The Great Spanish Crash This World

Spain is a country in crisis.

With millions unemployed and millions more now facing poverty,

Spaniards have taken to the streets in protest.

Spain's economic collapse means Europe is now spending billions

just to keep it afloat.

Either you save us or the Euro sinks.

That's a very powerful blackmail, isn't it?

With its massive economy, the Spanish crisis is big enough

to bring down the whole of the Eurozone.

If Spain was forced out of the Euro then who else is safe?

You know, why not France, why not Italy?

'So how did Spain, one of the largest economies in the world,

'reach a point where pharmacies are running out of medicine?'

There's hardly anything here.

Normally, it's todo lleno.

Full.

'And thousands of families can't afford to eat.'

This is the story of the rise and fall of Spain,

from dictatorship to democracy,

from construction boom to economic bust.

Benidorm, one of Spain's most famous holiday resorts.

We love it. That's why we come back. We enjoyed it so much last time.

The entertainment is brilliant. We went out last night.

It's free to get in.

Like Blackpool but warmer.

Yeah, it's a warmer version of Blackpool,

but they're very friendly people, though.

They make you feel very welcome.

Guaranteed sunshine, all-day fry-ups and Sky Sports mean that the

British love affair with Spain is still going strong.

Last year, 11 million of us holidayed in Spain,

making it by far and away the top tourist destination.

But just half an hour away, on the streets of Alicante,

there's not much of a holiday atmosphere.

70,000 people are marching against recent cuts.

Among them is 42-year-old mum, Loli Ballester.

Faced with economic ruin,

the Spanish government has enforced austerity measures that dwarf

anything seen in Britain or most other European countries.

Public service workers have had their pay cut,

unemployment benefit has been slashed and taxes raised.

It has led to mass unemployment, growing poverty and anger.

An hour's drive down the coast

is Loli's home town of San Miguel de Salinas...

..population, 8,000.

BELL RINGS

The old centre is traditionally Spanish, but half the population

is now made up of international ex-pats, mainly Brits.

The economy here is based on tourism and agriculture.

San Miguel is a typical small Spanish town.

It's got the feel of a place

that's done quite well for itself over the years,

and it's not the kind of place you'd expect to see poverty.

But now, you can.

People here are going through real hardship.

'Of course, not everyone in San Miguel is begging on the streets,

'but the crisis is now hitting

'ordinary middle-class Spanish families.'

Life for Loli and her family changed when she lost her job in a DIY store

at the start of the economic crisis five years ago.

To make matters worse, her husband, Emilio,

who works in the building industry, hasn't been paid for months.

With jobs few and far between, he has no alternative

but to carry on working for nothing.

In these tough times,

they manage to keep going with help from their family.

Most of the food they're eating

is grown on the grandparents' allotment.

Loli's daughter is still at school.

Her son wants to go to agricultural college,

but the recent cuts mean he might not go.

Everywhere in San Miguel there is anger and pessimism.

What do you think about the way the country's going?

So what is it that's brought this great country to its knees?

The answers lie in its turbulent recent past.

Little more than 40 years ago, Spain was a very different country,

backward, rural and ruled by a dictator.

From the late 1930s,

General Francisco Franco ruled Spain with an iron grip.

Franco had seized power from Spain's elected government

during a vicious civil war with atrocities on both sides.

Somewhere between 200,000 and 300,000 men were killed on the battlefields,

but well over another 200,000 were murdered unnecessarily

behind the lines.

Franco's brutal rule was marked by an economic policy designed

to isolate Spain.

Franco was, economically, a nincompoop,

but believed himself to be an economist of genius.

Immediately at the end of the Civil War, he rejected various

possibilities of credit from Britain and the United States

and adopted a policy of autarky so it was like a siege economy.

The conditions in Spain in the 1940s were comparable

to many African countries for which appeals for relief are made today.

They were, you know, people were starving in the streets,

living out of dustbins, living on potato peel.

I mean, it really was extraordinary.

Franco's policy condemned Spain to economic ruin

until he was impelled to accept economic assistance.

