Rigidities in the labour market make recovery even harder

This overview hardly scratches the surface of the problems that Spain is facing.

The rise in the unemployment in January 2010 was over 125000 persons. There is little likelihood of any company beginning to hire additional labour any time soon, and there is every likelihood that there will be a continued exodus of companies from Spain, relocating to where labour is more skilled, more flexible and cheaper. The days of inbound investment are finished, and the bureaucratic nightmare of dealing with national and regional regulations is expensive, frustrating and time consuming. An example of this is the increasing application of the law to enforce the use of Catalan is also resulting in relocation, though the vanity of the Catalan nationalists that form part of the tri-partite regional Government would prefer to know that the law is applied than that jobs are being retained.

I could go on, about the aging population, the increasing cost of pensions and health care, and especially about a prime Minister who is so scared of making any decision that may be unpopular. The recent declaration that the retirement age would increase to 67 years was retracted within 5 days after a wave of public outrage at such a decision.

In nearly every area that is important to the Spanish economy, including agriculture, viniculture, tourism, manufacturing and textiles, there has been a total loss of competitiveness over the past 15 years. This is not going to change overnight.

The two areas that had experienced dramatic growth were construction and banking. The first has crashed, with about 1 million newly bailout units remaining unoccupied and unsold, while the major banks and the local savings banks (cajas) are saddled with huge amounts of non-performing debt. The trick of the last couple of years of doing debt for asset swaps is now reaching an end, and the banks will soon need to make some honest declarations about the problems on their balance sheets.

Spain has proven to be a two-pony show, and both are now more than lame. No matter how hard the Spanish politician’s protest that "Spain is not Greece", it is still a country that is teetering on the edge. My guess is that it will fall. And hard.

Hola Vinarossenc

While I in no way wish to suppress the use of Catalan, I can assure that its commercial use in the world beyond the frontiers of Catalunya is ZERO!!

You have made a comparison with other small countries, referring to Denmark, Holland and Finland. Have you been to any of these countries? Are you aware of their language skills, and especially their command of spoken English? I do know, and I write with authority, as I am Danish! I have had considerable dealings with overseas clients, as the vast majority of our business is outside of Denmark, a case that applies to many Danish companies. The first language that we use within our company is English, though we are Danish working for a Danish company. My personal experience of dealing with Catalan companies has been very different from dealing with companies in the rest of Spain, and your assertion/belief that all Catalans are fluent in Spanish is certainly not my experience.

What I have experienced is that when meeting with a group of Catalans, there is often a reversion to using Catalan, leaving me marginalised or totally excluded. Is it because of habit or bad manners, I am unable to say. What I do know is that it is not helpful to any relationship, and business, like our own personal lives, is very dependant on the building of good relationships. And effective communication is one of the corner stones of any relationship.

Congrats to unawatuna for a very sensible and balanced account of the Spanish tragedy (Krugman dixit).

Just to complete the part of the banks : the housing bubble was financed in a large proportion by the saving banks, the « Cajas », which sit on mountains of sour mortgages. Mark-to-market just can’t be delayed for ever, so last week the Bank of Spain published a diktat forcing all lenders to write down a (very) modest 20% of ther real-estate collateral. Now, a conservative heuristic appraisal would have over half the saving banks under-water, which is why the Bank of Spain wants them to get their act together by marrying each other and fusionate into larger institutions.

A sensible enough proposition for any common sense loving economist. But the saving banks are the reserved turf of the (fiercily) localist Spanish politicos (Right and Left on this one), who use them as financial milk-cows and to support their patronage networks. They just hate to let go the saving-banks and they hotly drum up local micro-patriotism to keep THEIR SAVING BANKS. I’m afraid that we are talking many billions of bad debt HERE, hidden in their books that nobody in Mr. Zapatero’s courtesan entourage cares to scratch. While everybody frowns at Greece’s creative statistics, I doubt that they could keep something like this under the rug.

So, minister Salgado was painfully right when she said that “Spain ain’t Greece.” The most piquant part of it is that governments in Germany, Britain and France are well aware of all this. Guess where did the Spanish lenders get the financing of their sub-prime…

@ Muitato

Unawatuna is quite right on the dissuasive effect of imposed regional languages on FDI. That is even more the case when you have a self-contained minority language like Catalan competing with a major global language like Spanish. It doesn't make much sense for professional global execs to learn small languages or, say, to have one's kids attending school in Catalan, Gallician or Basque. Beyond emotional attachment, small languages are a pretty lousy economic bet.

