Sagging Spain holds lessons for Britain

The Madrid stock exchange rose in the wake of Jos Luis Rodriguez Zapatero's Socialist victory in the Spanish general election on Sunday, so the Prime Minister now has a "clear mandate to revive the sagging economy", says The Times.

However, Zapatero fell seven seats short of an absolute majority in the 350-seat parliament, so he will have to rely on ad-hoc support from regional parties. Nevertheless, he now has a political authority that lays to rest the "lingering controversy" over the Socialist victory in 2004, days after the Madrid train bombings.

The priority for Zapatero is Spain's looming economic crisis as the country's housing market collapses, says Wolfgang Munchau in the FT. Between 1995 and 2007 Spanish house prices doubled in real terms, but there is now a glut of unsold homes. The economic impact of a property downturn will hit Spain hard because construction investment constitutes a "staggering" 18% of Spanish GDP (in France and Germany the proportion is about 10%).

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If the construction sector's share of GDP were to shrink to 10% over four years, growth would fall by around 2% a year. Add in the consumption effect (people being unable to extract further equity from their homes to spend) and you "easily get a half-decade of zero growth perhaps longer, perhaps worse or both".

Fortunately, the Spanish economy has some "notable strengths". Spain has been running budget surpluses and has a manageable debt-to-GDP ratio that makes it better equipped to deal with a short cyclical shock than countries such as the UK. It also has a "robust" banking sector that has "avoided some of the pitfalls of modern credit markets". Finance minister Pedro Solbes told the FT that he would step up public works to absorb construction workers who are being laid off (unemployment has risen rapidly, to more than 8.6% of the workforce). He has also pledged to maintain a fiscal surplus, currently 2% of GDP, throughout the economic downturn.

In spite of this, investors aren't confident, says Ambrose Evans-Pritchard in The Daily Telegraph. The spreads on Spanish bonds have "ballooned" to reflect an "abrupt change in perceptions". It's not just Spain, says Joanna Chung in the FT. The yields on bonds issued by different governments in the eurozone are diverging more widely than at any time since the creation of the euro in 1999, as the global credit crisis gathers intensity and investors become more selective.

And things could get worse, says Evans-Pritchard. Traders may soon start concentrating on the risk that "monetary overkill could tip the bloc into a downturn". The ECB is refusing to cut interest rates, which is provoking protests from EU politicians as the super-strong euro causes pain to European industry.

Britain shouldn't feel complacent, says Peter Preston in The Guardian Spanish problems resonate here: an economy going off the boil; a building boom going bust; banks wobbling; terrorist threats; a monarchy under strain and immigration issues. Spain is the European country that feels "closest to the British condition".