The 2008 recession and the covid crisis: anatomy of two economic shocks
The ravages of the pandemic have been swifter and harsher, but recovery is expected to come sooner
BarcelonaWith 2020 now behind us and uncertainties about the duration of the pandemic well in place, the question arises: is the current crisis worse than the one that swept through Europe from 2008 to almost 2014? Then, toxic real estate assets infected the financial sector just as Spain's housing bubble was bursting, and before the sovereign debt crisis threatened to break up the European Union. With the outbreak of Covid-19, the shock has been more intense and presumably of a shorter duration, but equally devastating for the economy. Here are some of the differences and similarities between the two crises.
Economic destruction
Falling GDP and rising unemployment in both cases
The 2008 crisis has been defined as a W-shaped crisis. The sharpest declines were experienced in 2009 and 2012, with GDP losses of 3.8% and 3%, respectively. The economy also contracted by 0.8% and 1.4% in 2011 and 2013. Last year, with the pandemic, although there are no definitive figures yet, a historic slump of between 10 and 12% of GDP is expected, brought about mainly by lockdown and the collapse in the second quarter (-21,5%). But perhaps the 2008 Recession is best remembered in Spain for the unemployment figures it left behind, with the unemployment rate soaring above 26%. The current crisis has seen unemployment jump from 3.2 to 3.8 million in a single quarter, but the rate is still far from what it was then, and stands at 16.2%.
Duration
The recovery now looks to be much faster
The 2008 Recession formally began with the fall of Lehman Brothers (September 15, 2008) but Spain did not experience growth above 3% until 2015. To see GDP exceed 2008 figures we had to wait until 2016. These seven or eight years of impact are many more than what even the most pessimistic now expect. This year - despite the uncertainties - an economic rebound of around 6% is expected. And even the most prudent voices estimate that by 2022 or 2023 the 2019 GDP will be exceeded.
Sectors
From construction to tourism-related services
At the beginning of this century the Spanish economy staked its bets on the real estate sector under a premise that turned out to be false: housing never loses value, it only gains. That is why the construction sector grew to have a 10% weight in the economy during the years when the housing and mortgage bubble was growing. In the current crisis, the impact has been felt by services, especially those that depend more on tourism and activities that bring people together, such as restaurants, culture and sports. Although this does not affect the entire service sector (responsible in 2019 was 66% of Spain's wealth), the impact has been enormous, causing unemployment and the fall in consumption that characterizes crises.
The role of banks
From being part of the problem to being part of the solution
In the 2008 Recession, banking went from being a benchmark sector to a job-destroying machine with a terrible public image. Banks found themselves on the brink of the abyss due to their exposure to real estate and engaged in aggressive commercial policies (most famously, preference shares) that put them in the public eye. As a result, banks were unable to do the job of lending money to businesses that needed liquidity to continue.
Twelve years later, however, the situation has changed. The financial sector is far from being sufficiently profitable but it is much better capitalized than in 2008. As a result, it can lend and is doing so, even proactively and leading the way in granting loans with the public guarantee of the Spanish government's credit institute ICO. This has allowed many companies to strengthen their position in the midst of the crisis, a decisive fact. Currently, default rates in banks remain at 4.5%, when at the worst moment of the previous crisis they were 13%.
Public response
From austerity to calling for more spending
The fact that the previous crisis punished the countries of southern Europe, which were less rigorous in their budgets, meant that there was no united response to the problem. This led to the harsh recipes of austerity, with cuts in the midst of the crisis that worsened the situation and for which Brussels apologized years later. A decade later, things have changed: international bodies, the ECB and governments that used to call for austerity are now insisting that there must be public spending to address the social and economic ravages of Covid.
The furlough scheme
furlough schemeSpain's great recipe for keeping companies alive
Spain has a weapon in the current crisis that it did not even dream of during the 2008 Recession: the furlough scheme (ERTE), by which the State pays for most of the salaries of the companies that have been shut because of Covid. This is a lifeline that has allowed businesses to survive and employees to hold on to their jobs. In Spain there are still more than 750,000 workers on ERTE, and there have been up to 3.4 million. The policy will be in force until May 31; it remains to be seen how long it will last and what will happen after that.