In the late 50s, a group of leading economists

came up with a strategy to save the country from collapse.

One of them was Jose Luis Sampedro.

Now 95 years old,

he is still one of the most respected economists in Spain.

-TRANSLATION:

-At that time, Spanish society was running

on personal favours alongside the black market.

Of course, there's a moment when this system cannot continue.

It became clear we needed international support

because the country was so far into the red.

Sampedro and his fellow economists saw that Spain could benefit

from the country's desperate poverty.

It was precisely that poverty which offered

an opportunity for foreign investors.

European manufacturers began to relocate their factories to Spain

to take advantage of the low wages,

and Spain had one other enormous asset.

The sun.

NEWSREADER: This is the Costa del Sol, the sunshine coast of Andalucia,

newly invaded by sun-hungry hoards from northern Europe.

In the 1950s, the tourism industry was born.

Tourism had a huge economic impact.

It was a way of bringing money into the economy other than exports,

and it allowed the country to profit from its cheap accommodation.

-AIR STEWARDESS:

-Ladies and gentlemen, welcome to Alicante,

where the local time is 10:20.

By the 1970s, the Spanish coast was the destination for tourists,

particularly from the UK.

Glaswegian David Craig set up business here in 1973,

tapping into the swelling numbers of British tourists

travelling abroad for the first time.

I decided that because of the predominance of the English

holidaymakers here, we would make something for them,

and in actual fact, I started off with apple pies,

and then with Cornish pasties.

Today, he has a multi-million Euro business importing British food

to restaurants, cafes and bars in Benidorm and the Costa Blanca.

Here you are, mate.

Thank you kindly.

But when he started, under Franco, Spain was still a primitive country.

No one had ovens in their house. They cooked on a gas ring.

Anything they wanted to put into an oven they made at home and they took

along to the baker's, and after the bread was baked,

they were allowed to put their different dishes

into the oven to be finished off and baked.

Tourism unleashed a wave of construction that continued

unabated for decades, and helped Spain

to become the second fastest-growing economy in the world.

Today, the boom years suddenly feel very distant.

Here in San Miguel, things have got so bad that the neighbours'

association has opened a food bank to support families with no money.

And some of the donation are from Brits who came as tourists

but ended up settling down here.

We bought 35 kilos of flour, 35 kilos of sugar.

In the carrier bags we've 37 dozen eggs.

This is stuff that's collected from the bars.

They put all kind of things in,

but some of the things the Spanish are not used to,

like Bird's Custard Powder and beans in tomato sauce.

Loli was one of the founders of the food bank three years ago

when the crisis began to bite.

Treinta y tres.

Over recent months, she's seen demand steadily increase.

In Spain, you can only claim unemployment benefits for two years.

This has left an estimated one and a half million people with no income.

Beatrice Villarreal and her mother, Manuela Sanchez,

have never had to rely on charity before.

In 1975, Franco died,

and King Juan Carlos ushered in a new government

to begin the difficult transition to democracy.

Some of the decisions taken then were to have a big impact

on Spain's current crisis - above all, on the status of the regions.

After the first democratic elections,

a relatively moderate right-wing government

under a man called Adolfo Suarez came into power, and he had to deal with

the problem of the long, pent-up desire for autonomy

from both the Basque Country and Catalonia.

Catalonia and the Basque Country

have their own languages and culture.

Under Franco, all expressions of regional identity,

let alone autonomy, had been ruthlessly suppressed.

The new Prime Minister had to find a political solution

which would hold the country together.

And the way he chose to do it was, if you like, to dilute the problem,

to drown it, if you like,

by inventing 15 other autonomous regions.

The new regional governments were given extensive powers to make law

and, critically, to borrow and spend in their own right.

-TRANSLATION:

-I believe the model has worked relatively well.

Perhaps the main defect of the model is that autonomous

communities are responsible for certain spending policies,

health and education, but income is in the hands of the State.

These autonomous local governments with large budgets

but limited accountability for what they spent

would come to play a central role in the current crisis.

And there was another feature of regional Spain

which would also play its part.