Now, having to put up with a government of dogmatic linguistic zealots is a drag and when you fear that they would try to impose THEIR language on YOUR company if you decide to open shop there, the best one can do is to locate the company somewhere else, say in Madrid. My father used to say that in the time of the Franco regime Barcelona was a much more international and cosmopolitan city than Madrid, when schools, cinemas and so on were in the Spanish language. Now I think it is the other way around: Madrid has become a far more global city than Barcelona and every time I visit Spain the distance seems to have grown: Madrid more global, Barcelona more provincial. Add to that a more business friendly regulatory and fiscal climate in Madrid and you understand why 0ver 80% fo FDI now going to Spain goes there.

Bon Dia Muitato

In reference to your comment, in which you doubt that the enforced imposition of Catalan is causing the relocation of industry. I can assure you that it is, and I know of two companies that have done so. In both cases, which has effected over 700 employees, there was a generous relocation offer to all employees, though the take-up was less than 3%. Of that 3%, all were senior management. Labour force mobility in Spain now is virtually non-existent.

A further example is the current absurdity to impose by law the use of the Catalan language in the cinema and on DVD’s. This is a further measure that will prove to be job destruction for the sake of a few politicians who hold overt power. Instead of steering cinema to using “version original”, and sub-titles, and so possibly improving the very poor local command of English, the political forces are further entrenching and isolating Catalunya.

Ironically, there was once an agreement made, I believe in Barcelona, whereby the right of film Directors was recognised for their creative output – the film – to be shown in it’s original version, uncut, unmodified and uncensored. Certainly, I recall seeing a plaque embedded on the pavement of the Rambla de Catalunya commemorating this agreement.

The statement that I made I will hold to, and that is that the sacred pursuit of the use of the Catalan language at a commercial level is destroying jobs. My belief is that the majority of Catalans are not that aware, concerned or interested at the medium and long term implications of becoming so isolated from the rest of Spain, let alone the rest of Europe. The leader of the ERC, Carod-Rovira, can continue for the moment using an excessive amount of the Catalan budget for his vanity projects of opening missions overseas, though I doubt that there is any benefit to these. Probably no more use than his official visit to Senegal in January this year, which resulted in the agreement to open a Senegalese Consulate in Barcelona, when there was already one in existence, open and operating since 1973.

And: "Spain’s public finances are in a less bad state, thanks to discipline during its boom."

This is dishonesty by understatement. In fact Spain's public finances are much "better" than, say, Britain's or even Germany's. Which proves just how little public finances have to do with what's happening here.

The article is overstating many things, and this is not honest: let's go for a sentence: "Despite a deep recession and zero inflation, pay growth averaged 3% last year, according to the OECD. That helps explain why Spain... Ver más’s jobless rate shot up so quickly; it now stands at 19.5%."

We don't need to have a PhD in Economics to know that this alone doesn't "explain" why Spain's jobless rate shot up so quickly from 8.5% to 19.5%. Alternative, and complementary explanations include the two-tier labor market, where that 10% increase was mainly in temporary, junk contracts which weren't renewed (that's ultraflexibility, not rigidity, senores!); but also the predicting capacity of government, businesses and unions to forecast adequately the size of the recession (the increase decision for 2009 happened in December 2008, of course, just 60 days from the beginning of the financial crisis in the USA, days in which, even if scary, it seemed far away and the official discourse was one of "solid Spanish banking system, superavit, and the Stimulus will solve it all". Obviously a bad prediction, but the timing was very narrow as well (and the data for the first quarter in recession wasn't released until end of April 2009, 4 months after the wage increase agreement).

And we could go on and on about how solid this article is in all its claims. Obviously there are many big trues about the weaknesses of Spain (but even France or Germany shares many of them!!!). However, I think its "editorialistic" and campaigning tone is out of place (but sadly, very common at The Economist as of late). The Economist should be pursuing the truth, not a specific agenda. Cheerios.

"When firms cannot shed workers easily, they become reluctant to hire them at all, which pushes up unemployment."
Off topic, but neither theory nor evidence support this statement - and it has been researched extensively.

