The Pain in Spain

The Pain in Spain from Unemployment

The Pain in Spain…

…Falls mostly on the young!

The official unemployment rate in Spain is now 24.47%. When your unemployment rate is that high, you should just say 25% and be done with it.

Think about this for a minute. One in four people in Spain are unemployed. This is appalling. What makes it even worse is that, for young people, the number is just a touch higher, 51%. That’s right, slightly more than half of those under 25 years of age in Spain, who want to work, are without a job.

What can the government do about it? Not much, because Spain is part of the euro zone. But it did much to create this mess…

Behind most every economic failure is a series of government actions. In the case of Spain, there is the all too common story of a government that encouraged lending and engaged in shoddy oversight of the banking sector. This led to an ever-increasing reliance on credit to fuel a boom in consumption and building. The low interest rates that came along with being a member of the euro zone only fueled this boom further.

And just as night follows day, the credit collapse that happened in other countries also followed in Spain, where a construction boom was followed by bankruptcies. The end result in Spain has been a double-dip recession and massive layoffs.

Of course, there are other outcomes. When a quarter of your workers aren’t working, they’re not earning paychecks.

When your largest industry (construction) stops on a dime, corporate taxes fall.

When banks are bloodied with bankrupt borrowers, financial profits fall.

Let’s see. If workers don’t work, construction companies don’t construct and financial companies have no finance, then how does the government collect enough in taxes to keep its budget deficit low? It doesn’t. And that is where the fight starts.

Spain is in the Midst of a Meltdown

The unemployment rate is just a symptom of a widespread disease known as post-credit-bubble-syndrome. Ok, that’s not a real disease, but if economies were living things, then this really would be a sickness.

However, the real problem for Spain is not the disease, because countries have suffered through this many times in the past. The problem for Spain is that the country gave up control over its currency when it joined the euro zone. This means the Spanish cannot use the most common cure, which is to simply devalue their currency to make their goods more attractive to outside countries.

So Spain is left with one option – live through the pain. This approach, which involves the destruction of credit, falling GDP, declining wages and, of course, rampant unemployment, does eventually put a country in a more competitive position, but along the way the standard of living of the average citizen plummets.

And so this is where the young in Spain find themselves. After their politicians, bankers, financiers and even their parents spent with abandon to create a credit bubble, the kids face the consequences.

Does this lead to civil unrest? Will Spain leave the euro? Will major banks go under? Unfortunately, the answer to these questions seems to be, “Yes.” It’s only a matter of time. The longer it takes, the angrier the young and unemployed become.

It’s probably not a good year to spend your summer in Madrid.


Rodney

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Categories: Purchasing Power

About Author

Rodney Johnson works closely with Harry Dent to study how people spend their money as they go through predictable stages of life, how that spending drives our economy and how you can use this information to invest successfully in any market. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. He’s a regular guest on several radio programs such as America’s Wealth Management, Savvy Investor Radio, and has been featured on CNBC, Fox News and Fox Business’s “America’s Nightly Scorecard, where he discusses economic trends ranging from the price of oil to the direction of the U.S. economy. He holds degrees from Georgetown University and Southern Methodist University.