Friday, 5 June 2015

Why Spain and Other Eurozone Countries Aren’t Feeling the Recovery

In World Economy News 05/06/2015

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After nearly a year of unemployment, Cesar Mahiques was lucky enough to land a job managing a factory in this ceramic-tile manufacturing town. The catch was 50% lower pay than in his last job.
Half his income now goes to repaying debts, ending his middle-class lifestyle. He had to cancel last year’s family vacation to afford a car repair.
The factory’s exports of tiles are burgeoning, he says. But “at the end of each month, I’m still left with only pennies.”
Mr. Mahiques’s mixed feelings can stand for Spain’s, as the country grinds its way out of Europe’s longest postwar slump. Spanish exporters are gaining market share within Europe and beyond. But the way they are doing so is by reducing their costs and selling for less. And the flip side of that is sagging incomes for Spanish workers, making it harder for them to escape the heavy debts that were at the root of the crisis.
European authorities like to claim Spain’s return to growth as a success story, but many Spaniards say they aren’t feeling the recovery. The economy has been growing for seven consecutive quarters, up 2.7% in the year through March. Yet the unemployment rate is almost 24%, and a recent European Union survey found 97% of Spaniards still view the economic situation as “bad.” More than 40% of Spaniards surveyed by the state last year said they had no cash buffer for unexpected expenses and couldn’t afford a weeklong holiday.
Other countries on the eurozone periphery are also struggling to sustain recoveries and overcome one of their biggest weaknesses–a competitive disadvantage against leaner economies.
Portugal and Ireland, like Spain, have undergone years of painful belt tightening that has helped turn gaping current-account deficits into modest surpluses. But as all three economies rebound, their growing consumption of imported goods risks tipping their accounts back into the red and adding to piles of foreign debt, said Zsolt Darvas, a senior fellow at Bruegel, an independent Brussels-based think tank.
Portugal has cut public-employee salaries and made it easier for private companies to do so. But a slide in consumer spending has put a drag on Portugal’s recovery, and labor costs haven’t fallen far enough to spur strong export-led growth.
Labor costs also weigh on businesses in France and Italy. Cuts in social-security taxes over the past year brought relief to employers in both countries, only to be offset by ongoing wage growth in France. In Italy, a host of problems–an inefficient bureaucracy, underperforming schools and a scarcity of innovation–means the economy, just emerging from its slump, is unlikely to grow more than 1% annually in the years ahead, economists say.
Burdensome debts
Even in European economies that are growing, millions of families are stuck with shrunken incomes and still-towering debts. In Spain, average household income dropped 13% between 2008 and the start of last year, according to the National Statistics Institute.
When incomes decline, households and businesses must devote a larger share of their incomes to servicing their loans, which don’t fall. Between 2012 and last year, the Bank of Spain reported, those debt payments left net household savings hovering around zero.
“It’s like you’re carrying a really heavy backpack, and as the years pass you become skinnier and skinnier, and the backpack feels heavier and heavier,” said Juan Carlos Ureta, chairman of Renta 4 Banco SA, a Spanish bank and brokerage firm.
Spain’s economy, combining private and public sectors, has one of the highest debt levels in the world, at nearly three times the country’s annual economic output. More than half of the debt is owed to foreign creditors, leaving the country vulnerable when international financial markets become volatile.
Without a more robust recovery, “there is a very real risk that Spain will remain in a debt trap,” said Simon Tilford, deputy director of the Center for European Reform, a nonpartisan London think tank.
Worries that recovery across the eurozone could be stalled by a sustained period of falling prices led the European Central Bank to intervene in March, printing money to buy assets such as government bonds. Consumer prices in the 19-country bloc had declined 0.1% over the previous year, including a 0.7% drop in Spain.
The policy has driven down the euro’s exchange rate, giving hope to European exporters and lifting business sentiment. In May, ECB President Mario Draghi said the bloc’s economy had turned a corner, with growth picking up and inflation expectations recovering from their trough. Prices across the eurozone grew in May at a 0.3% annual rate.
