Spain’s Ghost Towns: The Crisis Explained

spain banking crisis

Spain, one of the Europe’s biggest economies has fallen spectacularly from its construction boom of 2000’s and is now among the toughest economies in the European Union along with Greece and Ireland. So what happened, what made a country almost as big as France so poor and desperate?

Spain for the biggest part of the 20th century was under either civil war or a thumb of a dictator, Franco. Its rich reserves of coal and minerals were very much isolated to the international trade. With Franco’s death in 1975 and a failed coup in 1981 marked the beginning of Spain’s democracy and its acceptance into the European Community.

In 1992 the Maastricht Treaty was signed by 11 countries, laying the foundation to the European Union, and then in 1999 Spain along with those 11 countries adopted the Euro. This is important to note for the future.

As Spain began using the common currency, it could borrow at the rock bottom rates of Germany. The floodgate was open. Spain’s banking system is quite different from a normal, European system. Since after Franco’s death, Spain was divided into 17 municipalities, with their own autonomous control over vast areas of policy. This gave way to loads of small, community banks called cajas, exclusive to only small provinces or even cities.

So what you get, especially after Spain’s entrance into the common currency, is 17 autonomous municipalities, with thousands of small, municipal banks, able to loan money at cheap rates.

People began to borrow a lot. Before the Euro, it was a norm to rent your property rather than buy it, but since borrowing was so easy and cheap, people turned their attention to property. Construction firms began building new houses fueled by sudden demand. Entire small cities, with roads, tennis courts and beaches were built.

Housing prices began to rise dramatically, now not only you could borrow and buy a house, you can also “invest” and wait for its price to rise. A bubble was forming.

When the Lehman collapsed, Spain was looking healthy among its European neighbors; it had low exposure to the sub-prime mortgages that hurt Germany’s and France’s banks. It looked like Spain was the success story of the European Union. But soon, problems began to arise.

As expected, the property bubbles burst, sending house prices flying down. Construction firms began to go bankrupt and the countless mortgages on bank’s balance sheets lost 25% percent of their value.

Yet there was no instant panic. Because of some loopholes and weird practices, banks had successfully hidden their toxic mortgage liabilities on their balance sheets and everything looked fine for some time.

Unless you count the ghost towns and unfinished buildings on every corner of the country fine.

The Spanish government began acknowledging the problem, and the solution it came to was to build and borrow even more. They tried to pull a Roosevelt and failed miserably.

Government had paid billions for useless art projects like museums, airports in the middle of nowhere, parks and galleries on borrowed money, the philosophy behind this was if you throw enough money at construction and borrow enough money, you could restart the cycle magically. Well that didn’t happen, the prices continued to fall and construction continued to go bankrupt.

What happened instead was Spain turned to shit its quite balanced, deficit-free balance sheet into a long list of debt. Spain began to live on debt. Its banks began to fail, and its great 3% growth per year turned into 1% contraction. Spain was in trouble.

Spain’s Unemployment Dilemma

Spain unemployment problem grew like everything else, out of construction business. Since the property boom invited a shit ton of construction business into the country, the young were attracted to good pay and steady employment. Almost 30% of people under 25 were in the construction business in 2007, so when that went bust, 30% of people were left without work and with useless qualifications.

This snowballed into a bigger problem once the debt and banking crisis went public, and investor and business confidence rapidly imploded. Businesses were closing down and those which stayed didn’t have the money or need to employ more people.

Then came the budget cuts, the government layoffs, and dreaded austerity, which made everything even worse. Tax hikes made businesses close, and government jobs paid 40% less.

The Conclusion

Spain is a great example of the failing of the European Union and the main idea behind it. A big, dumb, debt fueled, hollow economic boom followed by a huge, traumatic bust. This is the scenario the whole European Union is looking at in the future. The centralization of monetary policy, the centralization of debt leads to nothing but loss of sovereignty, dignity and prosperity. The European Union can’t be successful, can’t succeed and can’t heal itself from the issues that came from its entire core.

Spain is just the beginning.