By The Financial Times
Until this week students gazing out of the windows of Lluís Vives secondary school in the centre of Valencia, eastern Spain, had little more than a concrete basket ball court to distract them.
That was until a demonstration held by students and parents against education cuts was violently broken up by police, triggering days of protests across the city and transforming the school into a symbol of a country where the pain of austerity is becoming a feature of every day life.
“There are schools where there is no money to pay the electricity bills and the students can’t study,” says Marta, a 14-year-old student standing outside the school, alongside hundreds of other young Valencians in protest against the violence.
She says her mother, a state school teacher, has not been paid since Christmas. “We are living on credit. Other people’s parents don’t even have jobs.”
Spain’s recession has entered a new phase where spending cuts risk compounding the effects of rising unemployment and weak domestic demand.
The centre-right government is now so concerned about a vicious cycle driven by austerity that it has begun pressing Brussels to allow a relaxation of a planned budget deficit reduction from 8.4 per cent of gross domestic product to 4.4 per cent in a year.
For Mariano Rajoy, Spain’s prime minister, the events in Valencia have also served as a worrying reminder of the possible social cost of large-scale austerity coupled with a deepening recession.
The plight of Valencia, which last year received a last-minute bail-out from Madrid to repay a bank loan and which has seen its credit rating slashed to junk, is particularly bleak.
Earlier this month the electricity was cut at one of the town hall buildings because the bills were unpaid, while locals complain of unpaid workers and schools lacking toilet paper.
Away from Valencia, once the crucible of Spain’s property boom, now pockmarked with half-built developments and empty offices, there is increasing evidence that relatively prosperous regions are lurching back into recession.
While the Spanish economy is expected to shrink by 1.5 per cent this year, according to the Bank of Spain, the region of Madrid is expected to contract by 0.3 per cent in 2012, compared with a 1.2 per cent rise last year, according to estimates by BBVA. In the Basque country, which has one of Spain’s lowest levels of unemployment, gross domestic product is forecast to drop by 1 per cent.
Some economists argue that suffering among Spain’s more comfortably-off, many of whom until recently had avoided the full brunt of the construction industry collapse that cost many temporary labourers their jobs, could drive this next leg down.
“People with higher incomes and fixed contracts are now losing their jobs, and this will have different economic effects to the construction workers who were the first to suffer,” says Juan Carlos Martínez Lázaro, an economist at the IE Business School.
With the prospect of tax increases intended to raise €6bn, Spaniards are likely to spend less, argues Mr Martínez Lázaro, which risks creating a vicious circle where the benefits of short-term austerity are nullified by a stagnating economy. Spain’s consumer confidence index has already fallen sharply since the summer in a country where domestic household consumption accounts for 60 per cent of GDP.
Mr Rajoy now appears fearful that short-term austerity measures could imperil his government’s programme of longer-term reforms, which centre on establishing greater flexibility for employers, and ensuring regional governments, such as Valencia’s, will never again need to be rescued by Madrid.
Whether this will allow enough time for consumption to recover remains in doubt.
Restaurants and bars on streets of parts of central Madrid, which had appeared to carry on as normal while the country’s construction industry collapsed, are already showing signs of slowing down.
“Look, this is the Soho of Madrid, and it feels dead,” says Richard Foster, pointing to empty streets and shuttered shops near his Maison Blanche restaurant in Chueca.
Reservations have fallen by a third since the turn of the year. “Why?” he asks, “because my typical client has lost his job”.