For the theory, think of what Employment Protection Legislation (EPL in the jargon) does to job exit rates as well as to job entry rates. Both are reduced, which means the effect on the unemployment rate is ambiguous. Empirically, the OECD has published extensively on this; the strong initial expectations of their researchers that EPL would raise unemployment rates turned out to have no empiric support - in fact but the more they looked the more startling the absence of empiric support was.

They did find that EPL changes the COMPOSITION rather than the LEVEL of unemployment. EPL makes fewer people face a spell of unemployment in a given time period, but those that are unemployed are unemployed much longer. IOW EPL doesn't increase aggregate unemployment, but it makes the burden fall on a minority.

The underlying problem is socioeconomic pride, so stubbornly entrenched that it is bulldoggedly dismissive of reality. Unless the people and the 'governing bodies' throughout the country do a radical rethink of the way they think - put an end to cronyism, nepotism and corruption for a start - they will not find a solution to the 'already here' long-term downward spiral facing Spain. Juan A. Hervada and unawatuna are spot on. Can't go on looking at one's country through rose coloured glasses.

@Vinarossenc
I think you are missing the point many are trying to make about Catalonia's language policy. No-one is saying that Catalan is going to damage Catalonia's economy. Rather it's the small-minded policy to enforced the use of Catalan, which is going eventually to drive business and potential investors away. It simply adds another unnecessary layer of bureaucracy and expense (to the already too many layers which companies have to deal with in Spain). Simply put, it makes doing business in Catalonia more expensive for no real gain.

Why not let companies decided in which language to offer their services? Surely companies are best able to judge what their customers want? You use the Netherlands, Denmark and Finland as examples for countries which are seemingly not damaged by the use of their national languages, but you forget to mention that there is no enforced use of Dutch, Danish and Finnish in those respective countries. Companies in the Netherlands, Denmark and Finland can use whichever language makes sense for their business. There are fewer Danish speakers than Catalan speakers and yet the Danes feel no need to enforce the use of Danish in Denmark? Please just see Catalan language policy for what it is: A small-minded, nationalist - even fascist - policy which can only end up doing damage to Catalonia.

@Vinarossenc

The Catalan language indeed has nothing to do with the state of their economy irrespective of whether or not people in Catalunya speak Castilian Spanish or not. The Scandinavians, Dutch, French and German have good command of English - the lingua franca of international trade - above and beyond speaking their own and several others as well. Spain has a major drawback in that when Spanish people trying to do business, say in the wealthy Far East, speaking 'Spanish' and not English, people out there naturally misconstrued them to be Filipinos or Latin Americans, not Europeans and therefore reluctant to purchase their products deeming them to be obviously inferior. Given that the French equivalent of Harvard Business School teaches in English, the penny should drop on the Spaniards to get off their high horse and start thinking less emotionally and more logically. Government can only do so much, the people should wake up and do something for themselves and not wait for the 'authorities' to look after them.

If one looks at the options for Spain, they seem distinctly more open than Greece. For one, most of Spains sovereign debt is held domestically - so less risk of speculative attacks by nasty foreigners. Secondly, spain has more room to act than Greece. Third, Spain has intelligently accumulated 60 BN in a social security contingency fund. Yes the deficit is 9% but it is mostly cyclical and no, Spain is hardly bankrupt. What needs to be done in Spain is:
1. Go after those tax evading self-employed,
2. Make not paying VAT much harder
3. Rethink the architecture of the state, the multiple levels and competencies are a waste of money.
Just those 3 items would likely plug the cyclical deficit. 20 Bn in VAT (Spain undercollects compared to Germany, France or Netherlands), probably another 10 Bn from Income tax from all the self-employed who tax evade. Another 20 Bn by being as efficient as the best in class in europe. So a quick win of 50BN euros if there was the will.

Quite agree with The Economist: tough times to come for Spain.
We need urgent reforms to deal with the crisis.
If interest rates are increased next year there will be a lot of people losing their homes and jobs. The´ll become desperate people with no way out.

I think we need right now an agreement between the two big parties, PP and PSOE, to fix this painful situation.

Whatever his virtues and vices, Zapatero will NEVER alienate his core voters, which happen to be those that would lose from any type of rational reform: (permanent) workers.

Therefore any hope of reform must wait a few years until the next general election, or until the opposition succeeds ousting him through a non-confidence vote (from which there has been some talk recently).

