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Spain Largely Avoids Unrest Even as Economy Slumps

Spain's unemployment rate has topped 17%, and economists expect it to hit 20% next year. But Depression-era scenes don't dot its landscape.

Spaniards aren't, en masse, sleeping under bridges. Tent cities haven't sprung up outside Spanish towns. Labor has yet to call a single major strike.

Europeans are notoriously quick to take to the streets to defend their economic interests. Yet, as the Continent endures its worst economic crisis since the end of World War II, things seem unusually calm.

Even Friday's May Day marches were more muted than expected. Though hundreds of thousands of people across Europe took part in the annual demonstrations, calling on governments to support jobs and workers, overall participation was less than unions had hoped for, considering the severity of the downturn.

Exact reasons for the subdued mood vary from country to country, but a common theme emerges: The very factors that make some European economies sluggish and inflexible during times of plenty also help cushion the impact of the downturn.

Spain exemplifies this. During the good times, its economy is held back by low productivity, an extensive underground economy and scant labor mobility. Studies show that Spaniards are unusually reluctant to move away from their home region -- a trait that acts as a drag on the economy.

Today, however, being close to one's extended family is a lifeline. Members of Spanish families help one another pay the mortgage, so there are fewer foreclosures. Even when they lose their homes, Spaniards rarely end up on the street. For the most part, they move in together.

"The family represents kind of a social-welfare network that allows the country to withstand a much higher rate of unemployment," says Rafael Doménech, chief economist for Spain and Europe at BBVA bank.

Then there is the question of who would lead any unrest. The huge job losses in Spain have been borne almost entirely by temporary workers -- women, immigrants and the young -- who aren't represented by anyone. The types of workers who tend to belong to labor unions -- middle-aged men on full-time contracts -- have scarcely been touched by layoffs. In fact, the latest jobs report showed they had slightly increased their number in the first quarter of the year -- even as 800,000 temporary and self-employed workers lost their jobs.

Another issue Spain shares with other southern European countries is its extensive black economy. During the good times, economists have encouraged countries like Spain and Italy to bring the black market under control. In the bad times, however, that market can give many Spaniards secret, undeclared sources of income that can keep them afloat.Analysts say it could represent as much as one-fifth of the Spanish economy, providing work for people who are formally unemployed.

Most mainland European nations are also simply more accustomed to living with high unemployment. Even at the height of Spain's credit-fueled boom, with an overheated economy running at full tilt, the country's unemployment rate fell only to 8%.

Given the rigidities of its labor market, the country's "natural" rate of unemployment is far higher than that of other countries. Economists at Spain's BBVA bank put the country's so-called Nairu -- the sustainable rate of unemployment that can be reached without the economy overheating -- as high as 14%.

Spanish police had braced for violence during Friday's May Day marches. But just 6,000 people turned out for the parade in Madrid, according to Spanish police, in a largely good-natured event that featured samba dancing, not Molotov cocktails. Other Spanish cities also drew relatively small crowds.

In Germany and France, demonstrations attracted more people than last year. But Germany has seen little other sign of widespread protest or labor unrest. In France -- synonymous in many people's minds with revolution -- Friday's marches drew fewer people than a general strike two months ago. The country's biggest unions said over the weekend that they weren't planning to organize another strike right away lest they plunge the country into chaos. Overall, other than a few boss-nappings and some local protests, things have been reasonably tranquil.

A notable exception since the global economic crisis began is Greece, where one-fifth of people live below the poverty line. There, hundreds of youths clashed with police over four days of rioting in December, underscoring frustration over the high youth-unemployment rate.

Spain last suffered an unemployment rate of 17% only a decade ago, following the recession of the early 1990s. In the early 1990s, it regained growth by devaluing its currency. Now that it uses the euro, it no longer has that option. The only way it can make its wrenching economic adjustment is by shedding jobs.

Spain has no obvious industry to pick up the slack now that the country's bloated construction sector has collapsed. Because of its onerous labor laws, employers will wait a long time to hire, even when a recovery begins. And the Socialist government has made it clear it has no intention of overhauling labor laws.

The idiosyncrasies of European economies have so far permitted governments to take a more laid-back approach to fighting the downturn than, say, the U.S. But if the recession drags on, their people's patience will be tested. Then, Greece's riots could become the rule, rather than the exception.

—Marcus Walker in Berlin and David Gauthier-Villars in Paris contributed to this article.
Printed in The Wall Street Journal, page A2
http://online.wsj.com/article/SB124139642920281859.html