Every region has its own local banks, known as cajas de ahorros.

There are different cajas in every Spanish city.

Cajas are the Spanish equivalent of building societies,

and they were effectively local savings banks.

Cajas and savings banks were the ones

that were in touch with ordinary people

who wanted to buy their houses

and they gave them very good conditions to do so.

Small and locally managed, no-one imagined these cajas

could represent a threat to Spain's banking system.

And in the heady days of the new democracy,

the focus was on turning the country into a modern, European economy.

Mrs Thatcher and the other EEC leaders are meeting in Brussels

in triumphant mood after agreement

on Spain and Portugal's entry into the Common Market.

In 1986, Spain became a member of the European Economic Community.

-NEWSREADER:

-The Spanish and the Portuguese,

waiting anxiously in the wings,

were so relieved they burst into song.

The aspiration of being part of the European Union

was a very important magnetic pull for us.

Europe offered a completely different opportunity,

offered the possibility of democracy,

offered something that would guarantee democracy and so on,

so Spaniards embraced Europe

in a way that even the French and the Germans didn't.

There was enormous enthusiasm for Europe.

Felipe Gonzalez was the Prime Minister who took Spain into Europe.

Six years later, in the Dutch town of Maastricht, the European Union

was created and the first moves towards a single currency began.

Spain was at the very heart of the European dream.

TRANSLATION: I was one of the signatories of the Maastricht Treaty

and I'm sure that what I shared when I was in the Council,

with Mitterrand on one side and Helmut Kohl on the other,

well, that doesn't exist today.

Membership of the European Union

was meant to lock Spain into prosperity and democracy.

European grants and subsidies helped fund new roads and railways.

We had some help from the European Union.

We had money come into the structural funds that we can receive

because we were below the average per capita in the European Union,

and therefore we had to receive money from the European Union

for a long period of time.

The Spanish love affair with construction grew stronger.

As Spaniards got richer, more and more of them borrowed

to buy their own homes

in a country where most people had traditionally rented.

So very early in the life of democratic Spain,

you've got these three things that would prove crucial

once the financial storm hit.

A country heavily geared towards construction,

powerful and independent regional governments,

and local banks, for whom regulation was extremely poor.

But, when times are good,

structural problems like this don't really get noticed,

and in Spain, times were about to get really good.

NEWSREADER: Tonight's launch of the Euro

marks an historic step for 12 countries.

In January 2002, Spain became a founder member of the Euro.

NEWSREADER: In Spain, the banks opened to try to encourage people

to exchange their pesetas.

The demand was overwhelming, the queues long.

In doing so, it had linked itself to the mighty German economy

that sits at the centre of Europe,

and almost instantly it felt the benefits.

Spaniards could suddenly borrow at rock bottom, German interest rates.

You know, there was a big boom in investment

and in private consumption,

as people borrow.

There was a huge boom in bank lending.

In Spain, that mainly manifested itself in the property market.

Property became first easy to buy,

and then it went up and up and people said,

"Well, property is safe,

"I want to put my money in bricks because that never falls."

Spaniards steamed into the property market and construction companies

jumped at the chance to build thousands of new homes.

They were helped by a revolution in the planning laws.

The Land Act left local municipalities to decide

what was building land and what was not building land,

so with the stroke of a pencil on the map,

you made agricultural land into urban land,

and perhaps somebody was helped with his private expenses,

and so it's been a source of corruption

because of the amount of power given to local municipalities.

'The Spanish countryside is now scarred

'with sprawling and unregulated development.'

'The small town of San Miguel has not escaped.'

'Whole estates of houses were built, along with roads,

'street lighting and local amenities.'

'Spain is now littered with ghost towns like this.'

'The point of the Land Act

'was to solve the problem of escalating house prices.'

The idea was more homes would be built, and they were,

and that prices would fall.

But prices carried on rising.

In less than ten years, Spanish property prices doubled.

Thousands of Brits joined the frenzy.

Who would not want a home in the sun?

Some estate agents actually had their own aircraft and filled

them up back in the UK and brought them over on inspection tours.

