It seems as though when it comes to the worldwide recession, the US and Europe have switched roles. If in 2008 the US dragged Europe’s economy down, now the eurozone’s economic downturn is threatening to affect US markets. The spotlight is in on Greece, Spain, and Italy, which remain mired in recession with no end in sight. These once-relaxed Mediterranean countries are going through some stressful times.
In this post I want to focus on Spain’s lending crisis and how it affects small businesses, but first some background. This July the Spanish government announced that the economy is going to shrink by 0.5 percent next year—a higher rate than analysts expected. As a solution, Spain has focused on pursuing austerity to lower its debt burden, but many believe the only way out is through economic growth.
That wasn’t all. In June of this year, EU officials agreed to lend money directly to Spain’s banks. Everyone thought the European Union’s heart went out to the already squeezed Spanish government, which cannot afford to bail out its own banks. They thought wrong. Germany had to sour the deal. The German legislative body, Bundestag, voted to approve the bailout only if the Spanish government accepted full liability for the loans.
Saying that banks in Spain are in a bad shape is an understatement, and many small business owners in Spain are feeling the heat. Banks are being more conservative, and are not giving large credit lines to small businesses. Moreover, the banks are closing and shrinking credit lines that were already given. In a country where more than 60 percent of the economy, and 80 percent of the jobs, comes from small- and medium-sized companies, no lending means no growth.
However, small-business owners in Spain are not giving up. I recently read in the New York Times how some small-business owners are finding innovative ways to keep going without credit. Some of them work with multiple banks to gather the money they need for their business. Just like Olga Rioja Navarro, the financial director of a chocolate manufacturer, many business owners work with numerous banks and attempt to get loans toward a specific unpaid invoice. Others work out deals with their suppliers to pay them for the raw material only after they get paid for the sale; for example, Emilio Diaz, the owner of a window factory, pays for the glass only after he sold the window. Another method used is looking for private investors, like Ivan Moreno, the owner of a skateboard company, who is looking to find a private investor soon, before his brand “loses momentum.”
Spain’s small businesses are forced to juggle and be creative to survive these hard times. Although sometimes overlooked, just like in many countries, small businesses are the building blocks of Spain’s society and economy, and therefore should be what the European Union focuses on when trying to promote Spanish growth.
The financial crisis in Europe does make you wonder if the European Union deserves its name. Is it really a union? And if so, is it a good one? Will the chasm between EU countries ever be bridged? Can the European Union really surpass the cultural differences of its members and succeed? What do you think?