Bloomberg News

Europe’s Austerity Push Breaks Mother’s Promise of Social Model

March 27, 2012

Signs hang at the departure gates at Barajas airport's terminal 4 in Madrid. Photographer: Denis Doyle/Bloomberg

Signs hang at the departure gates at Barajas airport's terminal 4 in Madrid. Photographer: Denis Doyle/Bloomberg

Ester Artells’s mother told her that if she worked hard she would go a long way.

Growing up in Reus in northern Spain (IBEX), Artells understood that a good education would give her the career and lifestyle her mother was denied by the military regime of General Francisco Franco. The economic slump has forced the 35-year-old biologist to move to France, putting a painful twist on the parental advice she received in what’s now the heartland of European unemployment.

“It was clear to me, as soon as I finished my thesis, I’d be packing my bags,” said Artells, who found a research post at the University of Aix-Marseille after completing her doctorate last year. “For my mother, it’s very difficult. Everything we’ve fought for since the dictatorship is being wrecked.”

Across Europe, parents who assumed the social model built by governments since World War II would make each generation better off than the last are watching the sovereign debt crisis sweep away the promises they made to their children.

Greek teachers and state workers are witnessing the end of the job for life and English students face U.S.-style tuition fees, while the French have been forced to join other Europeans in retiring later. In the background, politicians across the 27 European Union members are implementing austerity measures to the tune of about 450 billion euros ($600 billion), according to government announcements.

End of Road?

“Western European society cannot continue in the way it has been,” said Gabriel Stein, a director at Lombard Street Research Ltd., a company in London analyzing the economy. “We have reached a limit to how much can realistically be done through the public sector. It’s going to be very messy.”

Spain embodies the challenge governments and populations must overcome to reconfigure Europe.

The Spanish government will slash investment spending by 40 percent when it sets this year’s budget on March 30, Economy Minister Luis de Guindos told parliament this month. That will make it tougher for up-and-coming scientists like Artells. The country needs to trim about 55 billion euros from its deficit to meet its target, according to Funcas, the savings banks’ foundation in Madrid.

Should de Guindos and his colleagues fail to deliver those cuts, bond investors may shut off funding for Spain as they did Greece, forcing the government to seek a bailout from the EU and threatening its membership of the single currency. The yield on 10-year government debt reached a 14-year high of 6.699 percent in November before the European Central Bank’s long-term loans flooded the banking system with more than 1 trillion euros.

Age Statistics

Artells’s generation is both the best-educated Spain has produced and the hardest hit by the crisis.

Spaniards in their 20s and 30s have a high school graduation rate of 86 percent, compared with 50 percent for those in their 50s and 60s, according to data from the National Statistics Institute.

Younger workers have suffered the most as the economy staggered from recession to recession because they mainly had temporary jobs while older workers were protected by cast-iron contracts and lush pensions.

About 68 percent of young Spaniards are considering emigrating, an EU survey showed last year.

“What can we say to parents who realize that for the first time in history their children will be worse off than them? What can we say?” Spanish Prime Minister Mariano Rajoy said during a speech in Seville last month.

Social Pressures

Unemployment among people under 25 was 50 percent at the end of last year, according to Eurostat. Spain has the second- highest rate in the world, according to the International Labor Organization. Only South Africa is worse. The overall jobless rate was 23 percent in Spain, the highest in the EU.

“You have some real issues when unemployment of young people gets to the level of Spain, when you look at what changes societies,” said Bill Dinning, investment strategist at Kames Capital in Edinburgh. “If we can’t find some growth from somewhere pretty quickly and start reversing this cyclical downturn, then those social pressures are going to get worse.”

It’s a reversal from the late 1940s when European nations emerging from six years of war laid the foundations of the continent’s social model by introducing mechanisms to ensure poorer members of society weren’t left behind as they rebuilt their economies.

Pensions, Health

France brought in state pensions in 1946, the U.K. set up its free-to-use National Health Service in 1948 and West Germany guaranteed unions a third of the seats on company boards in 1952. The Germans, French and Italians went on to form the precursor to the EU in the early 1950s, while the Spanish and Portuguese were living under dictatorships, the last remnants of European fascism, and the military junta took over in Greece following a 1967 coup.

Spain, Portugal and Greece returned to democracy in the 1970s, paving the way for them to join the European bloc over the following decade. That brought them many of the same social policies and eventually membership of the single currency around the turn of the millennium.

The question of whether Europe can maintain that level of protection for its citizens has split senior policymakers.

ECB President Mario Draghi said in a Feb. 23 interview with the Wall Street Journal that youth unemployment rates in countries like Spain show that “the European social model has already gone.” Danish Prime Minister Helle Thorning-Schmidt, who holds the rotating EU presidency, disputed that view the following day in a speech in Washington.

International Rescues

“The fundamental goal is to ensure that the social market economies of Europe can be sustained,” Thorning-Schmidt said. “It is what sets Europe apart.”

Spain so far was spared the need for international bailouts required by Portugal and Greece over the past two years. Like its southern European peers, a surge in cheap credit during the first years of the euro masked problems in the labor market and the regulation of companies.

The Spanish economy, which raised income per capita six- fold since the 1978 constitution, ran out of fuel in 2008 and policymakers have failed to restart its engine since then. Gross domestic product per capita last year was the same as in 2004 and public debt is set to double by 2013 from 40 percent of GDP before the onslaught of the crisis.