Still, most economists doubt the measures can raise inflation to anywhere near the central bank’s target of nearly 2% a year. Prices in Spanish shops, in decline since July, are likely to stay under pressure from high unemployment, weak investment and low wages, said Edward Hugh, a Barcelona-based economist.
Boosting exports
A major part of Spain’s recovery strategy has been to spur exports. New labor contracts that cut wages helped persuade car makers to shift some production to Spain from elsewhere in Europe. Smaller companies managed to boost sales abroad of products ranging from olive oil and citrus fruits to wind turbines and tires. And for selling beyond the eurozone, a now-cheaper euro provides help.
Spanish exports equaled nearly 33% of gross domestic product at the end of last year, up from 26% of GDP before the crisis, though GDP was bigger then.
Tiles, such as for bathrooms and kitchen floors, are among the star performers. Tile exports rose at an annual clip of around 10% from 2011 through 2013, before slowing to 3% growth last year.
The tile industry, centered near the Mediterranean coast in the province of Castellón and the town of Alcora, is a microcosm of the country’s boom, bust and mixed-blessing recovery.
The region had a particularly intense housing frenzy, fueling rapid growth in construction-related industries. The bubble years sucked in workers and pumped up wages. Factory workers drove BMWs, bought on credit.
The crash after 2008 hit the region hard. Fifty-six out of 207 tile makers closed, according to a trade group known as ASCER. More than 12,000 jobs were lost–47% of the total–as even firms that survived shed workers. Unemployment in Castellón, which had been a little over 6% before the crisis, reached around 31% two years ago. It is 26% now.
Mr. Mahiques, an industrial engineer by training, went to work in the tile business in the 1990s, a few years before Spain adopted the euro and began a credit-fueled building boom. His employer took on debt to expand.
Over 16 years, he saw his pay more than quintuple. He bought a better car and traveled farther on vacations. In 2007 he and his then-wife took out a second mortgage to buy a bigger house, with plans to sell their old house after the move.
“We were all sucked into the maelstrom,” said Mr. Mahiques, 46 years old.
When the housing market crashed, selling the house became impossible. Then, in 2012, he lost his job.
A tile maker called Halcón Cerámicas SA weathered the downturn by closing two of its three plants and laying off more than half its workers.
It also cut the price of its tiles, redirecting sales efforts toward large home-improvement retailers abroad.
Markdowns of 20% by Halcón and other survivors lured customers such as Dave Campbell of Ireland, whose family runs House of Tiles, a small chain of stores around Dublin. “Spanish producers were desperate for business,” the Irishman said as he browsed at Halcón’s stand during a tile fair held annually in Valencia, Spain. The lower prices led him to source more tiles in Spain.
As Halcón’s order backlog grew, the company rented a long-idle factory and set about restarting its production line. To manage it, the company last year hired the laid-off Mr. Mahiques. He now supervises 63 workers and three production lines.
There is one big difference. His monthly pay at the job he lost in 2012 had reached EUR4,000. This one pays EUR2,000.
Restaurant meals are now a rarity. Last summer, his 13-year-old Volkswagen Polo hatchback broke down. Mr. Mahiques had to shell out EUR1,050 to change the gearbox and clutch. He canceled the family’s plans to vacation at a Mediterranean beach town.
“You go from a stable, comfortable situation to one where your income barely covers costs,” he said.
Overall pay at the rented factory he runs is about 20% lower than at Halcón’s older factory, said Vicente Gascó, the company’s head of human resources. At the older one, unions resisted pay cuts, but workers accepted a freeze.
Lean staffing
The workforce of the reopened factory is much leaner than the one Mr. Mahiques ran for his past employer. Twelve workers staff each shift, 60% fewer than at his last factory. Halcón has installed digital printers that decorate and glaze tiles quickly and accurately. Another machine handles quality checks previously done manually.
Although Mr. Mahiques earns less than workers who rank below him at Halcón’s older factory, he isn’t complaining. “The lower the costs, the more likely it is that the company makes profits in the long run, and that’s what will keep our jobs safe,” he said.
Years of dwindling household incomes have fostered deflation in Castellón province. Consumer prices fell 1% in the 12 months through April.
Around Alcora, a hill town with a Moorish-era castle, it isn’t only prices that are shrinking. At the Panorama restaurant, situated in a dusty roundabout next to several tile factories, business is down by more than half since the economic crisis struck. Owner Manuel Muñoz cut employees’ workday in half and now fills sandwiches with less ham than before.

Source: Dow Jones