As Spain's economy burns, neighbours fear the backdraught



The forest fires that have ravaged thousands of hectares of north-eastern Spain have offered something close to a metaphor for the financial crisis that has inflicted so much damage on the country, intensifying the threat to Europe's economic stability.

When flames engulf an area equivalent to a large city, they not only have devastating material consequences, but can cause enormous human suffering. The fallout from the explosion of Spanish debt is having a comparable effect.

Sooner or later, though, fires will be quelled, just as firefighters in Catalonia tamed this blaze on Tuesday. There are few signs, however, that the economic crisis is being brought under control any time soon. It seems to matter little what is thrown at it, from European bailout money for struggling banks to grinding austerity measures affecting millions of lives. Only incurable optimists see more favourable winds on the horizon.

Yet an unmistakable sense of deja vu hovers over any discussion of Spain's descent into an economic abyss. The world has grown accustomed to crises in a string of European countries. Ireland, Portugal, Greece, Italy and Cyprus have all been pilloried as what the French call the mauvais élèves - bad pupils - of Europe. All have sought bailouts except, so far, Italy.

And if the dunces' corner already seems crowded, credit rating agencies have downgraded apparently sounder economies, casting more gloom. Even the outlook for Germany, long viewed as a role model for the slower learners, has been altered from stable to negative by one of those agencies, Moody's.

But it is the intimidating scale of the problems confronting the worst performers, along with the belief that stronger nations must accept more pain, that suggests the worst is yet to come.

What is different about Spain? Why should Europe, and the wider world, be more apprehensive now than it was, for example, when the Irish and Portuguese cried for help or Cyprus began its spell of the rotating European Union presidency by thrusting a begging bowl in the direction of Brussels?

Simply put, as Europe's fifth biggest economy, Spain would be a major casualty both symbolically and practically if it had to demand a sovereign bailout.

So far, Madrid has limited itself to seeking €100 billion (Dh443 billion) from European funds to help "recapitalise Spanish banks that need it". It persistently denies that the inevitable next step will be an appeal for a full rescue package costing much more. But just as emptying the contents of a watering can would hardly extinguish a scrubland blaze, a targeted solution for the banks strikes many observers as inadequate if Spain is to show early signs of recovery.

Bad news has continued to stream from Madrid. Borrowing rates reached 7.5 per cent on Monday, a record high for Spain in the 13 years of the euro zone deemed unsustainable in the long term. The Bank of Spain reported further decline in gross domestic product, with a fall of 0.4 per cent in the second quarter following one of 0.3 per cent in the first.

If Spain is hardly to blame for the even graver Greek financial woes, market and business confidence is unlikely to be restored in the single currency zone after mutterings in Berlin that, for all the European money directed towards Athens, Greece's possible departure is no longer viewed with horror.

For the website of Britain's Investors Chronicle, Spain is in a different category. "The size of the Spanish economy and its potential impact on the wider euro zone hugely overshadow any impact Greece exiting the euro would have," it said.

Life has not entirely ground to a halt. Travel analysts say a tourist could easily complete a fortnight's holiday on the sunny Costas without direct exposure to the crisis, save for profiting from bargains offered by restaurants and bars desperate for their custom. Inland, with the austerity programme turning the screw ever more tightly on beleaguered household budgets, last weekend brought another wave of mass protests. Unemployment is just under 25 per cent, and double that rate among young people. Public anger is understandable.

In some towns, shopkeepers have experimented with accepting stashed-away pesetas for payment long after the euro replaced them. The banks will still convert such takings to the single currency. And there is semi-serious talk of abolishing the siesta, a measure favoured by businesses to liberalise shopping hours.

Among those able to recall a more robust Spain of the relatively recent past, it is natural to wonder what went wrong. Vigorous recovery from the global recession in the early 1990s was followed by a 10-year property boom that saw construction account, before the decline began in 2007, for 16 per cent of GDP and 12 per cent of jobs.

But this in turn helped to trigger an eruption of personal debt, soaring inflation and the growth of the trade deficit to a whopping 10 per cent of GDP by mid-2008. Harsh measures have reduced that level, and harsher measures are in store as the new right-wing government aims for 5.3 per cent this year and 3.3 per cent in 2013.

For an idea of what this means in practice, consider again those burning forests. The region of Catalonia, which is already considering a plea for federal help to relieve debt problems, says its ability to tackle the fires has been weakened because more than half its budget in fire prevention and response has been cut since last year.

Colin Randall is the former executive editor of The National and writes regularly from France

www.francesalut.com

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