Then some of the estate agents could sell up to 100 houses a week.

Millions of Spaniards switched jobs

to the lucrative construction industry.

Economic boom led to higher wages and even more willingness to borrow.

And the banks, including the local savings banks, the cajas,

were only too happy to oblige.

When you went to ask for a mortgage they said, "All right,

"we'll value your house generously and then we'll give you 80%,

"perhaps 100% of the value of your house, and we'll give you a little

"more for your daughter's wedding and for the car on your holidays."

So there's been a lot of bad behaviour by savings banks and banks.

But while times were good, nobody cared.

Banks offered mortgages on very cheap terms

to help sell the millions of newly-built homes.

By about 2008, half the cement in Europe was being used in Spain.

You know, the whole place was like a forest of cranes.

I think they built 750,000 homes per year,

in a country where they normally built 250,000.

And Spain's regional governments had also joined the party.

The Guggenheim art gallery put Bilbao on the map.

Now everywhere else joined in

with glamorous and expensive public projects.

'San Miguel is in the region of Valencia.'

'It's two hours drive to the regional capital,

'the city of Valencia.'

The government there was determined to raise its profile

by joining the pubic building frenzy.

As Spain's economic crisis deepens,

I've come to join a tour of Valencia's public building projects.

The mood here today is very different from the heady optimism

at the height of the boom.

You're going to sit in the first or second.

OK, thank you. Second.

This coach trip, which is called the tour of squandering,

is a regular event organised by activists to highlight the way

they claim the Valencian government has wasted public money.

What's that called?

It is the opera...

Opera house. How much did it cost?

It cost, like, almost 400 million Euros.

It's a nice building.

It's a nice building. A very expensive building.

Do we know who financed that?

The Valencian government.

The Valencian government.

Yes. That is now...

Yeah. And now they can't even pay their bills. Yeah.

'Valencia's regional government is currently in debt

'to the tune of 25 billion euros.'

'Now, it's struggling to pay for essential public services.'

And what is this?

It's a school.

Because, to me, that looks like a bunch of containers

on a container ship.

'Despite appearances,

'I'm told this is a primary school called College 103.'

I can see even up there, there's a banner saying,

'No To The Containers'.

'Parents are campaigning for a proper school to be built.'

Eso fue hace cinco anos.

Five years ago they built this temporary construction.

They have been waiting for five years.

And when will the real construction?

They didn't get a response yet.

WOMAN SPEAKS SPANISH

'Next stop, the port area.'

'Houses, parks and businesses were bulldozed here

'at a cost of 2.7 billion to make way for the America's Cup,

'an international yachting tournament.'

'After just two seasons, it won't be coming back.'

'Hosting Formula 1 was another short-lived glory project.'

'But this is the piece de resistance.'

'The city of arts and sciences cost 1.3 billion euros to build

'and tens of millions more to maintain each year.'

It is spectacular, this place.

There is nothing like it in the United Kingdom, architecturally,

in terms of scope and adventurousness,

but it is white, it does look a bit like an elephant,

and you do wonder what the impact,

not only of building it, but of maintaining it,

is on a city like Valencia with less than a million people.

You are part of a new administration here in Valencia.

It does seem like the old administration spent a lot of money

on projects that could be best described as prestige

and in some ways beautiful, but not useful to the people of Valencia.

Well, it's very difficult to calculate the impact.

The previous government has created

the most attractive tourist spot

in Spain, so long-term it's like

saying OK, the Pharaoh

who built the pyramid was crazy, but it's a long term investment.

Long term it will pay back.

Short term, obviously we're paying huge amounts a month of interest.

People in Valencia said to us,

"Look, we love this building, it's beautiful,

"but we'd rather have schools that weren't made out of sea containers."

How did that happen?

Well, there are not so many schools with sea containers.

There are schools with sea containers.

There was a construction programme

which was capable of doing 400 schools.

Now we can't spend so much, so the programme to convert the schools

into brick schools is going slower.

As the building binge went on,

Valencia's projects became more and more excessive.

As late as 2011, a new airport was opened at Castellon.

