The first to notice that the bubble was coming to an end were the property developers. After nearly 900,000 housing starts in 2006—exceeding those of France, Germany and Italy put together—sales began to fall away. Mediterranean coastal developments were especially hard hit by the bursting of the uk housing bubble in mid-2007, leading to problems for British second-home owners. Re-zoned land awaiting development, bought at the height of the bubble with loans from the cajas, started to be seen as a bad investment. By the end of 2008 there were a million unsold homes on the market, while Spanish household indebtedness had risen to 84 per cent of gdp. Collapsing property developers began landing the cajas with massive bad loans: in July 2008 the Martinsa–Fadesa construction company filed for bankruptcy with debts of over €5bn.
The Zapatero government’s initial response was to try to pass the crisis off as a global phenomenon, only marginally affecting Spain, in comparison to the—far larger—debacle of the subprime-related market in the United States. At most, Madrid acknowledged that it would be necessary to give some help to the cajas—the possibility of a €50bn bail-out fund was floated in October 2008—and to expand short-term deficit spending, in tandem with the rest of the g20. However, these predictions were quickly shown to be hopelessly optimistic as unemployment doubled, pushing the jobless rate up to nearly 20 per cent by the end of 2009. The destruction of jobs was not confined to construction, but also affected the consumer-goods industry and market services. The virtuous circle of asset-price Keynesianism had gone into reverse, generating a severe ‘poverty effect’ which, together with the contraction of credit, drastically reduced private consumption. Owing to the high proportion of employees on short-term and temporary contracts, businesses were able to reduce their workforces quickly and at very little cost in response to falling demand, which was then in turn further depressed by rising unemployment, reaching over 40 per cent among under-25s. Government revenues plummeted, as gdp contracted by 7.7 points, peak to trough, and the 2006 fiscal surplus of 2 per cent of gdp turned into a 2009 deficit of over 11 per cent.
Like its European counterparts, the Zapatero government focused on a policy of socializing the losses of the country’s oligarchic blocs. This very much included the major Spanish construction companies, some of them—acs, fcc and Ferrovial—now global players, having been generously fattened up by more than 25 years of expansive infrastructure budgets, and who now demanded that their public-works contracts be maintained, whatever the cost. The large private banks—Santander and bbva are the biggest—appeared to be better provisioned than some of their British and us competitors, having captured the deposits of the middle classes of Latin America. In fact they now went on a spending spree, Santander in particular adding British building societies and American savings banks to its already extensive Latin American and Asian interests, creating a behemoth too big to fail—and perhaps too big to save.
For their part, the cajas remain saturated with debt. Estimates of their total capital shortfall vary from €15bn (the Bank of Spain’s figure) to around €100bn, which would be approaching 10 per cent of gdp; in March 2009 the Caja Castilla–La Mancha alone was bailed out to the tune of €9bn.  In June 2009, Zapatero announced plans for a €99bn rescue fund, the frob, and a merger programme that would reduce the 45 cajas to 17; they were also instructed to raise their core-capital levels to 10 per cent by September 2011, which would require an extra €20bn–50bn in cash. Sidestepping this, the cajas have also been encouraged, through the Bank of Spain, to swap property developers’ debts for real estate, land and houses, valued somewhat fictitiously at 10 per cent below their peak price, in order to flatter their balance-sheets and avoid technical bankruptcy. As in Ireland, however, losses have tended to exceed initial estimates: in March 2011 revelations of bigger-than-anticipated problems at the Alicante-based Caja de Ahorros Mediterráneo, Spain’s fourth-largest caja, scotched the merger plan in which it was involved. After their record-breaking rise, Spanish house prices have so far fallen back by little more than 10 per cent (see Figure 4).
