Spain rearranges furniture as economy sinks

"Half our team has been taken from the unemployment office," he said.

G-20 nations -- which account for over 80 percent of global gross national product -- are spending an estimated $700 billion in 2009 to ward off the deepest slump since Roosevelt's day.

"The question is how to balance the short term 'hole digging' approach with investments which may not provide so much bang for the buck in the short term, but are good for long-term productivity," said Eswar Prasad, Senior Professor of Trade Policy at Cornell University. "Everyone, from China to the United States is grappling for that balance."

Plan E does not address Spain's structural problems, but may defer confrontation over them. Even during the economic boom, when Spain was growing far faster than its European peers, unemployment stood at over 8 percent.

"The crisis is highlighting how badly the labor market runs," said Jose Luis Escriva, head economist at BBVA. "The Plan E must not overlook these problems."

Prime Minister Jose Luis Rodriguez Zapatero sees a future of "more computers and fewer bricks" with technology-driven, green growth from sectors like wind power, which at present provides only 0.35 percent of gross domestic product.

Before that can happen, economists say Spain needs to follow the route Germany took with structural economic reforms to raise competitiveness and compete globally.

For example, costs of making a long-term employee redundant in Spain are among the highest in the world, according to the OECD: a disincentive to make permanent hires during the crisis.

One third of workers are on temporary, low-protection contracts, the highest rate in the European Union: their jobs are often low-skilled and disposable during economic downturns.

"At the edge of the abyss there are two reactions," said Prasad. "Use this as a time for dramatic change or do whatever it takes ... to get out of the hole and deal with the big problems later.

"It does seem that many economies are taking the latter route," Prasad said.

Spain's stimulus plan is worth nearly 5 percent of its gross domestic product and includes popular measures such as a 400-euro tax rebate for all taxpayers and the 'Baby Check' -- 2,500 euros for each newborn.

They have cost Spain 16.5 billion euros, but few economists believe they have done much to stoke demand.

"These measures burned through the Spanish public accounts surplus ... and 400 euros doesn't buy you a car, nor pay your mortgage," said Robert Tornabell, Professor of Finance at Barcelona business school ESADE.

VULNERABLE

The short-term infrastructure and tax spending have helped turn a 2.2 percent public accounts surplus in 2007 to an expected 9.8 percent deficit by the end of 2010, according to the European Commission: the second-biggest fiscal deterioration of any euro zone country after Ireland.