It had cost 150 million euros, but its main air strip had been built

too narrow and, so far, not a single plane has landed there.

TRANSLATION: One of the positive factors of Spain

is that its infrastructure is much better.

That's one thing, but it's a bit different from the megalomaniac

madness of building an airport where no planes go.

'Valencia's politicians were only able to go on this massive spending

'spree because they had a very special relationship

'with their local savings banks, the cajas.'

'One bank that helped them out to the tune of billions of euros

'was Bancaixa, the biggest savings bank in the Valencia region.'

'One of the members of its board

'was a professor at Valencia University's economics faculty.'

'Jordi Palafox sat on the board between 1998 and 2006,

'most of the boom years.'

How does the board of a caja work? Who takes the decisions?

When I was in Bancaixa,

there were basically three components of the board.

The first one were the savers

and obviously most of them have no economic knowledge.

The second part was entrepreneurs,

some of them with loans given by the same caja.

Some of the board were actually people who were being loaned money

for their businesses by the very bank they were running?

Exactly.

So they have a conflict of interests.

In my opinion, a clear conflict of interest with the cajas.

And the third block were politicians, some kind of second rank politicians.

So let me just get this clear.

The board was made up of savers who knew very little about economics,

business people who were making decisions about the bank's future

and getting the loans from the bank,

and politicians who were getting little grants from the bank

to help their local festival.

That's it.

'Bancaixa provided huge amounts of credit to Valencia's regional

'government as well as to private property developers,

'with disastrous consequences.'

How many other people in that caja system

did what you did and questioned?

During the years I was there, not one.

'What had been just a local savings bank was now lending out billions

'of euros, most of it tied up in the ever-expanding property market.'

Well, I was quite a strange member of the board.

When I discussed, they didn't take me very seriously.

But I said we don't have enough capital

to maintain this kind of expansion.

What was the message coming back to you?

That I was no-one and the Bank of Spain was saying that

we don't have a bubble, and that the bubble, in any case,

will disappear very slowly without any kind of problem.

'But Spain was booming, its economy growing at a healthy 3% a year.'

'Nobody wanted to listen to doom-mongers.'

Unlike the regional authorities,

Spain's national government was highly responsible.

It kept its borrowing lower even than Germany,

often running budget surpluses.

In many ways, Spain looked like the great success story of Europe.

Let me remind you, from the year 1998 or 9 to the year 2007,

the level of growth of Spain was splendid.

The level of employment, the creation of employment at that time,

we created most of the jobs in the European Union.

Three times the jobs of the UK, your country.

The labour force increased by almost 40%.

It was really a very, appeared to be a very solid moment.

But in 2008, the world changed.

NEWSREADER SPEAKS SPANISH

A collapse in the American housing market left international financial

institutions facing massive losses on so-called subprime mortgages.

NEWSREADER SPEAKS SPANISH

When we had the collapse of Lehmann

in the US in 2008,

the impact was that bank lending

across the world froze.

You had credit channels all freeze up

and that meant that businesses couldn't borrow to invest,

individuals couldn't borrow to pay off their mortgages.

British and American banks needed huge government bail-outs

to avoid the collapse of the entire financial system.

But to Spain, the event seemed barely relevant.

The health of a lot of banking systems at that point

was measured in part on direct exposure to subprime lending

in the US, and for Spain there wasn't a lot of exposure

to subprime lending specifically.

Then on that measure alone, Spain looked quite good.

Just ten days after Lehman's went bust, Spain's Prime Minister,

Jose Luis Zapatero, visited Wall Street in New York.

Zapatero had good reason to smile.

Spain's biggest banks, including Santander and BBVA,

were in relatively good shape.

TRANSLATION: At that moment, the government was thinking,

reasonably enough, that our financial system

was very minimally affected by the contagion

of North American subprime.

But on the contrary. In Spain, we had our own subprime.

There had already been a warning that all was not well.

A few months earlier, the largest property developer in Spain,

Martinsa Fadesa, had filed for bankruptcy

with a debt of seven billion euros.

