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Unemployment in Spain

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May 7th 2009 | MADRID
From The Economist print edition

Spain is experiencing Europe’s worst unemployment problem

THE huge signs are up in town squares, city parks and myriad spots where men in overalls dig holes, lay pavements or spruce up public facilities. They proclaim that the work is being paid for by Plan E, the stimulus package pushed through by Spain’s Socialist prime minister, José Luis Rodríguez Zapatero. This included €8 billion ($11 billion) for immediate spending by town halls.

Plan E was meant to keep Spaniards working. Yet the latest unemployment figures show that it is not enough. In April 40,000 more people joined the dole queues. That was a slower rise than in previous months, but it still leaves Spain with a 17.4% unemployment rate, the highest in the European Union and twice the EU average. The European Commission predicts that unemployment will hit 20.5% next year. It also says Spain will struggle longer than other countries to recover, getting into positive growth only in 2011, a full year after the EU as a whole. “The sick man of Europe” was how the pro-government El País newspaper greeted the news.

Perhaps the most worrying thing is that Plan E has, in part, worked. The government says it has created some 280,000 jobs, even if few are permanent. The effect is temporary, said Pablo Vázquez of the Foundation for Applied Economic Studies. In August and September unemployment may climb again. Spain is lucky that strong social networks (helped by the black economy) help to prevent civil unrest.

The economy is in a double bind. It has been engulfed, like the rest of the world, by recession and shrinking global trade. To this is added Spain’s own particular crisis, as a model based on cheap labour and a dizzy property market hits the skids. Economists say that Spain must now make the sacrifices and take the tough decisions that it avoided during the long boom years.

Labour-market reform is perhaps the toughest of all. In some ways Spain’s labour laws are quite flexible. With almost a third of the workforce on temporary contracts, marginal workers are easy to shed by the simple expedient of not renewing contracts. That explains why Spain accounts for over half the additional unemployment within the euro area in the past year. The rest of the workforce is on Teflon-coated permanent contracts that make people difficult and expensive to sack. Companies inevitably choose staff to shed on the basis of how easy they are to fire.

Almost everyone favours reform. Such an initiative is urgently needed, with the government leading it, said a group of 95 academic economists in a letter. Mr Zapatero, however, does not share their sense of urgency. And labour-market reforms are not all that he is shying away from. The Bank of Spain recently issued a warning about a dwindling pension pot, suggesting it was time to push the retirement age above 65. Liberalisation of services provided by everyone from notaries and lawyers to veterinarians would help the recovery, said José Carlos Diez of Intermoney, a consultancy. “Whenever we have had a liberalisation plan, the economy has shown its potential for growth,” he added.

So why does Mr Zapatero not reform? Besides all the usual worries about strikes, trade unions and public support, his main problem lies in parliament. Last month his minority government lost its first parliamentary vote. Although the Socialists are only seven seats short of an absolute majority, they are struggling to find allies. Basque nationalist deputies are angry that a Socialist, Patxi Lopez, has just become their region’s premier. Catalan nationalists are similarly tired of the Socialist-led administration in their region. A fractious group of left-wing parties is not always reliable and unlikely to back tough reforms.

That leaves the main opposition, the conservative People’s Party, which now leads in the opinion polls. Some Spaniards would like to see the two big parties push a reform agenda through together. Things will have to get much worse before they are ready to do that.

http://www.economist.com/opinion/displaystory.cfm?story_id=13611650

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