By mid-2009, the pressure at eu and, more specifically, Eurozone level swiftly shifted from bank-rescue packages—the total pledged may have come to €2.5 trillion from the eu as a whole—to the austerity measures necessitated by the transfer of finance capital’s losses onto the nation-states’ books. From early 2010, budget cuts, wage freezes and the dismantling of social programmes were introduced in one country after another. The crisis was explicitly seen as an opportunity for state-by-state ‘structural adjustments’ according to the well-known prescriptions. The role of the eu’s summit institutions in the crisis could not have been more closely linked to financial interests. In this sequence of events, the sovereign-debt crises, especially the episodes involving Greece and Ireland, must be seen as providing an enormous business opportunity for the big European—German, French and British—banks, the main holders of the European countries’ sovereign bonds. Aided by the rating agencies, the announcements of the insolvency or financial fragility of the Eurozone’s deficit members—Greece, Portugal, Ireland, Spain and Italy—enabled them to amass enormous profits based on debt-bond interest rates, artificially blown up at a time when it was impossible for financial profits in the private and household sectors to return to their pre-crisis levels.
In April 2010, as the Greek debt crisis unfolded, Zapatero came under increasing pressure from Berlin, Brussels and the ecb to impose austerity measures and labour-market restructuring—effectively launching an offensive against the state-sector employees who still had long-term contracts and wage-bargaining rights. Unwilling to assault key sections of his base, yet incapable of mobilizing it towards any alternative solution, Zapatero procrastinated. Finally on 12 May, apparently after further arm-twisting from the Obama White House, he announced a drastic austerity programme: public-sector wages slashed by 5 per cent, benefits and pensions cut, investment projects cancelled, the retirement age raised, wage bargaining restricted, sackings made simpler. The result was an immediate plunge in the polls: from level-pegging with the pp, the psoe dropped to 7 points behind, then carried on falling. Trade-union leaders were trapped between the pressure from their rank and file and their anxieties about precipitating the fall of the psoe government. A general strike on 29 September 2010 was the main focus for social opposition to the Zapatero measures, but the leadership prevented some of the best-organized sectors, such as transport workers, from coming out, and failed to mobilize the huge mass of short-contract workers in services and retail. The union leadership then promptly signed an agreement on cutbacks in pension provision and a rise in the retirement age.
The mask of a modern progressive republicanism has fallen as the Socialist Party government lined up unambiguously with the hegemonic financial bloc. Following the script that has characterized the current phase of the crisis, the extra burdens on Spanish public-debt issue have led to measures in line with the most orthodox structural adjustment policies. In the final analysis, this means that public expenditure is subject to the political oversight of the financial agents. The result has been the desertion of a large part of the psoe electorate, the Party now at an all-time low in the polls. On 2 April 2011, with unemployment soaring (see Figure 5) and the Socialists trailing by 16 points, Zapatero announced that he would not be running as the psoe leader in the March 2012 general election. The main pressures for him to resign came from within the party, particularly from Socialist candidates in the May 2011 regional elections who wanted to distance themselves from his political legacy. The front-runner to succeed him is Alfredo Pérez Rubalcaba, a veteran of the psoe right whose political career began under Felipe González. Rubalcaba has been at the Interior Ministry since 2006 and is notorious for having formulated an even tougher, ‘war on terror’ response to the Basque separatist movement eta than the pp. As a result of this strong-man stance, he was rewarded with two other high positions in the Zapatero government: vice-president and spokesman of the government. As a man of the felipista old guard, Rubalcaba is favoured by the mighty prisa group and its chief mouthpiece, El País. The leading candidate of the psoe’s zapaterista wing and the Mediapro group, Defence Minister Carme Chacón, withdrew when she saw which way the wind was blowing.
The crisis has brought Spain face to face with the fragility of the economic structures underpinning its long decade of prosperity, and the psoe with the aporias that were the foundation of its politics. Financial engineering perpetuated the fiction that an expanded home-owning middle-class majority had achieved permanent levels of prosperity. The collapse of the property bubble has torn the veil from a highly polarized social order, with a large proportion of the population deep in debt, many out of work and dependent on public services doubly hit by spending cuts and privatization. If to this we add that the worst hit are the young—facing starkly diminished prospects compared to their elders—and foreign-born workers, then the lines projecting the cost of the crisis onto the most vulnerable groups become clear. Spain has long been the most Europhiliac of eu member states; Europeanism was deeply associated in people’s imaginations with the post-Franco democratization and modernization of the country, and the Spanish electorate has historically been almost completely uncritical of the eu. Such complacency has now disappeared.