It was the largest default in Spanish history.

The truth was the mighty Spanish construction industry

was in trouble.

It became clear that companies

that were making money on property

and on building and on construction

were going to start losing money

and so the fall started with the property

and construction sector where we had a lot of employment.

And those employed went into unemployment in droves.

In San Miguel, most of these young people used to have well-paid jobs

in the construction industry.

Like many of the town's youngsters, they are now out of work.

You can find scenes like this in every town in Spain.

A quarter of the population are unemployed

and more than half of under-25s.

'At the neighbours' association, Loli Ballester

'and a group of long-term unemployed people from San Miguel

'have formed a task force to try and get back into work.'

-Sientate.

-Thank you.

Como estamos, amigo?

Hi, hi. Nice to meet you all.

Nice to meet you.

So, tell me about Los Angeles.

'They advertise themselves as The Angels,

'a band of workers willing to do any jobs around the town.'

How has this group been able to help you?

Can you give me an example of the way the crisis

has affected your life,

your family's life and people around you?

'One of the Angels' target markets

'is the huge community of British ex-pats.'

'Pepe has found himself a gardening job with Jill Burden.'

I'm asking him to clean the swimming pool,

and then after that he's going to cut down some of my overgrown bushes.

Very good. There are no problem.

Fontanero aqui manana.

Por la...

Plumber, plumber.

Plumber, plumber.

Tomorrow the plumber.

Tomorrow, manana...

In the house...

No, in the garage.

Since the crisis started, British ex-pats like Jill

have seen the value of their houses fall.

My house has been on the market now for two years.

Unfortunately, the people who want to buy now

don't want to pay the money that I want for it.

Many like Jill are retired, though, living on pensions and savings

from Britain, and are not dependant on Spanish jobs or benefits.

But for Pepe, and countless like him all over Spain,

this is the new reality.

No, three quarters.

Tres cuartos? Fantastico!

The best they can hope for now

is odd jobs that add up to barely a living wage.

Unemployment is a tragedy for Pepe and millions like him,

but it's also a catastrophe for the economy.

By the end of 2008, with far fewer people earning,

tax revenues had plummeted.

Spain's centre left government had to take action.

The first thing the socialist government did was to spend more.

They said the economy needs a stimulus.

This is Plan E.

This is Plan E, and so the first decision was to say

there's no crisis but there's a little bit of rising unemployment.

We can spend our way out of it.

The programme was worth 11 billion euros.

The money would go into infrastructure

and building projects.

Spain would build her way out of trouble.

TRANSLATION: What Spain did during that first part of the crisis

was apply counter-cyclical measures,

recommended by the European Union and the IMF.

Here in San Miguel, they spent 400,000 euros of government

stimulus money building this very nice sports centre.

It did provide some construction jobs while it was being built,

but since then it's been largely unused.

People just can't afford the fees.

And there are thousands of white elephant projects

just like this all across Spain.

'By 2009, it was clear

'the government stimulus plan had failed.'

'Unemployment continued to rise, tax revenues fell,

'government borrowing began to creep up.'

'But this wasn't a good time for a country to be in debt.'

Greece, then Ireland and Portugal, saw their debts spin out of control.

Last year, each received bail-outs from the European Union and the IMF.

Suddenly, European governments considered to be risky,

like Spain, saw the interest rate they were charged

to borrow money on the global markets go through the roof.

Throughout this crisis, we have seen a flow of money.

Investors don't want to lend Spain money now, because they aren't sure

that the Spanish government is good for it and will ever pay them back.

The government cannot viably keep paying

very, very high interest rates for its borrowing.

If, for example, the Spanish government is paying 5.5, 6.5, 7.5%

to borrow money but the economy isn't growing,

then its fiscal position is on a very, very alarming deterioration.

As if this wasn't enough, another black hole was about to open up.

Spain's local banking system, the cajas, now began to go under.

Banks were up to their ears in property and suddenly,

as property prices fell through the floor, many banks,

especially savings banks, found that they were broke.

