Can Spain Sustain?

A generation ago, San Sebastián de los Reyes was a sleepy bedroom community of 27,000 people at the northern tip of greater Madrid. The high point of the local calendar was the traditional festival of Cristo de los Remedios in late August, when residents celebrated with fireworks, bullfights and bull running. The rest of the year, the demands of the town's residents were relatively simple: clean streets, regular garbage pickup and an early bus down Burgos Road to Madrid, where the jobs were.

These days, San Sebastián de los Reyes refers to itself as Sanse — "a way of modernizing our corporate image," explains Rubén Holguera, its deputy mayor and councillor for urban development. The town's population has grown to 70,000, many of them well-salaried young people who grew up with the town. They still go all-out during Cristo de los Remedios, but now there are plenty of other things to do during the rest of the year.

In 2004, Plaza Norte 2, a mega–shopping center with a golden cupola, 225 shops and 14 cinemas, started drawing shoppers from all corners of Spain. Last year the town opened a new 2,500-sq-m multisports center featuring swimming pools, basketball courts and putting greens. And last month it inaugurated [an error occurred while processing this directive] a new youth center, with a theater, concert hall, workshops and mediatheque, where kids can surf the Internet, watch movies and listen to music. The keys have just been handed over to the first of 5,000 new houses, the bulk of them moderately priced, in La Dehesa Vieja (the Old Meadow). By the time that development is complete next year, the Madrid metro will have extended its Line 10 to include three new stations in Sanse, which has become essentially an airy, upscale barrio of one of Europe's most dynamic capitals. "We have a well-educated population, a vibrant town and almost full employment," says Holguera.

San Sebastián de los Reyes appears to be but one sunny page in Spain's storybook economic transformation over the last generation. What was once a diffidently autarchic appendage to the Continent has become an important economic locomotive for all of Europe. Spain's economy grew 3.4% last year, over twice the euro-zone average, and is expected to best the average again this year by a full percentage point. Spanish companies like phone-giant Telefónica, construction and infrastructure consortium Grupo Ferrovial, real estate developer Metrovacesa and financial conglomerate Santander Group have become Continent-wide — and even global — players. Last week Ferrovial concluded a €15 billion takeover bid for BAA, the company that runs Heathrow, Stansted and Gatwick airports.

But Holguera, whose principal job is managing coherent expansion for his changing hometown, is among the growing number of people worried that Spain's impressive growth depends too much on one churning mammoth: the construction industry. That sector accounts for more than 16% of Spain's economic output, roughly twice the average of euro-zone countries. "Everybody wants to own a house, but even middle-class people are having serious problems paying their mortgages," he says. Eventually, Holguera fears, the market could collapse, turning Sanse from a symbol of expansion into an icon of the Big Squeeze. It's not only that the construction trade supplies an inordinate number of jobs for Spain — 12% of total employment as opposed to 8% in the E.U. as a whole. It also funds the sports center and theater — not to mention the garbage pickup — in Sanse and in hundreds of towns and cities like it. Holguera says that roughly half of his municipality's services are funded by taxes, licenses and fees on construction; in the booming communities along the Mediterranean coast, that figure can reach as much as 70%. "Our situation depends now on growing, always growing," he says. "I don't see it collapsing all at once; this isn't Latin America or East Asia in the late 1990s. But in Spain we still don't have the capacity of France or Germany to absorb problems and still guarantee services to our people." Manuel Prados, president of adicae, an association of financial-services consumers, says 40% of Spanish households have trouble getting to the end of the month. And even some who don't have trouble found themselves vulnerable with the launch of an investigation last month into two large firms that solicited billions of investments in postage stamps (see Stamps of Disapproval).
Can Spain stay the course? It seems almost churlish to ask. So much wealth has been created in the last two decades that Spaniards appear largely immune to the "declinism" that plagues France, Italy and Germany. The two main political parties, Prime Minister José Luis Rodríguez Zapatero's ruling Socialists and Mariano Rajoy's conservative Popular Party (PP), spit and scream over everything from Franco's legacy to gay rights; last week the PP broke off all relations with the government to protest what Rajoy called its "ignominious" dealings with the banned Batasuna party to negotiate an end to the Basque separatist terrorist group eta. But economic policy is one area where the idea of the "two Spains" has little grip.

That is due in large part to Spain's abiding ardor for the European Union. "Everybody in Spain agrees that we have to make sure our fiscal and economic policies are in line with Brussels," says Antonio Argandoña, professor of economics at the Barcelona campus of the iese business school. "There's a consensus on these questions to the point that there's no real discussion." Pedro Solbes, Zapatero's Minister of Economics and Finance, established a reputation for fiscal probity both as a Minister in previous Socialist governments and as European Commissioner for Economics. His presence has helped the government shore up support from Spanish businesses that might otherwise think themselves better served by conservatives.

What worries some economists, though, is that Spanish citizens, too, all seem to want the same thing and be willing to go into debt to get it. Spain's rate of home ownership is 85%, far and away the highest in the Organization for Economic Cooperation and Development (o.e.c.d.). Because of the high level of mortgage debt, Jamie Caruana, governor of the Bank of Spain, warned last year that by the end of 2004, "The cushion of saving available ... had fallen to practically zero for Spanish households." Ricardo Vergés, an economist who earlier this year completed the first accounting report on housing for the National Institute of Statistics, is spooked by what he found. "We have €7.4 billion in mortgages. If you divide that by the national income, you see that we're indebted 130%. We're on a direct route to catastrophe. Our children will have to pay back amounts that will reach almost half of their incomes. It's a kind of economic slavery, and it can't be sustained." Granted, not many share that dire outlook. Just because Spain can't continue growing like it has doesn't mean its economy will catastrophically self-destruct. "Our central scenario is a soft landing," says Claude Giorno, who analyzes the Spanish economy for the o.e.c.d.; he sees the construction market slowing gradually rather than collapsing. But even he concedes that future growth must come from somewhere.