Chart shows projected unemployment rates in Q4 2020 showing a quarter of the Spanish workforce could soon be unemployed

Spain looks for jobs boost from EU pandemic recovery package

In an upscale part of Madrid, the Daughters of Charity of Saint Vincent de Paul are briskly handing out parcels of rice, sardines and milk. Outside the food bank wait women in their early twenties, homeless men, youths from north Africa and Latin Americans of all ages. These and hundreds of thousands of others are the faces of hunger and joblessness in Spain. 

Use of the country’s food banks has increased by some 40 per cent in recent months and risks matching the worst levels of the financial crisis if there is a second wave of Covid-19.

The pandemic has already left an indelible mark on the country. More than 40,000 excess deaths have been recorded since it was first hit by coronavirus. But a further legacy of the disease will be the destruction of jobs and livelihoods — and here too Spain risks becoming one of the worst-affected states in Europe.

“It just looks terrible,” says Mirella, who declined to give her surname. She resorted to the food bank after losing her job in a casino when the pandemic struck in March. “I don’t know when I will be able to find work again; in the meantime I come here for food to help me get by.”

According to OECD forecasts, Spain is likely to suffer more from unemployment than any other member state. The organisation predicts Spanish joblessness is set to jump to almost 22 per cent by the end of the year — or 25.5 per cent if there is a second wave of infections. That could remain at one in five people up to the final quarter of 2021. 

The country has never fully recovered from the financial crisis a decade ago, despite huge efforts since then to cut debts, increase exports and lower costs. On the eve of the pandemic, unemployment stood at 14 per cent, more than double the EU average. Youth unemployment was more than one in three.

Now worse is on the way, unless the EU can aid Spain — and much of the rest of the continent. Given its own deep problems with unemployment — the curse of the democratic era — the country is a crucial test case of whether the EU can avoid catastrophe.

“Europe was the answer to the great crisis of the second world war and Europe once again has to be the answer to the great crisis caused by the pandemic,” said Pedro Sánchez, Spain’s prime minister, as he urged EU leaders to agree a €750bn bloc-wide recovery package at a summit this weekend. Spain expects to be one of the main beneficiaries, with as much as €80bn in grants. 

People queue for food at a distribution centre in Madrid in May. Attendance at Spain’s food banks has risen by some 40 per cent in recent months
People queue for food at a distribution centre in Madrid. The use of Spain’s food banks has risen by some 40 per cent in recent months © Denis Doyle/Getty

Mr Sánchez’s government argues that the combination of the recovery package, furlough schemes based on a German model and “more European-style” social protections of vulnerable temporary workers should prevent unemployment spiralling. With the EU funds, Madrid even wants to make inroads into the deep structural causes of joblessness in the country, such as a two-tier labour market and a high rate of early school leavers.

The scale and decisiveness of the EU’s response to the crisis has surprised some critics. But many of the biggest changes — and biggest challenges — will fall on governments like Spain’s if a rise in unemployment is to be stopped in its tracks.

Mr Sánchez argues the EU has learnt the lessons of the financial crisis, when, according to many economists, Europe moved too fast in raising interest rates and cutting spending. The bloc emerged in much worse shape than the US, with higher unemployment, lower growth and a less robust banking sector.

Chart shows % change in number of workers affiliated to the social security system since March 2020 showing the worst-hit sectors in the Spanish economy

The success or failure of a more expansionist response this time around could shape the continent’s destiny for years to come. Countries like Spain can ill-afford the long-term damage that would come from a second huge wave of joblessness within a decade.

So far this year Europe has held unemployment in check, largely through such measures as temporary leave schemes. After the bloc’s unemployment rate hit a 12-year low of 6.4 per cent in March, it then only inched up to 6.7 per cent in May. That is in sharp contrast with the US, where 12m people have lost their jobs, according to the US labour department, and the unemployment rate now stands at 11 per cent.

Yet economists, executives and officials admit that the true state of the European economy is difficult to assess. The combined effect of the furlough schemes, interest rate holidays and other measures means it can sometimes be impossible to determine whether a company has a future, a loan is past due or a job is coming back. 