On 15 May, in the run up to the 22 May regional elections—and exactly a year after Zapatero had announced his swingeing cuts—a huge wave of social protest swept across the country. Tens of thousands of young demonstrators took to the streets, then set up camp in the central squares of a score of Spanish cities, including Plaza Catalunya in Barcelona and Puerta del Sol in Madrid: students, workers, employed and unemployed, staking a claim to public space, with a salute to the young Arab demonstrators of Pearl Roundabout and Tahrir Square (see page 29). In Puerta del Sol the occupation established a permanent popular assembly, voting daily on all decisions. Among the slogans of the 15M movement: ‘For a transition to democracy!’—‘We are not commodities in the hands of politicians and bankers’—‘ppsoe: psoe and pp, both the same crap’—‘Real democracy now!’ The 20 May Manifesto approved by the Sol’s popular assembly assailed political corruption, the closed-list electoral system (in which only the names of the party and its leader appear on the ballot paper), the power of the ecb–imf and the injustice of the ruling-class response to the crisis. At the time of writing, the ‘campers’ have been holding the squares for nearly two weeks—during which period the psoe has had the worst drubbing in its history, losing control of Barcelona, Seville and four acs, as well as town halls across its stronghold of Andalusia.  But if Mariano Rahoy’s pp takes power in the general election, due in less than a year, it will confront the forces of the 15M movement, the indignados and ‘youth without a future’: ‘No house, no job, no pension—no fear!’
The outlook for economic recovery in Spain remains bleak. The scale of the housing bubble; the centrality of asset-price Keynesianism to growth since the 1990s; the depth of the post-bust recession, exacerbated by truly draconian austerity measures; the strength of the Euro (thanks in part to quantitative easing from the us Federal Reserve), which hits non-Eurozone tourism; and a tightening of credit by the ecb—all this suggests that any return to growth in Spain is a very long way off indeed. The immediate prospect is almost certain to be further retrenchment and therefore an increase in Spain’s deficit. This poses severe dilemmas for the Eurozone’s attempts to pretend that the crisis is just a temporary liquidity problem which can be managed by funnelling ecb–imf bridging loans to the countries in question during the time it takes to grow their way out of debt. In fact, the crisis is that of the major German, French and British banks, hugely exposed by the bursting of the periphery’s property bubbles (see Figure 6). Rather than face the trauma of a full-blown banking crisis at home, Berlin, Paris and London have been running what one central banker has described as a public-sector Ponzi scheme, ‘only sustainable as long as additional amounts of money are available to continue the pretence’:
The collapse of the Spanish model threatens this pyramid scheme from several directions: first, German and French banks’ exposure is far greater in Spain than in Greece and Ireland; second, the scale of the cajas’ problems has yet to be fathomed; third, the social problem—a population that has grown by 18 per cent in the past decade, largely by immigration; nearly one in two of the younger generation unemployed—is potentially more explosive, as social and welfare spending shrinks still further, from levels already low compared to those in central Europe. A Spanish debt crisis could finally capsize the eu3’s attempt to make the peripheral populations bail out the stricken banks, which are reaping usurious, artificially inflated rates on government bonds to compensate for the lack of financial profits in the private sector. For that reason, every effort will no doubt be made to avoid one.
Some of the original bondholders are being paid with the official loans that also finance the remaining primary deficits. When it turns out that countries cannot meet the austerity and structural conditions imposed on them, and therefore cannot return to the voluntary market, these loans will eventually be rolled over and enhanced by Eurozone members and international organizations . . . European governments are finding it more convenient to postpone the day of reckoning and continue throwing money into the peripheral countries, rather than face domestic financial disruption.