Pain in Spain

Spain has long been Europe’s super-achiever. Over the past few years it’s created more than half of all the new jobs in the European Union. Thanks to the decade-long economic bonanza, per capita incomes now approximate France and Japan.

As the world’s ninth largest economy, Spain has been a particular beneficiary of both the global real estate boom in recent years and, especially, tourism. But it already feels like history.

The real estate market has come to a standstill, with new housing and office structures remaining only half-finished across the country as the credit squeeze deepens. Average level of household debt has tripled in recent years, with the ratio of debt to income approaching 130% for lower income groups.

Clearly, the newly-elected Prime Minister José Luis Rodriguez Zapatero faces some tough hurdles as he heads into his second term. Over the weekend he was reported to be bringing forward the structure of a new cabinet so that he can present urgent measures against the economic slowdown. The Socialist leader wants to be able to approve initial legislation within two weeks.

These measures are expected to address the slump in construction by sending households big tax rebates of around €400 while investing heavily in public infrastructure projects like rail and roadways.

“They know they have to do something quickly, there’s a high sense of urgency” said Chief Economist Martin Val Vliet at ING Financial Services Amsterdam.

Zapatero himself said recently that the aim of urgent legislation is “to give impetus to the economy, to employment and to social policies”. Massive investments are also needed in education as well as R&D.

Zapatero may well be the man for the job. Swept into power in 2004 on a surge of public rage about terror bombings, he is anything but timid. Zapatero granted more power to the provinces, withdrew Spanish troops from Iraq and legalized gay marriage. He also launched peace talks with Basque separatists in a brokerage attempt that has failed. On a broader scale, his secular vision for Spain placed him on a permanent collision course with the conservative Catholic Church.

In tackling pressing economic issues, Zapatero’s sense of urgency is heightened by the global credit squeeze sparked by the virtual collapse of the American mortgage market. His call for massive infrastructure investments is the first in Europe that addresses the prospect of severe job losses and hard times during a possible global downturn. Other EU countries may well follow suit as the extent of the global credit drama continues to unfold.