Spain Is Mucho Macho and too Big to Fail

07/03/2011 04:07 pm ET | Updated Sep 02, 2011

MADRID -- The signs of economic strain are few and far between in this beautiful city except for one bistro menu I came across cheekily offering a "Especial Anticrisis Menu of bread, beverage and dessert for nine Euros."

The Spanish are hurting but not in agony, unlike the Greeks who hurl abuse, and stones, against their government for bringing the country to the brink of bankruptcy and then also for trying to pull it back.

This week, a Spanish business tycoon dismissively boasted that there is no "S" in PIGS, meaning that Spain should be removed from the list of countries that form Europe's basket cases. "It is PIG or Portugal, Ireland and Greece," he said. "Maybe a second I for Italy."

Mucho boasto
Spain seems to be managing its downside cunningly. A German-born retailer I spoke with maintained that many Spanish seek employment, but there are jobs. He also said that apartment and house prices have remained level -- almost double Germany's -- despite Spain's unemployment, low economic growth and dramatically lower wages than Germany's.

"It makes no sense," he said.

What makes sense is that, obviously, the Spanish are still able to indirectly bail out their banks so they do not foreclose or write off non-performing mortgages. Thus the housing bubble remains intact.

This has not escaped notice. Last week, the International Monetary Fund warned Spain to undertake more financial and banking reforms, and spending cuts, in order to allay market fears about woes.

The Spanish business attitude, mocking or machismo, underlines worries about Spain's economy, which is as big as Canada, Russia or India. Spain and Italy are simply too big to fail.
Signs of pain and protest are few and far between. A couple of weeks ago, the "Spanish Spring" involved hundreds of thousands of "indigandos" (indignants), or students, unionists and impoverished, who staged protests in Madrid, Barcelona and elsewhere. In Madrid's Puerta del Sol square are the remnants of the large sleeping-bag protests that were scattered across the country.

Employado Espana

Unemployment is 22%, or roughly four million Spaniards. Last year, the government chopped public spending by 7.9% and hopes are the economy will grow in 2012 by 2.3% and unemployment decline to 18.5%. The under-25 unemployment rate is 45%. Beneath these figures, however, is a gigantic underground economy, based mostly on cash and tourism, which continues to maintain its activity, in some measure due to the "Arab Spring." Europeans destined for sun holidays in North Africa have canceled plans and gone to Spain and other southern European countries instead for their vacations.

But the country still has some challenges. The ruling Socialist Party of Prime Minister Jose Zapatero has agreed to cut €15 billion (roughly C$21 billion or the size of Canada's total defense budget); chop civil service salaries by up to 15%; raise the retirement age from 65 to 67 and chop health care and education. Execution will be difficult and he's leaving office.

Staring down the bull
He is another casualty in a political climate that is akin to Spain's blood sport, the bullfight. Current and future leaders must be as fearless and courageous as matadors, slaying monstrous bulls in the hot sun in front of 80,000 screaming fans. And this weekend, the country's bullfighting sensation, Jose Tomas, returns to the ring after a year recovering from a near-fatal goring in Mexico. The speculation here is whether his fearlessness will prove fatal because he takes so many risks.

The same could be said for many of Europe's leaders who risk their political lives and will all eventually bring about their demise. The toll has been huge and political careers in Spain, Greece, Ireland and Portugal have been destroyed. Others, in Germany or even France and in Europe's central bank, are likely to follow as Europe's living standards ebb.

From the Financial Post blog.