Well, as everyone on the planet knows, Spain won the Eurocopa by beating Germany 1-0. The country erupted in celebrations which lasted for a few days afterwards. But then unfortunately real life started intruding. Spain is in deep economic trouble. During the past decade, an enormous construction boom has meant that the economic news was seemingly always good: falling unemployment, growth much faster than the rest of Western Europe, rising house prices, everyone happy. Now all that has come to a screeching halt. There is not the kind of mortgage market collapse as in the US, and Spanish banks seem to have stayed away from US mortgage-based securities. But the impact is here nonetheless, as the banks have become more conservative in funding construction projects, and prospective buyers of beachfront apartments from the UK have discovered that their houses back home are worth less than they thought and that the pound, which a year ago was worth EUR 1.50, now buys only EUR 1.25 or thereabouts.
Unfortunately for Spain, during the good years not much was done to reform the economy. Housing construction contributed 12% of GDP in 2007, much higher than anywhere else and clearly unsustainable. Unfortunetaly, there are not a lot of other industries in Spain that can take up the slack–Spanish industry is largely composed of smallish, low-tech firms. This is not something that can be changed quickly.
This week Spain’s biggest construction company went bust. It is very ironic to see the bosses of other companies in the same sector now calling for government intervention to help them out of their trouble. I hope that the Zapatero government has the spine to say no. It is not the role of government to prop up failing companies and help inflate an industry that is building houses that nobody wants to buy. Help the workers who lose their jobs, yes. But let the companies go bust if they cannot stand on their own.