Before speaking about the consequences of the pandemic for Spain, we must be aware of the situation we were in just before COVID-19 struck. The 2008 crisis had not been fully corrected, in 2012 the European Central Bank started giving away money -quantitive easing- to avoid the collapse of the financial system and increase inflation – just like the Federal Reserve and the Bank of Japan-. Now, banks in Spain still have real estate assets on their balance sheets from the previous crisis, which they are gradually selling to recognize losses in various years.
Quantitative easing measures consisted of buying financial assets, such as government bonds and corporate debt, on the secondary market. Who were the assets purchased from? Mainly from banks, so they have more liquidity to grant loans and increase economic activity.
These measures should have led to an increase in inflation. However, the increase was not as high as expected because they aren’t increasing credit in the same proportion and so the money growth remains paralyzed in bank reserves. This worsens when gradually withdrawing the massive purchase of assets, the so-called “tapering”.
Financial assets bought by the European Central Bank
In € Millions
The argument that is generally used to say that inflation is good in macroeconomic terms is that it occurs because of an increase in investment and consumption. This increase is due to a rise in the purchasing power of both families and companies. On the other hand, the companies that produce goods and services take time to react and produce more, which creates inflation. This favours debtors (the most important debtor being the United States government and governments of the EU countries) and hurts savers. What is the real reason that central bankers are aiming for a price rise? Government debt decreases the higher the inflation.
Currently, PELTROs or Pandemic Emergency Long-Term Refinancing Operations have been made available to EU countries, but they seem insufficient due to the lack of liquidity in the system.
The more open to the exterior European countries will be the most affected by this unprecedented crisis; Italy, Spain and Greece.
We can already see clearly that there will be sectors that will be harmed such as banking, hotels and restaurants, shops … And sectors that will be strengthened such as those related to technology (digital reality, cybersecurity, online commerce, distance training), the sector healthcare, collaborative economy and “pay per use”.
The Spanish economy has suffered a 4% slowdown in GDP in the first quarter of 2020 -with just 15 days of almost complete economic slowdown-, compared to 3.8% on average in the eurozone.
Subsequently, in the third quarter, the economy of the euro area countries recovered better than expected according to the estimates of the community statistical office, with the euro area GDP rising by 12.7% after the sharp decline suffered in April and June.
In particular, France and Spain led the growth this summer marked by the coronavirus crisis, according to preliminary data from Eurostat, Spain made a record expansion of 16.7% of GDP.
By sectors, the most affected have been and will continue to be the following:
- tourism, which represents 15% of GDP, where a drop of about € 124 billion is expected, that is, a decrease in GDP of around 12%. With this regard, it should be noted that in the third quarter, after the partial reopening of the tourism sector, a rebound was recorded, whereby almost 60% of the activity lost during the first half of the year was recovered.
- The automotive sector, which represents 10% of GDP and employs 15% of the active population in our country. This sector is expected to drop by around 30%, representing a drop in GDP of another 300 basis points.
- Trade is the third most important sector for the economy and it is expected that around 20% of businesses will close, which would mean a further 2% drop in GDP.
- The construction sector is next in importance and a 35% drop is expected, motivated by a decrease in prices for housing and other real estate assets of between 30-40%.
- Exports, where a drop of 8% is expected.
In relation to these sharp falls that have been taking place since the beginning of the pandemic, the third quarter of the year has shown some recovery from the strong recession experienced. According to data from the INE, commerce, transport and hospitality grew by 42.5% compared to the falls of the previous first quarter.
It should also be taken into account that the break in the underground economy has been practically 100%. The underground economy in Spain has more impact in mechanical workshops, transport of goods, hairdressers, bars and restaurants, cleaning companies, construction and the agricultural sector. According to the Secretary General of the Technicians of the Ministry of Finance (Gestha), José María Mollinedo, the underground economy in Spain represented around 25% of GDP in 2019.
If the fall in GDP in 2020 is 20%, the GDP will go from € 1.25B to 1 trillion. But as previously explained, the fall could be greater.
Public spending and unemployment
On the other hand, there is an increase in public spending via subsidies, ERTES, a higher demand of unemployment benefits and healthcare spending and a drop in collection via VAT, Social Security, ITP, etc.
Around 40% of the active population (23 million people) is inactive for various reasons; ERTES, unemployment or cessation of activity of the self-employed and SMEs. This means that, of the total population of Spain, only 30% are currently working, of which 6-7% are public officials. In other words, 30% of the population supports the remaining 70%.
Both the fall in GDP and the rise in public debt could reach a ratio of 140% -160% in 2020, which would cause the suspension of payments in 2021 and the rescue by Europe. Spain is not the only country that could ask Europe for help since all countries are suffering to a greater or lesser extent from the never-seen consequences of this almost total economic slowdown. Currently the Eurozone debt represents 50% of GDP and, according to Bank of America, Merril Lynch could reach 58% of GDP by the end of 2020.
In comparative terms, the Federal Reserve currently has a debt of 38% of the United States’ GDP while the Bank of England reaches almost 50%, the Australian Reserve barely has a debt of 18% of the GDP and the Bank of Japan presents 112%.
This strong public indebtedness in Spain could lead in the medium term to an increase in taxes, flexibility of the labour market and containment of public spending; taxes such as VAT and IBI would rise, retirement age would be delayed, the minimum wage would fall, and pensions would be frozen or lowered. For the rescue of Greece, pensions were lowered by 40% and wages were reduced by 35%.
All of this could lead to the need for a new economic system.
Francisco Camacho, Lali de Juan and Marta Clemente.
Translation by Marina Agrelo.
