From the Economist Magazine

Spanish economy
In a slump
Apr 17th 2008 MADRIDFrom The Economist print edition
The Spanish prime minister has recently won re-election, but his economic problems are just starting
AP
THE higher they climb, the harder they fall. Spain, one of Europe's economic star performers for more than a decade, is tumbling from its pedestal just as José Luis Rodríguez Zapatero, the Socialist prime minister, begins his second term.
Mr Zapatero has burnished his credentials as a social reformer, with a fresh cabinet dominated by women, including the new defence minister, Carme Chancón. But the need for economic reforms is becoming ever more urgent.



The global credit crunch has come with an extra twist in Spain, where it coincides with the bursting of the housing bubble. An expected soft landing has suddenly become hard and painful. Underlying (and untended) economic weaknesses that were hidden by the construction boom are being painfully exposed, among them low productivity growth.
Things have become considerably worse since the March 9th elections. The IMF estimates that last year's growth of 3.8% will fall to 1.8% this year, and get worse in 2009. These would be the slowest growth levels in Spain since 1993.
House prices are predicted to fall by up to 15% over three years. Negative equity threatens some home-owners. But as a member of the euro zone, Spain has no control over interest rates or the value of the currency. Builders are struggling to find buyers for homes and, worse, cannot borrow to get through hard times. Some have already gone bankrupt. The construction sector—which accounts for 60% of all bank loans—is set to shed some 400,000 jobs over the next two years.
The most worrying factor, however, is the disappearing budget surplus. Before the elections, Mr Zapatero boasted that he had ample funds to respond to the downturn. Last year's surplus was a healthy 2.2% of GDP, or €23 billion ($36 billion). “The comfortable state of public finances provides margin for manoeuvre,” says the veteran finance minister, Pedro Solbes. A report from the BBVA bank, however, suggests the surplus will turn to deficit next year. Receipts from value-added tax have already dropped in the first two months of 2008.
Nevertheless, at the first cabinet meeting of the new government due to be held on April 18th, ministers were expected to approve a fiscal stimulus worth €10 billion ($16 billion), including a €400 annual rebate to every taxpayer (worth €6 billion) and several other measures, such as infrastructure and public-housing contracts.
Fiscal expansion may not be enough, however. A strengthening euro will hinder export-led growth. Productivity and competitiveness remain Spain's greatest challenges. These need reforms to the labour market, the education system and Spain's research and development infrastructure that may take years to produce results.
Mr Zapatero is lucky, for the moment at least. The opposition People's Party is immersed in internal squabbling, and is waiting to see whether its leader, Mariano Rajoy, who has lost two consecutive elections, will face a challenge from Madrid's ambitious regional premier, Esperanza Aguirre, at its convention in June.
The prime minister is fortunate, too, in that he went to the polls before the worst of the economic news emerged. His minority government is just seven seats short of a parliamentary majority, although it should get support from Catalan or Basque regional parties.
Mr Zapatero claims the downturn is temporary and promises that Spain will soon return to high growth. That will be a taller order than he may imagine.

Internet Browsing trouble in the government

Apr 24, 10:12 AM EDT
Spain bans sports Web surfing for Defense Ministry staff
By DANIEL WOOLLS Associated Press Writer
AP Photo/Fraidoon Pooyaa
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MADRID, Spain (AP) -- Spain's Defense Ministry has ordered its staff to stop browsing sports and entertainment Web sites while on duty, an official said Thursday.
The newspaper El Mundo said the restrictions stem from recent incidents in which computer systems overloaded and nearly crashed.
A ministry official said the order distributed this week affects staff at the ministry building as well as the army, navy and air force headquarters. The official spoke on condition of anonymity, in line with ministry rules.
The official said the order did not come directly from Carme Chacon, 37, who took over last week as Spain's first female defense minister
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Sunflower Oil Recall

Apr 28, 4:36 AM EDT
Spain ends warning against sunflower oil
By CIARAN GILES Associated Press Writer
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Producers Tap Old Wells in Search of Oil
MADRID, Spain (AP) -- Spain's Health Ministry has ended a warning against using sunflower oil, saying a contaminated batch has been removed from outlets.
A ministry spokesman says none of the batch of tainted sunflower oil that came from the Ukraine will be on store shelves starting Monday.
Since Friday, the government has warned people against buying sunflower oil. The government had said that the shipment from the Ukraine had arrived at Rotterdam and that France, Italy, the Netherlands and Spain had received deliveries.
The oil had been withdrawn in other countries before reaching retail outlets.
The ministry did not specify what effects the oil could have on consumers' health but insisted it was not toxic.
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Spanish Grand Prix