As the Spanish economy deteriorated, many of the cajas

had hidden their toxic loans by simply refusing to recognise

the collapsing value of the housing on their books,

and they had a very handy way of doing it.

One of the interesting tweaks in the Spanish banking system

is that the banks own a lot of estate agents.

They kind of own their own estate agents, which is very useful

when it comes to valuing properties because you can sort of pretend

that they're worth more than they really are.

For a couple of years after the crash, they went around basically

just pretending that these empty properties

were still worth something.

'By the summer of 2010, Spain faced a full-blown banking crisis,

'with the cajas revealing tens of billions of bad debt

'that made them effectively bankrupt.'

'The government came up with another plan.'

This time, it was Plan B for Bankia.

With the help of a 4.5 billion Euro bail-out

from the Spanish government,

Caja Madrid and the Valencian savings bank, Bancaixa, announced

they would merge with a number of smaller banks to form Bankia.

Spain essentially took six unhealthy banks and merged them together

into a big conglomerate, Bankia, and then was really surprised

when Bankia was actually really unhealthy.

That was a mistake both by the economics ministry

and the Bank of Spain.

There was this idea that you needed large institutions

to be able to survive.

The government encouraged other mergers as well,

as more and more cajas ran into trouble.

The scale of the damage was finally being revealed,

with up to 100 billion euros of bad loans identified.

With bust banks, rising unemployment and a soaring national debt,

the Spanish government changed tack.

It introduced an austerity programme of spending cuts and tax hikes.

It was the message the rest of Europe wanted to hear.

This painful adjustment is absolutely needed.

The economies that have lost competitiveness

require painful adjustments

increase in productivity,

more economic dynamism,

better fiscal policies to have sustainable public finances.

All this is needed.

'The fact was, the government had very little choice.'

'In this kind of situation,

'what most countries do is devalue their currency.'

'It makes their exports cheap and makes borrowing less expensive.'

'But Spain couldn't do this.'

Spain is a member of the Euro Zone so it doesn't have its own currency,

it doesn't have its own central bank,

it doesn't have any rights or jurisdiction over a currency.

It is a participant with 16 other countries

in the management of the Euro.

Locked in a single currency,

austerity was seen as the only way for Spain to become competitive

with countries like Germany and to avoid going spectacularly bankrupt.

But the Spanish people had other ideas.

In May 2011, more than a million of them took to the streets,

young people who had never before protested,

from Madrid to the smallest towns.

They called themselves Los Indignados, the indignant ones.

Amid the public fury came the election.

The centre-left government was swept away.

But the new administration of Mariano Rajoy

arrived with a familiar message.

The right wing Partido Popular proposed even harsher

austerity measures to tackle the spiralling debt.

And there was still more bad news.

Two years after being formed from the merger of struggling cajas,

the giant Bankia collapsed

and had to be bailed out by the government with 19 billion euros.

It was money the country could ill afford.

Earlier this year, several of Spain's regional governments,

like Valencia, started to come clean

about their own financial black holes.

They'd accumulated massive debts on public projects

with devastating consequences for ordinary people.

Things are so bad in Valencia, that the local government

can't even pay the region's pharmacies the money they owe them

for prescriptions.

-Buenas tardes.

-Buenas tardes.

-It's Paula?

-Paula.

Paula. Nice to meet you. I'm Paul Mason.

Tell me what's happening with the pharmacy system in this city.

It seems to be breaking down.

'Because she hasn't been paid by the government for six months,

'Paula has been forced to cut back her stock levels.'

'The pharmacy is beginning to run out of basic medicines.'

There's hardly anything here.

Normally, it's todo lleno.

Full.

Do you have to ever send people away who are really sick?

Si.

What kind of illnesses?

And how does it make you feel?

'If Paula and the other pharmacies aren't paid soon,

'they may have to close.'

'Valencia has become Spain's most indebted region and one of four

'who have so far been bailed out

'by the cash-strapped central government.'

By 2012, Spain was facing the perfect storm.

Its local banks, mired in corruption and huge losses,

many of its biggest regions effectively bankrupt,

and with the housing bubble well and truly burst, mass unemployment.