“It is very difficult to know what is solvent, what is healthy and what is going to be viable,” says Rafael Doménech, head of economic analysis at BBVA, the bank.

Labour minister Yolanda Díaz: ‘Little by little the economy is returning to life’
Labour minister Yolanda Díaz: ‘Little by little the economy is returning to life’ © EPA-EFE/Mariscal/Pool

No time for frugality

Just beside La Castellana, the main north-south artery in Madrid, looms Nuevos Ministerios, a huge government building whose construction began under the ill-fated 1930s Republican governments that were later driven from power by General Francisco Franco’s nationalist forces. Inside the complex, one of the first communist ministers since those days holds court: Yolanda Díaz, who has the employment brief in Mr Sánchez’s Socialist-led government.

Ms Díaz, a labour lawyer, and a member of Podemos, the junior partner in the Socialist-led coalition, wields considerable power at a decisive time for Spain and Europe. She says it would be a “collective failure” if the country returned to the mass joblessness of 26 per cent that marked the worst moments of the financial crisis.

“Little by little the economy is returning to life,” she says, adding that, like Mr Sánchez, she believes that EU help and influence will make the difference this time. 

Chart shows % of employees for which job retention support has been claimed showing millions of Spanish workers have benefited from job retention scheme

Up to now the key factor in Spain, and many other European economies, has been temporary leave schemes. Part financed by EU loans, Spain’s ERTE programme involves the state paying around 70 per cent of employee salaries. At their height, the scheme supported more than 3m people — more than a sixth of the Spanish workforce.

The urgent task now is getting as many people as possible off such schemes and back into employment. The government says 1.8m have gone back to their jobs. But for the sectors worst hit by the crisis — such as tourism, transport and hospitality — the schemes may well have to be extended. And Ms Díaz concedes that the true toll of unemployment may not be seen until the end of 2020, as companies using the emergency programme are forbidden from dismissing employees within six months of joining the scheme.

The OECD has called on governments to scale back such wage subsidies to allow the economy to adjust and for workers to move into new jobs rather than remain in unviable enterprises likely to collapse once support is withdrawn.

Yet the most intense controversy surrounds the centrepiece of the government’s European ambitions: the proposal for a once-in-a-generation transfer of EU resources to countries like Spain — a plan that more “frugal” member states worry will end up increasing waste, rather than defeating unemployment.

A man creates social distance using tape at the Nord Beach in Gandia, near Valencia. More than 40,000 excess deaths have been recorded since Spain was hit by coronavirus
A man creates social distance using tape at the Nord Beach in Gandia, near Valencia. More than 40,000 excess deaths have been recorded since Spain was hit by coronavirus © Jose Jordan/AFP/Getty

Planning the recovery

Madrid is pinning its hopes on a proposed European recovery package that would break with precedent by being financed by EU wide debt, and delivered via grants as well as loans

The government argues that the funds will help transform Spain — in part through investment in clean energy and digitalisation — an enthusiasm that is shared in the private sector.

“We have a massive opportunity to build on the transformation of our industries,” says José María Álvarez-Pallete, chairman and chief executive of Telefónica, Spain’s biggest telecoms group. “We have a massive opportunity to revolutionise education, to revolutionise active policy measures, in terms of training, skills for workers.”

But Spain has traditionally been one of the slower countries to disburse EU funds, partly because of problems in identifying projects that meet the bloc’s criteria.

“We have received lots of European aid, lots of (EU) structural funds,” says Mr Doménech. “They have had an important role, they have helped Spain narrow the gap in GDP per capita with other EU countries, but they have not resolved our structural problems.”

Critics of the recovery fund proposal, such as the Netherlands, doubt the effectiveness of grants and insist that beneficiaries must carry out accompanying reforms to their labour and tax systems. But a grant-based fund is still overwhelmingly likely to be approved, if not at this week’s summit, then at a later gathering.