Apr 27, 5:34 PM EDT
Raikkonen's win in Spanish GP hands Ferrari control in chase
By PAUL LOGOTHETIS AP Auto Racing Writer
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BARCELONA, Spain (AP) -- Kimi Raikkonen drove Ferrari to its third straight Formula One victory, winning the Spanish Grand Prix on Sunday to put the Italian team in control of the championship race.
The 28-year-old Finn won his 17th race by 3.228 seconds ahead of teammate Felipe Massa of Brazil. Raikkonen was second to Massa at Bahrain three weeks ago after winning the Malaysian GP last month.
Raikkonen led from start to finish for the sixth time to put him nine points ahead of McLaren's Lewis Hamilton atop the drivers standings and lift Ferrari into the constructors lead after four races.
Ferrari's one-point effort at the season-opening Australian GP in Melbourne - its worst start in 16 years - is now a distant memory.
"It would be hard to do better than this," said Raikkonen, who matched former driver Mika Hakkinen of Finland with 51 career top-three finishes. "We are leading both championships, which I am happy about. The whole weekend went well."
Hamilton placed third, but the McLaren team was focused on a violent crash that sent Heikki Kovalainen to a hospital. A likely wheel rim failure caused the Finnish driver's front-left tire to explode and his car to fly into the side wall at 150 mph. It took at least 10 minutes for the track's medical team to remove Kovalainen from the wrecked car, which was missing half its front.
Kovalainen was shaken, but medical scans showed no injuries.
"(Heikki) is safe and well," McLaren team principal Ron Dennis said. "He has no broken bones and CT scans performed at the hospital confirm that he has no head injuries, and the team is optimistic that he will make a full recovery over the next few days."
Hamilton overcame a career-worst 13th-place finish at Bahrain to get back into the points. The Briton is convinced McLaren has the car to compete with Ferrari.
"For sure, you could say it was a surprise (to finish third) because they were very quick. They just have the slight edge for the moment," Hamilton said.
Robert Kubica of BMW Sauber was nearly 6 seconds back in fourth and Mark Webber of Red Bull rounded out the top five. Jenson Button of Honda was sixth, followed by Kazuki Nakajima of Williams and Jarno Trulli of Toyota in the final positions to earn points.
Raikkonen, who also won here in 2005, leads the overall standings with 29 points. After Hamilton, Kubica is next with 19, one more than Massa.
Raikkonen topped both of Friday's practice sessions before taking his 15th career pole. That makes it eight straight winners here to have won from the pole.
"You know the chance to win is very small ... but I was pretty much sure that unless something happened, it would be very difficult to win the race," Massa said. "It's very important to bring home eight points and make another step forward in the championship that we know is quite long."
Two-time F1 champion Fernando Alonso of Renault, who started second, withdrew with engine problems after 34 laps.
"The motor broke, I think," said Alonso, who won his home race two years ago. "It's tough because we're here in Spain. But I think in the next race we can do a better performance."
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Spanish Government takes back the coast

