Just as Spain’s economy was recovering, coronavirus threatens new crisis

After Italy, Spain has been the most affected country in Europe as both countries reel from the coronavirus outbreak and the human toll it’s taking.

Both countries have instituted increasingly draconian measures to halt the spread of the virus which has also taken a toll on the economy.

“The direct, immediate impact is going to be very hard, it’s already happening. We are experiencing a lot of layoffs, many people will lose their jobs” warned Carmen Gonzalez Enriquez, a Senior Analyst at the Elcano Royal Institute of International and Strategic Studies in Spain.

“The situation is like a nightmare,” she told TRT World over the phone from her home in Madrid, which is also one of the hardest-hit areas in Spain.

In the Spanish capital Madrid, more than 12,000 people have been infected and 1,777 have died. In total the country has seen more than 39,000 infections and 2,696 deaths.

The Spanish government announced last week a $220 billion aid package to cushion the blow, however, whether this will be enough or not for the tourism and services reliant country will depend on how long the crisis lasts.

“Many people who are self-employed or small shop owners are closing their businesses. The economic package that the government approved is not prepared to deal with that suffering. In Spain, small companies are the base of the economic system. It is going to be hard for them,” added Enriquez.

The coronavirus epidemic has hit Spain at the time the country would have geared up for the summer tourism season, which is so essential to Spain, accounting for 15 percent of GDP.

“This summer will be a disaster for the tourism industry,” said Enriquez pessimistically.

Spain will be one of many countries globally that are likely to feel the impact of a drop in tourism along with many popular Mediterranean destinations like Italy, Morocco, Greece and Turkey facing a similar outlook.

The exceptional situation in Spain has also brought about a sense of political unity for a country that had two national elections in 2019.

“Maybe six months from now everything has been solved and we come back to the situation we had before and start speaking about Catalonia and issues that were worrying us in December and all this is a kind of parentheses in our lives,” said Enriquez. “But we are in totally uncharted waters, we can not predict what the long term political implications are.”

A local government source in Spain who wished to speak on condition of anonymity because of the sensitivity of the situation gave an early indication of what may emerge after the coronavirus crises.

“Politicians in Catalonia and the Basque Country, which have many infected cases, have also criticised that the Spanish government acted very late,” the source said. Both regions prior to the coronavirus outbreak had active secessionist movements.

“They closed schools and universities but you could still take the train to other places in the country. This has been a problem for the spreading of the virus. I think people, in general, are not very happy how this crisis has been handled so far.”

After Madrid, the Basque and Catalan regions have been impacted by the coronavirus according to the government’s statistics.

Going into this pandemic, many countries around the world were already facing a slowdown due to the tariff war that the Trump administration began with China and Europe. Some have also suggested that the economic impact of the virus may be similar to that of World War II.

“It is too early to have an evaluation of the economic impact of this coronavirus shock in Spain,” said Professor of Economics Joss García-Montalvo from the Barcelona Graduate School of Economics.

“For the European Union, with the available information, the impact could be, at the high end, similar to the so-called Spanish flu of 1918, a decrease of 5 percent of GDP at the end of the year; this is also the number that the ECB seems to be backing,” added García-Montalvo to TRT World.

Many analysts had begun to say that Spain had turned a corner and embarked on a steady path to reduced unemployment, which had peaked in 2014 at around 27 percent.

“If the decrease in GDP in the EU reaches 22 percent in the second quarter, as calculated by JP Morgan, then the economic implication could be much more important,” said García-Montalvo. Whether this happens will depend on how the virus is contained and what the medical advancements are.

“Judging by the effect of the Spanish flu in the past, the recovery could be fast: the capital has not been affected nor the financial structures if the liquidity provided by the ECB [European Central Bank] and the governments is enough.”

Unlike the 2008 financial crisis, which was generated in the financial sector, the economic prescription this time is more about ensuring liquidity in the markets so that they weather the current slowdown, rather than about attempting to stimulate demand.

What is also unknown is what the potential political blowback could be. The rise of populist and nationalist parties has marked the political scene in Europe and the US. In Spain, in the most recent elections, the right-wing Vox party came in third having not existed 10 years ago.  

“I guess that, as in many other countries, the populist trend will be intensified by the crisis: nationalistic tendencies and the anti-EU sentiment,” said García-Montalvo.