realize that after all Spain, just like Greece, is the ‘Club-Med’ peripheral European nations that didn’t had anything else except warm weather and beaches to offer to the world.
The reality has settled in. Spain’s economy shrunk last year, unemployment is crippling back at 20%, banks have gone bankrupt, Spaniards have started withdrawing money from the Spanish Banks and are moving it to Germany and France. Spanish youths who had moved out of their parents homes, returned back. In Spain they're called the "ni ni” (“nor nor”) generation — they have neither money, nor homes, nor careers. Reflecting the reality of bad times, Real Madrid and Barcelona both lost in the UEFA champion’s league.
It makes sense now and it made sense then. I do not uderstand why it did not made sense to global investors, politicians, and general people of spain. When country do not have much to offer or differentiate itself, country will be in the situation that Spain is in. Many oil rich countries have realized this (though late) and started to invest in different segments.
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