There can be only one topic this morning – Spain’s economic plight. Long-term readers will know I’ve expressed [and reported] growing concern over the last 2 years about the unsustainability of success built on the sandy foundations of a false construction boom, grants from the EU and inflows of hot money from Russia. But the recent stock market falls have brought out the professional Jeremiahs in force.

"The housing market in Spain is about to implode," said economists at Lombard Street Research yesterday. But this is nothing to the predictions made in the Daily Telegraph - The current account deficit has reached 9.5pc of GDP, a sign of extreme over-heating. Spain is now the second biggest net contributor to global demand after the US, far outstripping China, astonishing for a country of only 40 million. More than 800,000 homes were built last year, beating France, Germany, and Italy combined, leaving a glut of property hanging over the market. House prices have risen 270pc over the past decade to an average price of €276,000 but began to slow sharply late last year. Household debt has risen to 133% of disposable income, from 75% in 1995. Spain could now find itself facing a monetary squeeze just as the economy swings from boom to bust, more or less the fate suffered by Britain in the ERM debacle of 1992, except that Spain has no way out. Bernard Connolly, global strategist for Banque AIG, said the country will face a brutal adjustment over the next two years - if it can remain in the euro at all. "Spain”, he said “is going to face the very direst of economic circumstances: a cycle of recession, deflation and widespread private sector default - a depression in fact. This stock market slide is not just a 'correction'. It has a very, very, long way to go.”

If this is true, there is a great deal of misery ahead. But it’s an ill wind that blows no good and Brits looking for property here will surely find it much cheaper quite soon.

Fittingly, my latest compilation is of the comments I made on the SPANISH ECONOMY during 2005 and 2006. This year’s are already in the link to the right of the page. You can’t say you weren’t warned. But, then, the really clever thing would have been to predict When, not What . . .

2005

The Spanish economy grew by a healthy 2.7% last year but, for the first time in several years, failed to ‘converge’ towards the EU average. Specifically, per capita income and productivity fared badly. With reductions in EU subsidies getting closer by the minute, this must be rather worrying for the government. Though it’s not all bad news; a report today predicts that Spain’s per capita income will have overtaken that of Germany by 2011. Can this really be true?

I regularly wonder how the Spanish economy can continue to boom when levels of efficiency are low by international standards. The answer perhaps came in an article today, which reported that, whilst the domestic market [fuelled by Brussels handouts?] continues to thrive, exports don’t. EU largesse is destined to reduce from 2007 so I guess we can party for a while yet.

The Spanish economy continues to grow at over 3% a year, in sharp contrast to Germany, France and elsewhere. However, a good part of this is said to be attributable to rapidly increasing business on the part of more than 500[sic] mafia groups operating around the country. The trendsetters are said to be the Bulgarians, Rumanians and Poles. So Spain’s entry into the EU hasn’t been one of unalloyed benefit, then.

The Spanish economy continues to surge ahead, growing by over 3% at the moment. But below the surface there are worrying trends. The current account deficit is growing at an alarming rate and Spain has just been downgraded from 23^rd to 29^th position in the list of competitive economies, behind countries like Estonia, Chile and Malaysia. Spanish interest rates are far too low in the context of its economic challenges but, of course, as a member of Euroland, there’s nothing the government can do about this.

In an editorial yesterday, El Pais referred to the underlying problems of the rapidly growing Spanish economy and fingered, as one factor, the lack of competition in the supply of basic services and commodities. Bang on cue, I received my latest bill from the water company I’m compelled to use, in which I saw both the fixed and variable prices had risen way above the [high enough] level of inflation. What an easy way to make money. I suppose we could call it ‘the Telefonica strategy’.

The forecast for Spain’s economic growth this year has recently been upped to something close to twice the EU average, and 3 times that of France. Little of the resulting profits seems to be seeping into investment in R&D, where Spain is at the bottom of the league table. Another reason to worry about long-term performance.

The average salary increase in Spain over the last 12 months is 2.9%. As inflation is at least 3.5%, this tells you all you need to know about unemployment levels in an economy that is, nonetheless, one of the fastest growing in the EU.