The social equilibrium equation in Spain is the following:

(confident permanent workers) > (afraid permanent workers) + (temporary workers) + unemployed + enterpreneurs + capitalists

The longer the crisis lasts, the more people will swing to the right of the equation, away from Zapatero. But there is still a long way to go - for all the economical problems in Spain, Zapatero has a strong support from those that would lose from reforming, which are majority.

At the end in Spain there is a classic social explotation of the majority (permanent workers) against the minority, mainly unemployed and temporary workers. I can not imagine this changing, and Zapatero is playing perfectly his role as protector of this majority.

@ agent provocateur

I wholeheartedly agree with you. If I speak English and French, besides Catalan and Spanish, it is thanks to my parents who insisted on the importance of learning foreign languages. For your information I am 50 years old now and have never lived abroad. Unfortunately many people in Spain still buy the "500 million Spanish speakers" story, forgetting the fact that, languagewise, it is not quantity but quality that counts. How many scientific papers or books about technology are published in Spanish and how many in English? The stubbornly monolingual Spaniards should face the fact that English is the lingua franca of the current world.

But my post was not about that. What the Catalans want is to speak Catalan in Catalonia and be able to buy products and services in Catalan in our own country, just as the Danish, Dutch or Finnish do in their respective countries with their respective languages. That people like Mr. Hervada, who is obviously an intelligent, well informed, liberal and cultured man, fail to grasp such a natural fact, never ceases to amaze me.

I mostly agree with the opinions expressed by unawatuna and Juan A. Hervada. Notwithstanding, I oppose unawatuna comment on the enforcement of the use of Catalan as a jobs-losing cause or relocation of industries.
Catalonia has always been one of the most dinamic regions in Spain, as well as Madrid, The Basque Country, Navarra, and some others.
The economic problems of Catalonia are, I agree with unawatuna, the excessive regulations, bureaucracy, a multilevel administration, and the unstoppable increasing of public workers, most of them unnecessary and not productive (when not obstructive).
One of the insidious effects of the unemployment regulation in Spain is that lots of people prefer to remain unemployed than move to any other region (or even country in EU) looking for better opportunities. That is because people can stay up to 2 years unemployed and receiving a pay from the government (or the taxpayers, I'd better say), with no need to actively look for jobs or taking any training.

@ unawatuna and Juan A. Hervada

I fail to see why the Catalan language should damage Catalonia's economy while apparently Dutch, Danish or Finnish languages seem not to hurt Netherlands, Denmark or Finland's economies. Specially taking into account that each and every Catalan speaker also speaks fluent Spanish, and that a bigger percentage of them speak English or French if compared whith the mainly monolingual Castilian people.

The solution to this economic mess is simple: Lower taxes, less government, more economic freedom, reform entitlements, open labor markets without those ridiculous benefits.... As Maggie Thatcher used to say, "The problem with socialism is that sooner or later you run out of other people's money"

True you didn´t need a Phd in economics to understand the cause of the sudden and massive rise in unemployment. If you live here you simply needed look out of the window. The construction industry, within the space of a few months, collapsed leaving 1m unsold homes on urbanisations and in apartments blocks. With another 1m in the resale amrket, means it is a minimum of 5 years before anyone needs to lay a brick in Spain again. The loss of an entire industry in areas along coast where there are no growth industries.

Thanks you for an informative, albeit upbeat, article.

Excellent analysis, though ,just to remind the economist, just 2 years ago, praised Zapatero's some "booming age" policies and bullet-proof financial-banking system as a model to follow....the spanish tragedy is not only an excellent and succulent slogan, fertile soil for the ever-ready-to fish eurosceptics, the true tragedy resides in that there's no alternative, no plan, no fresh ideas, no will to agree a deep long-term reform... only a painfull civil national agreement,and loads of patiente, without self-indulgences, can save us .Spain still (after 30 years of democracy) has a severe disfunctional behaviour problem...and maybe outsourced economic therapists can be useful... but the pacient firstly needs to be concious of his sickness. You dont help a pacient by telling him every hour, he is going to die soon,and there's no hope for him. I wonder, as Spanish and UK resident(and subsecquently a generous tax-payer),whether is the horizon brighter over here. Who really wins with this systematic and continous attack? Which is the goal? Are you willing we push the self-destruction button? again? ..Nahh, We already did it 70 years ago.. and noone helped us... Still I want see the light, I trust on the spaniards and their capacity to reinvent themselves, their politicians are unable to do it.