Radio interview

Adam Austerfield, Director of LSE Enterprise in Spain and President of the British Chamber of Commerce in Madrid, was interviewed on 18 May about the Spanish economy on BBC Radio 5 Live Drive. You can listen to him at (scroll to 8 minutes and 30 seconds) until Friday 25 May 2012, or read an approximate transcript below.

It’s the real estate bubble which is at the heart of this crisis I guess?

That’s one of the fundamental domestic problems. If you think of 1.2 million empty and unsold houses which are still on the books of many of the cajas and banks, this can only take five years, possibly a decade to unwind.

The second problem however is of course unemployment. We have about 23% unemployment in Spain as a whole, some figures are quoting around 50% for youth unemployment for under 25s. Whilst those figures are probably a little excessive, as you’ve got to remember that in the boom times Spain probably had 8 or 9% unemployment, which would be crisis level in the UK – there’s a large degree of grey economy in Spain – those two fundamental domestic problems are critical.

Where does Spain go next, because at the moment the economy is in recession.

It is in recession, again, and it’s going to be a long tortuous process. With the scale of the unemployment and the structural reforms that take years to implement, let alone to take effect, we’re talking five or ten years before Spain starts to recover in a serious way. And if that means going cap in hand to Brussels, if that means credit lines in the way Hungarians have done in the past, I think that’s entirely possible, whereas 12 months ago I don’t think that was on the table.

And in the meantime there’s the immediate problem of the banks, which are presumably very much extended because of the property boom, I think that’s where the money’s come from, isn’t it – how are you going to get out of that?

When things really hit rock bottom, especially round the coastal areas in Spain, you’re beginning to see signs of the kind of distressed asset funds who will pick up properties that were valued at let’s say half a million euros, but which companies with funds external from Spain can pick up from 50 to 100,000 euros. So they’re paying less than half the list price, and everyone is so desperate, whether it’s the banks or individuals, that those houses are being sold. So there’s a little bit of liquidity right at the bottom of the market but the market’s probably got a good bit further to go. A good 15, even 20% more.

Is Spain going to be able to withstand all this? There’s a strong family system in Spain, they’re probably better able to withstand social pressures than perhaps our country, but on the other hand, this is getting extreme, isn’t it?

It is getting extreme. There were some cases in the culture where young people used to stay home for a long time, perhaps until they got a significant job, or got married and moved out, perhaps in their late 20s or early 30s, but there was at least one earner in the household, either father or mother or both, perhaps one of the children was earning and so on. There are many households now where no one is earning and everyone is on unemployment benefits, and that creates a very difficult and depressive cycle even for the very strong cultural family ties that people have in Spain, so it’s the most difficult that anyone I know there, with long memories, has seen the country.

You’ve been so expert at answering all these questions that I’ll ask you the impossible one now Adam, is the Euro going to survive?

Thanks for that! It’s possible that the Euro will survive of course. A lot of Spain’s problems are related to the wider Euro problem of course and the Greek possibility of an exit may not be the end for the Spanish membership of the Euro or for the Euro as a whole. In Spain in fact the debt to GDP ratio is much lower than in the UK, Italy and other countries and certainly about half as much as it is in Greece. It’s got terrific infrastructure and a lot of well qualified young people. So some of the fundamentals are good, however it all depends on the Greeks and the Germans really, as much as the Spanish.

Very expertly not answered, thank you Adam.