The EU commission has upped the growth rate forecast for Spain for this year but warned that the economy is displaying some worrying signs, such as a poor trade balance, increasingly high domestic debt levels and no improvement in the country’s low productivity.

A columnist in El Mundo yesterday argued that Spain should go on receiving its traditional level of subsidies from the EU because ‘Although it appears to be a much richer country now, it doesn’t really have a competitive economy’. Well, whose fault is that?, one might ask. Not much of an incentive to improve, is there, when you can go on living off someone else’s money in perpetuity. Welfare dependency on an international scale.

The German Chancellor, Mrs Merkel, says she wants to increase the powers of the central government at the expense of those of the regions. Spain, of course, is trending in the opposite direction. I guess the aim of both governments is to make their countries stronger and more efficient. The difference, perhaps, is that Germany is a net contributor to the EU and has a sluggish economy that needs to be revitalised. Spain, on the other hand, has a booming economy, benefits from a bank rate which is inappropriately low relative to its economic fundamentals and [for reasons beyond me] will be a net beneficiary of EU funds until 2014. So I guess there’s a stronger case [or, at least, opportunity] here for playing constitutional games that could well render Spain even less able to compete with, say, China and India. Time will surely tell and it will be interesting to see where the two countries are – especially their economic rankings – in 10 and 20 years’ time.

The one thing both El Pais and El Mundo seem to agree on is that the [false] Spanish economic boom of the last few years is approaching its end and tougher times lie ahead.

2006

Today’s El Mundo reported that Spain’s inflation was running at 2.2%, against an EU average of 3.8%. El Pais had the figures the other way round. On this occasion, I’m confident the latter paper – albeit left-wing – has given us the correct economic data.

It seems that the 500 euro note still represents almost 60% of the value of notes in circulation in Spain. The Bank of Spain, if I understand them correctly, has said this is because of the upsurge in personal loans. So, nothing to do, then, with the fact that larger notes are much more useful in a black economy.

A footnote to my comment on the 500 euro note yesterday – Spain is today reported to have a black economy [or ‘submerged economy’, as it’s called here] worth 22% of its GDP. In the developed world, this ranks third - after Greece [28%] and Italy [26%]. One wonders how they arrive at these numbers and just how accurate they can be.

At 3.8% Spain’s 2005 inflation was again the 3^rd highest in the EU, after Latvia [7.1] and Slovakia [3.9]. The smell of burning must be coming from an overheated economy, unrestrained by any fear that the value of the country’s currency will reflect the problem. It can only end in tears.

We’ve been advised again the 500 euro note in remarkably popular in Spain, where 59% of the EU’s notes of this denomination are currently in circulation. Experts tell us this means the country’s black economy is in fine fettle. Though one doesn’t need to be Einstein to figure this out, especially as the housing market continues to boom.

Spain’s economy continues to power ahead, at a growth rate of more than 3% per annum. But inflation is in excess of 4%, average salaries are falling and the percentage of new jobs on short contracts has risen from 18% in 2002 to 64% in 2005. So I guess it’s not terribly surprising there’s an underlying concern about the economy in general and unemployment in particular. But, come what may, at least the currency is secure. Unless the euro implodes, of course.

I’ve said a few times Spain’s economic trends would in the past have merited a devaluation of its currency. An article in one of today’s national papers addressed the question of whether things were now so critical Spain should leave the Euro. Needless to say, the answer was that it shouldn’t but some way really needed to be found to address the problems of high inflation, low productivity and a rapidly deteriorating trade balance. Unfortunately, no one has ever come up with one. So, roll on Armageddon.

Proof of Spain’s increasing wealth has come from a survey of per capita GDP among the 25 EU nations. Actually, 24 as the UK was not included. With the average set at 100, the range is from 248 [Luxembourg] to 50 [Latvia]. Germany and France are both at 110 and Italy at 103. Spain is at 99. In each of the latter two cases, I’m left wondering whether this includes the large ‘submerged’ economies as well as those above the water line.