The challenge facing Spain — like other countries in southern Europe — is to make the most of such extraordinary crisis measures while carrying out the kind of domestic reforms that are difficult to push through at the best of times, let alone in the middle of a health crisis.

“The most important thing is to proceed with the reforms that we have failed to carry out for so long,” says Toni Roldán, a former centrist member of parliament. “A lot more money, badly used, won’t change the problem of structural unemployment in Spain. The key is to invest it well.”

Chart sows unemployment rate (%) showing joblessness in Spain could approach peak reached in 2013

Structural problems

Spain has suffered chronic unemployment over the past four decades, with joblessness averaging 17 per cent and regularly topping 20 per cent when crisis strikes.

Small and medium-sized companies employ more than 70 per cent of workers — well over the EU average — but often do not have the funds to withstand crises or to increase productivity through investment. Services such as the battered tourist industry, which in good times sustains 13 per cent of the workforce, play an outsized role in the economy. 

Economists such as Mr Roldán argue that the Spanish economy is undermined by a long tradition of political favours: companies have prospered if they are close to power, to the disadvantage of their rivals and competitiveness more generally.

Ignacio Galán, the long-serving chairman and chief executive of Iberdrola, the power utility that is Spain’s second-largest listed company, adds that many people work under the radar in the black economy, which he estimates could account for as much as 20 per cent of gross domestic product.

Spain also has the highest proportion in the EU of early school leavers: 17 per cent of 18- to 24-year-olds complete only lower secondary education.

“There is a structural problem that we have to solve,” says Mr Galán. “Sometimes the problem is one of education, sometimes it is of training, sometimes it’s about altering the tools that we have: so-called employment offices, which in fact are unemployment offices.”

Farmers using their own equipment disinfect the town of Valdelacalzada, in Badajoz, western Spain, in March
Farmers using their own equipment disinfect the town of Valdelacalzada, in Badajoz, western Spain, at the height of the pandemic in March © Jero Morales/EPA-EFE

People across the political spectrum identify a single fatal flaw in the Spanish labour market — its two-tier system, in which anything between a quarter and a third of all workers are on temporary contracts.

No other EU country has a higher proportion of temporary workers, who typically have worse terms and less job security than those on permanent contracts. When downturns occur, the response is to sack them — rather than, for example, to reduce hours worked, as occurred in Germany during the financial crisis.

In March and April, when up to 950,000 people lost their jobs as the Spanish economy was locked down, less than 2 per cent of those on permanent contracts were made unemployed, but 16 per cent of temporary workers — often women and younger people — were fired. Between mid-March and the end of June, 50 per cent more women than men lost their jobs.

Ms Diaz argues that workers’ temporary status deters companies from investing in them. “We have to go to contractual models similar to the Europeans,” she says. “We want to eliminate factors that distinguish us from the European mainstream.” 

Police try to dismantle a camp in Barcelona in 2011 during the  protests against the economic crisis and joblessness
Police try to dismantle a camp in Barcelona in 2011 during the protests against the economic crisis and joblessness © Josep Lago/AFP/Getty

The issue is whether the government will principally seek to heal the breach in the labour market by reducing protections for employees on permanent contracts or increasing them for temporary workers.

Mr Sánchez’s coalition has agreed to revoke 2012 labour reforms that many economists say made Spain more competitive at the cost of workers’ salaries and conditions. Although Ms Díaz, in office since January, promises that no step will be taken without dialogue, there is little doubt about which way she wants to go.

“Those prescriptions have failed,” she says, “and the message from the IMF, the European Commission has been clear: react speedily, spend what you can, keep the receipts and reactivate the economy now to spend less in the future.”

So far, EU leaders can point to a much more decisive crisis response than a decade ago and initial success in holding unemployment down, particularly when compared with the US.

But big questions hang over how countries like Spain will spend funds worth tens of billions of euros, whether the country’s bureaucracy can be shaken up to help match skills and jobs, and whether increasing rather than decreasing labour rights will help bolster employment or instead kill jobs.

“We will be judged,” says Ms Díaz, “the EU, the government, all of us — by how we respond to this crisis”.