Spain’s great depression

Spain's economy shrank for a seventh successive quarter between January and March 2013. GDP fell by 0.5%, compared to 0.8% in the previous three months. Unemployment hit 27.2% in the first quarter. Among under-25s, the rate is 56%.

The government said its annual deficit would be around 6.3% of GDP this year, up from an earlier 4.5% estimate. It has been given an extra two years to bring the shortfall down to the EU target of 3%.

What the commentators said

The most striking feature of Spain's "great depression" is the shattered labour market, said Matthew O'Brien on Theatlantic.com. Other states have had worse slides in GDP, but their jobless totals aren't so high. That shows that a large part of Spain's labour-market malaise is structural.

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On the one hand there are permanent employees, who are practically impossible to get rid of, so firms are reluctant to hire any more. Then there are the temporary workers comprising a third of the labour force "who enjoy few protections and fewer opportunities".

In this segment there is plenty of churn as employers can ditch them at the first sign of trouble. So "young people get stuck in a never-ending cycle of under-and-unemployment" and their skills atrophy.

While the government has tinkered with the labour market, it hasn't tackled this basic division, as Reuters.com pointed out. The housing slump, which undermines confidence and spending by indebted households, continues, with Standard & Poor's predicting another 8% drop in house prices this year.

Falling house prices and the ongoing recession threaten to cause further losses at banks, which are already extremely reluctant to lend. "When it comes to financial conditions, it's just the sovereign that's benefiting from the more favorable perceptions of Spain. Borrowing costs for businesses and households remain punitive," said Nicholas Spiro of Spiro Sovereign Strategy.

In short, said O'Brien, Spain is in such a mess that merely easing up on austerity, as the two-year deficit extension implies, won't be enough. "Spain needs shock therapy for its labour markets", but politicians will shy away from this as the short-term costs would be even higher unemployment. Euro membership set off an "uncontrollable boom" in Spain, concluded Ambrose Evans-Pritchard on Telegraph.co.uk. It "now faces an uncontrollable bust".