The national and regional governments insist they want to see an end to construction well in excess of actual needs but there are at least two factors which must make them ambivalent about it all. Firstly, Spain’s current high rate of economic growth is largely driven by this construction boom and, secondly, with a sales tax of 6-7% on every purchase, the government stands to see a large reduction in revenues when it stops. Rather as with cigarette smoking. So we just get lectures.

A Sunday Times article makes the point I regularly stress, that Spain’s impressive economic growth is based very largely on a false construction boom that must end one day, very possibly abruptly. Perhaps the writer confined his/her research to my blog. Delusions of grandeur

At 4%, inflation in Spain is the highest in the Euro Zone. It compares with an EU average of 2.4% and 1.4% in the UK. In the latter you can get 5% on even a current account, whereas in Spain you’d be lucky to get 3% on a deposit account. Is it any wonder people invest in property?

But the good news is that, not only is the Spanish economy still booming away at 3.6% a year, but there are also signs this growth is starting to owe more to exports than domestic consumption. But with inflation so high relative to international competitors, can this continue?

Between 1986 and 2005, Spain received 86 billion euros from other EU taxpayers, making it the EU’s largest beneficiary. Commentators here are now forecasting Spain will have a higher per capita income than Italy by 2010 and will eventually overtake France and Germany. This is despite the fact productivity here is, with each passing year, further below the European average. Can any economically literate reader explain this for us? Is it all be down to massive flows of dirty money and an unsustainable property boom, neither of which are very productive?

I suppose the day will dawn when I eventually understand the Spanish economy but I fear it’s a long way off. This is a country which has been by far the largest beneficiary of EU munificence since the late 80s and will go on being in the top two for at least another seven years. This surely suggests the country is amongst the poorest in Europe. And yet every time I go down into town I see a new café/bar has opened and there’s at least one new branch of a bank being fitted out. OK, this may be accounted for by local wealth but it was reported again today that Spain has the highest per capita house ownership in the EU. One reason for this is the highest second-home ownership in Europe. Behind Spain in the list – for similar reasons – come Greece and Portugal. I’m left wondering whether the simple explanation for all this is the notoriously high levels of ‘black cash’ which are said to circulate in each of these countries. And which are presumably ignored for the sake of the statistics which justify the EU hand-outs. But, if so, why isn’t Italy higher in the list?

Reportedly, in this booming economy – the 8^th largest in the world – 40% of households can’t afford to take even one week’s holiday a year. I’m stumped by this but have finally put it down to the view that moving for a month or two to your second home along the coast doesn’t actually count as a holiday.

Between 2007 and 2013, Spain will receive 19.5 billion euros in EU subventions. This is 24% of the total, for a country which has a booming economy and which seems far from poor. Some senior Brussels functionary has appealed for more control of where all this money actually goes. Which might cause a few problems.

El Mundo this weekend published a list of the 100 richest people in Spain. Most of them, it stresses, have become wealthy only in the last 25 years. Coincidentally since Spain joined the EU. The list is headed by the founder of the Zara clothing empire but the next nine places are taken by property constructors. Given the infamous dishonesty of this sector, one is forced to ask [as, to its credit, El Mundo does] what on earth this says about Spain. Not just about the country’s morals but also about the underlying strength of its productive economy. Or, to quote, El Mundo, “It is all a reflection of a vigorous Spanish economy which has not yet moved on from crisis to find a place where its foundations are solid.”

I see French politicians are beginning to complain that the one-size-fits-all Euro was a huge mistake and that nations should again be free to control their own economies, in particular their bank rate. If the end result is a range of Euro rates, it might be best to start selling the ones with Spanish symbols on them, since devaluation would be inescapable.

I’ve written too much about both corruption and the Spanish economy recently but, nonetheless, here’s a couple of comments from UK commentators on the current French pressure on the European Central Bank:- "The ECB faces an impossible task because there is no such thing as Euroland: there are groups of countries going different ways. Germany has clawed back competitiveness by squeezing its economy but Italy, France, Spain and others have been enjoying property booms. Boom goes bust." “The fundamental problem is that the economies of the ‘Germanic’ members have diverged so far from those of the ‘Latin’ bloc that the single interest rate set by the European Central Bank (ECB) is becoming a huge political liability”.