For this, one of the biggest economies in the world,

it seemed there could be only one way out.

When a country looks like going bust,

international markets are unforgiving.

The interest rates they charge become so high

that a government has no choice but to look for a bail-out,

a massive cheap loan from an international institution.

And when you get a bail-out, you then get lots of officials from the EU

and the IMF come in and they take over the government

and you have to pretty much surrender economic sovereignty.

But Spain had watched as Greece, Portugal and Ireland were humiliated

when tough conditions and outside control

were attached to the bail-out money.

It was determined not to follow.

So began a tortured period of negotiation with the leader

of the Eurozone's dominant economy, German Chancellor Angela Merkel.

Germany is only really willing to stump up money for Spain

if they can dictate the terms and can impose a lot of conditions,

so there will be a lot of negotiating going forward.

The Spanish are using their size

and they're using their leverage to try and get better terms.

I mean, they don't want to submit to what the Greeks

and the Portuguese and the Irish have submitted to.

In the game of bluff and double bluff,

Spain, in the end, always had one very strong card to play.

Either you save us or the Euro sinks.

That's a very powerful blackmail, isn't it?

Because the Euro cannot survive if Spain fails totally.

That would be catastrophic for the single currency,

because if Spain was forced out of the euro

then who else is safe, you know?

Why not France, why not Italy, why not Austria?

Negotiations dragged on for months

as Spain's economic situation continued to worsen.

And on the streets of Spain, a more violent element

has entered the mass protest movement.

This summer, Spanish miners fought running battles with the police.

There is a real risk that this recession turns into a full-blown

depression, with all the potential for social upheaval that entails.

But even more is at stake.

The integrity of the Spanish state itself.

Its richest region, Catalonia, is pushing for independence.

Catalan nationalism has been around for years, but until now,

cultural freedom and a degree of autonomy have been enough.

Now, though, Madrid has nothing left to give this region,

and demands for outright independence are becoming real.

At the end of September, one and a half million people

took to the streets of Barcelona to protest for Catalan independence.

The economic crisis is putting huge strains on the political system that

emerged as Spain embraced democracy after Franco's dictatorship.

Many young Spaniards are starting to question

whether they have a future in Spain at all.

-Que pasa, tio?

-Buenas, que tal?

Even though he has a marketing degree,

Sergio is working as a barman.

His friend, Javi, a chemistry graduate,

tried for five years to find work in Spain.

Nine months ago, he decided he had to leave.

Now, I'm in Edinburgh. I have been in Edinburgh for nine months.

I live in a hostel.

I work in a restaurant, like a kitchen porter.

I cannot find anything else.

I try to improve my English,

and after that, try to find something about chemistry.

But here in Spain, I cannot find anything.

Javi is one of an estimated 300,000 graduates

who've left Spain since the crisis started.

I have friends in Belgium,

I have friends in South America, I have friends in Finland, all over.

Because here in Spain it is so difficult,

it is like a tourist place.

-TRANSLATION:

-We are hoping not to lose a whole generation.

This is the biggest risk for Spain.

'For most, though, leaving isn't an option.'

Spain is in uncharted territory because never before has so much

austerity been piled on to an economy already in so much trouble.

Spain has so far avoided a full-scale bail-out,

but Europe's spending billions to keep it afloat.

All these bail-out funds are just ways to try to buy time,

for policy makers to come together and make the difficult agreements

that they need to, to keep the Eurozone together.

When countries that did pretty much what they were supposed to do

still go bust then you have to step back a little bit and say, you

know what, maybe there's something actually wrong with this currency.

I know that there are obstacles, but at the end of the day,

I am convinced that this is the direction.

It has been the direction since the end of the Second World War,

and this will continue to be the direction in the 21st century.

'Nothing like the Euro has ever been tried before.'

'So far, the Euro leaders have managed to bail out the countries

'that went bust, but they were small.'

'Spain is huge.'

'Its people are very angry, and the only thing that's certain is,

'for ordinary Spaniards, more suffering lies ahead.'

Subtitles by Red Bee Media