“This country’s position in the world order is at stake over the next few years,” said Rafael Domenech, chief economist for developed countries at BBVA Research.

New Spain

The plight of people like Artells shows the mechanism that passes knowledge and wealth from one generation to the next has broken down in Spain. To stem the exodus of both talent and capital, Rajoy like colleagues across Europe must rewire the economy to make it easier for people to put their skills to work, Draghi said.

Artells was born just after the death of Franco and she grew up as Spain grew up. Her mother had only basic reading skills and worked as a nanny and housekeeper.

Franco’s economy based on agriculture and tourism was transformed by tighter trade links and subsidies funded by Spain’s neighbors to the north following EU accession and produced companies that rank among Europe’s biggest banks, phone operators and construction companies.

Artells worked part-time to support herself through her undergraduate degree and finished her doctoral thesis last July after a 12-year academic journey. Her options in Spain consisted of a job as a lab technician or a sales representative for a pharmaceutical or chemical producer, she said.

French University

Instead, she got a research post in Marseille studying the toxicity of nano-sized particles of titanium and cerium on the environment. The particles are used in sunscreens, paints and diesel fuel from where they leach into the sea and the air.

She earns more than she would for a similar position in Spain, if she could even find one. And the cost of living is much cheaper. She pays 850 euros a month in rent for a two- bedroom apartment in the French city with a south-facing balcony and a view of the mountains. It would cost at least twice that in Barcelona, she said.

“I don’t know what happened,” Artells said in a March 13 interview by phone from the French port city. “I worked; I went to university; I studied. And now if you want a job, you have to take something totally unrelated to your qualifications, or you have to go abroad. For what have they trained us so much?”

Since 2000, successive governments have emphasized the need to boost Spain’s capacity in research and development to make its companies more competitive. Former Prime Minister Jose Luis Rodriguez Zapatero aspired to create a “knowledge economy” throughout his time in office beginning in 2004, encouraging people like Artells to stay in education.

Skill Defections

The mistake was to spur the training of researchers before the economy was ready to put them to work, BBVA’s Domenech said.

“That strategy wasn’t well designed,” he said in a March 13 interview at the bank’s Madrid headquarters.

Spain’s economy has less capacity to employ the most- skilled workers because of its high proportion of small companies, he said. About 28 percent of jobs in Spain were at companies with fewer than 20 workers in 2006, according to BBVA research. Germany had about 13 percent, while Greece, Portugal and Italy had more than 30 percent.

Spain, like other countries in the euro area that are struggling to grow, impeded the expansion of its companies with rigid labor rules and costly regulation during the boom years, Domenech said. The country is 44th on the World Bank’s Ease of Doing Business ranking between Puerto Rico and Rwanda. Singapore is top, while the U.S. places fourth.

Brain Drain

“We need to prepare the foundations so that in four or five years they can come back, with professional experience that has been enriching,” Domenech said. “So even though in the short term our human capital may decline, in the medium term it may increase.”

It’s not just that brain drain that has set the clock ticking for Rajoy as he pushes through the economic reforms that he aims to bolster the economy. Bond investors are watching for signs that the country won’t be able to generate the growth it needs to place its government borrowing on a sustainable path.

Spain’s borrowing costs have eased since the ECB’s three- year loans bolstered the continent’s banking system in December, with the extra yield investors demand to hold the country’s 10- year debt over German benchmarks falling to 344 basis points from 468 on Nov. 22.

Economic Estimate

With the EU forecasting a 1.3 percent contraction for the economy this year, the market tension may return and force Spain to seek a direct bailout from the 750 billion-euro rescue fund that EU leaders are negotiating, according to Megan Greene, head of European economics at Roubini Global Economics in New York.

The EU has enough firepower to keep Spain and Italy out of the bond markets until 2015, Greene said. By then, Rajoy will have to have figured out how to get the economy growing again.

“You don’t really get a second shot,” Greene said in a March 12 telephone interview. “It’s a long road. It’s questionable whether Spain can do it.”

Spain’s export performance suggests the country can turn around the economy enough to pay back its debts and persuade its best and brightest to return home, said Gilles Moec, co-chief European economist at Frankfurt-based Deutsche Bank AG. Exports have risen 12 percent since the crisis began in 2008, outstripping the gain in German exports by 5 percentage points.

“This received wisdom that Spain wouldn’t be able to benefit from any external traction has been proved quite massively wrong,” Moec said in a March 14 telephone interview. “The picture is probably not as bleak as we thought.”

International Experience

Should the reforms succeed in restarting the economy, Spain may enjoy a boost in productivity by tapping the intellectual capital that has been forced offshore by the slump, Domenech said. And the returning workers will have added international experience to their Spanish education.

The pull of family and friends is still strong for Artells. She makes the 200-mile trip back to Catalonia every holiday and suffers a twinge of home sickness when her friends send e-mails to organize the traditional spring fiestas.

“We’re real family people in Spain,” she said. “I’m not asking for a house with a pool and a 4x4, I just want to be able to think about having a family.”

To contact the reporter on this story: Ben Sills in Madrid at bsills@bloomberg.net

To contact the editor responsible for this story: Tim Quinson at tquinson@bloomberg.net


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