Second lockdown could destroy Spain's devastated economy

Spain’s tourism-reliant economy has taken a beating from ongoing global travel quarantines, but coronavirus cases are continuing to surge

Spain
Quarantines imposed by Britain and other countries have decimated Spain's tourism sector as cases in the country rise

This five-part series looks at how major European economies have coped with the Covid crisis, and how governments have scrambled to save jobs and businesses. Today we visit Spain, where there are fears a second lockdown could decimate the economy. 

Not since Spain plunged into a bloody Civil War more than eight decades ago has the country’s economy suffered so badly as during the Covid pandemic.

When General Francisco Franco’s Nationalists staged an uprising against the Republican government, the country’s economy went into deep decline between 1936-1939.

The same happened when Spain imposed one of the strictest lockdowns in Europe in March in order to try to contain the epidemic.

After emerging from lockdown in June, a new surge from the virus saw the total number of coronavirus cases rise to 359,082, the highest number in Europe, according to the data released on Aug 17.

More than 28,600 Spaniards have lost their lives to Covid-19, according to health ministry data, although the real death toll is closer to 45,000, according to data from regional authorities and research bodies.

The dire cost of Spain's economic hibernation was laid bare when government data revealed the economy shrank by 18.5pc between April and June.

Official records only go back to 1970, but estimates by economic historian Leandro Prados de la Escosura show that in 1936 – the start of the Spanish civil war – the economy sank at an annual rate of 26.8pc, or 6.7pc each quarter.

Spain’s tourism dependent economy has been devastated

Tourism-dependent Spain, which depends on holidaymakers for 12pc of its GDP and 13pc of jobs, according to official data, has seen this crucial sector decimated by the imposition of quarantines by Britain and other countries. Last year, 18m Britons travelled to Spain, making up one in five of all tourists to the country.  

Over the first six months of this year, 10.8m foreign tourists visited Spain, nearly three-quarters fewer than in the same period of 2019, according to the country’s National Statistics Institute (INE).

Spain haemorrhaged businesses and jobs when it would normally be gaining them during the summer, tourism-reliant, months.

Between February and June, 51,000 businesses closed, compared to the same period in 2019, when 24,000 opened, according to INE.

More than one million people lost their jobs in the second quarter of the year, the worst fall in employed workers on record, pushing unemployment to 15.3pc.

A second lockdown may be a death knell for Spain’s economy

Alfredo Marquez, an automotive consultant from Barcelona, was made redundant in July.

“I have been looking for a job but it is really hard. This could not have happened at a worse time,” he said.

The IMF predicts Spanish GDP will decrease by 12.8pc this year, meaning it will be worse hit than Britain where the economic slowdown is expected to be 10.2pc.

The reason is twofold. Spain adopted a more severe lockdown earlier than Britain and it is more dependent on tourism.

With coronavirus cases soaring the fear is Spain may have to bring in a second lockdown to flatten the curve once more.

However, Antonio Garamendi, president of the Spanish Confederation of Business Organisations, says this will be the death knell for the economy.

“We are very worried that we will have to go through what we had to go through in March and April. People come first but the economy will suffer brutally,” he says.

Spain’s government has spent €8.1bn (£7.2bn) on a furlough scheme that has saved many workers from hardship. However temporary workers, like those in tourism, and small companies have not been eligible for the programme and have instead had to rely on loan schemes. 

Spain's labour minister Yolanda Díaz has signalled the furlough scheme will be extended to the end of the year but for businesses this could spell headaches ahead.

The Red Cross has launched a campaign to raise awareness among Spanish youngsters to avoid new spikes in Barcelona Credit: Alejandro García/EPA-EFE/Shutterstock

Kate Preston, a British businesswoman who runs eight restaurants in Barcelona, said: “The furlough scheme has saved many companies from going bankrupt immediately.

“[However] when it ends, I forecast carnage because companies are obliged to keep all staff in their previous positions for a minimum of six months or return all furlough money for all workers. If your takings are down 70-80pc, that is clearly impossible.”

Political in-fighting may slow Spain’s recovery even further

Spain is expected to receive €140bn in European Union funds to help shore up its economy and €61bn could be in grants rather than loans.

The fragile left-wing coalition government has drawn up a €150bn public spending plan for the next two years and wants to avoid making cuts as happened during the 2008 financial crisis.

However, Spain’s polarised political system means agreeing how best to spend the cash has proved hard.

Pedro Sanchez, the Socialist prime minister, only came into power in January after striking a deal to form a coalition with Pablo Iglesias, leader of the far-left Unidas Podemos (United We Can) party and the government must pass the budget for 2021 by October.

Garnering enough support from a myriad of small parties is not straightforward. 

Pablo Casado, leader of the conservative People’s Party, does not want to make cuts either but does not want EU money spent on “ideological projects”.

Faced with ballooning public debt that is pushing 110pc of GDP, the expectation is that government will have to raise taxes.

Javier Díaz, an economist for IESE Business School, says: “More than the economics it will be the politics which decide our ability to recover. We have a divided political scene and the government must pass the budget by October or we will have to have another election.”

Which European countries have been hit hardest by the pandemic and how can they recover? Share your view in the comments section below.