Apr 19, 3:55 AM EDT
Spain cleanup jolts property owners
By CIARAN GILES Associated Press Writer
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VALENCIA, Spain (AP) -- It's been the dream of millions - a home by the sea in sunny Spain. People from all over Europe have invested hard-earned savings in coastal villas and apartments.
Now a government drive to clean up Spain's concrete-filled coastline after decades of abuse may wash away many of those dreams like castles of sand.
Enforcing a much-neglected 1988 law, the Socialist government is getting tough about what constitutes coastal public domain - the strip of land stretching back from the water's edge - and telling thousands of house and apartment owners their properties do not really belong to them.
"Out of the blue we've been told the house we have owned for more than 30 years is no longer ours," said retired British electronics engineer Clifford Carter, 59, who lives with his Spanish wife in La Casbah, a beach side complex in eastern Spain.
"The house was built legally, but now they say we can only live here until we die but can't sell the house or leave it to our children," said Carter.
The fears of losing coastal villas come as Spain's real estate market is turning sour, a situation tied by some to the international banking crisis and its parent, the U.S. subprime mortgage scandal. While the troubles of Spain's overgrown coast are not directly tied to the banking crisis, both have involved shady business practices that often wind up in the lap of individual homeowners.
Along the Spanish coast, a protest group formed in January says it already represents 20,000 people. It notes that up to half a million others - apartment and villa owners and restaurant and hotel proprietors - could be affected. Most are Spaniards, but many are foreigners.
"This is the single biggest assault on private property we have seen in the recent history of Spain," said Jose Ortega, a spokesman for the group and lawyer for many of those affected.
He says that at best, owners are being given 60-year concessions to live on the property or operate their businesses. Others, he says, are threatened with demolition.
The government says the claims are exaggerated but insists the coast has to be saved.
"We're taking the law seriously," said the Environment Ministry's coastal department director, Jose Fernandez. "Previous governments didn't think it was important, while we have made it a priority."
The government is finishing the process of drawing the line that designates what is state-owned and cannot contain private property along Spain's 4,900 miles of coast - which includes the Canary and Balearic Islands and North African territories in addition the mainland.
It plans to spend some $8 billion to fix up the coast. Some of the money will go to homeowners who, under the 1988 law, cannot sell to another private party but can sell to the state.
Many people are suddenly finding they're on the wrong side of the dividing line. Ortega's group alleges the government is drawing it selectively, targeting individuals but shying away from tourist resorts.
But it's not just individuals. The five-star Hotel Sidi lies a stone's throw from retired engineer Carter's house and the shoreline. Last December its owners were told it had been built on dune land protected by the 1988 law and must go. They are being offered a 60-year operating concession, after which it falls into state hands.
"We're afraid that they'll take away the property. It was built legally with all the papers," said Roger Zimmermann, the hotel's managing director. "This is our livelihood."
Fernandez admits 1,300 structures have been demolished since the Socialists came to power in 2004 but insists most were constructed without permits. He denies the government has plans for mass demolitions or immediate expropriations. Barring exceptional cases, he says, people whose property is in the public domain will be able to continue living or working there.
Ortega says that is not comforting. "Today anybody who owns or wants to own a home or property on the coast can't be sure because at any moment the government can take it away from you without compensation," he said.
The economic impact on construction and tourism could be immense, Ortega argues.
This would be bad news for a real estate sector that has largely driven Spain's economy for the past decade but it now cooling sharply.
The Costa del Sol Association of Builders and Promoters reported in February that sales of tourist property in southern Malaga province fell nearly 50 percent last year. It claimed the main problem was people being frightened by corruption scandals in which homes were built with licenses obtained through bribes.
Tourism and rampant construction over the past three decades have turned the Spanish coast from the French border all the way round and beyond the Rock of Gibraltar into a continuous mass of concrete.
In many cases, town halls bypassed planning regulations and took bribes in exchange for licenses.
Spain says 40 percent of the coast is built on and nearly 70 percent of its beaches are surrounded by buildings.
"It was the politics of money today, forget about tomorrow." said Luis Cerrillo, head of the Ecologists in Action group in the Valencia region.
Spain, the world's No. 2 tourism destination, is the most popular choice for northern Europeans seeking to own a second home. Just British residents in Spain are believed to amount to nearly 1 million - though it's not certain how many own property.
Most observers agree it is no coincidence that the coastal clean-up drive follows a real estate fraud scandal on the Costa del Sol in 2006 in which 80 people face charges.
Gordon Turnbull of Blue Med estate agents in the eastern Murcia region blames the corruption scandals and international banking crisis for dropping sales, but argues the coastal law might actually stimulate the market by making the coast prettier.
On two nearby beaches, he says there are the shells of two major apartment buildings, illegal and unfinished monstrosities.
"They put people off buying here," said Turnbull. "People appreciate seeing an eyesore getting knocked down. The government's not doing enough."
(This version CORRECTS the length of the Spanish coastline to 4,900 miles.)
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View of Terrorism from Outside

Apr 18, 4:56 AM EDT
Spain arrests 10 in Basque region
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MADRID, Spain (AP) -- Spanish officials say they have arrested 10 people on suspicion of engaging in street violence in support of the armed Basque separatist group.
The Interior Ministry says in a statement the 10 are accused of throwing Molotov cocktails at a police station, setting fires and carrying out other attacks in the Basque region since 2005.
The ministry says the suspects range in age from 20 to 27.
The statement Friday comes a day after a bombing blamed on the ETA separatist group injured seven policemen in Bilbao.
After peace talks failed, ETA ended a cease-fire with a bombing that killed two people in Madrid in December 2006. It has waged more than a dozen attacks since then and killed three more people.
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