Spain’s stagflation deepens as pandemic savings and EU funds run dry

Pandemic savings exhausted: Spain enters uncomfortable phase of stagflation

The final quarter of 2023 began with Spanish unemployment rising by 24,800 people, contrary to the expected decrease of 21,300 and the previous period's drop of 11,000. The labor market moved in the opposite direction of consensus expectations at the worst possible moment: when the two buffers that masked economic cracks—accumulated pandemic savings and ELbichito-19 aid—are running out. The prevailing view is that stagflation has entered its awkward phase: no longer inflation with hidden recession, but persistent inflation with visible recessionary consequences.

Why is this October different from previous ones?

Because the monetary expansion that saved previous Octobers has stalled, giving long-time pessimists an argument they previously lacked: deterioration is no longer hidden in averages. Previous Octobers were sustained by money printing; this one arrives with interest rates uncertain and European funding taps half-closed. Some summarize it bluntly: those earlier Octobers kept the machine running, leading directly to this situation.

The most cited evidence comes from outside Spain. Germany shows underlying inflation above 6% and quarterly growth of 0%. This time, the crisis hits wealthy Northern Europe, not just the periphery. Spain’s outcome depends on whether it benefits or gets sidelined in what some predict will be a second eurozone crisis.

Cutting rates amid oil surge: the dilemma nobody wants to address

The emergency prescription—cutting rates and moving forward—faces a price problem. Monetary easing would push oil prices to $150, dragging up other imports. This breaks more than it fixes, fueling stagflation instead of curbing it. The alternative is equally difficult, as maintaining high rates sustains debt costs already seen elsewhere. Greece once paid 35% on its bonds.

A crucial detail often overlooked: current bond prices are supported by liquidity, which is fleeting. Euribor and bond markets have been artificially suppressed for some time. Pessimists argue this intervention has only two news cycles left.

CPI diverges from street-level reality

The gap between statistics and perception is partially explained by local conditions. With shopping baskets rising from €1,000 to €1,300 and salaries from €2,500 to €3,000, inflation is a nuisance; with frozen wages and the same basket, it becomes household stagflation. Economic sentiment varies significantly among neighbors.

Meanwhile, street indicators send mixed signals: diesel at €1.70, restaurants requiring advance bookings, busy malls on weekdays, and car registrations up 8% year-on-year in August. This can be read two ways: either there is hidden spending capacity, or many are spending beyond their means. Both may be true simultaneously.

EU funds, zero-interest deposits, and stable delinquency

Arguments against an immediate explosion rest on three pillars: banks still offer 0% on deposits, delinquency remains low, and billions in pending ELbichito-19 funds remain. Post-2008, banks scrutinize borrowers more closely, creating a filter that delays any burst.

However, most aid is already committed, and remaining funds come with austerity conditions. With deficit reduction protocols reactivated, figures around €15 billion are circulating. Banks offer zero returns not due to excess liquidity, but to steer clients toward riskier, higher-yield products. A detailed breakdown suggests net liquidity inflows are near zero.

External dependence: from capital flows to aid

Spain no longer relies solely on external capital flows but directly on aid and debt generation capacity. The parallel drawn is with the economic drought trinc the real estate bubble burst: then credit dried up; now cheap liquidity is vanishing.

Anecdotes illustrate the cycle: assets appearing solvent due to third-party debt, parents ruined by guaranteeing children’s loans, and individuals losing income rapidly. Liquidity masks balance sheet weaknesses until it stops doing so. Specific cases are detailed in original sources.

Analysis stalls here. Scenarios overlap without fitting together: discussions include delaying civil servant and pensioner bonuses before Christmas 2024, launching a digital euro in 2025, and ending cash usage. None of these pieces align perfectly. What seems clear is that the buffers making previous Octobers bearable are gone.