Time - Postcards from Europe's Financial Bust

Wednesday, Oct. 15, 2008

Postcards from Europe's Financial Bust

By TIME Correspondents

Reykjavík, Iceland In the Icelandic language the words for "money" and "sheep" are the same. But under Iceland's current economic conditions, goes a joke doing the rounds, only one will put food on the table and a coat on your back — as long as you eat mutton and wear wool.

With a flagging currency and a crippled banking sector, Icelanders are fast losing their jobs, savings and businesses. The government fears that some may even be losing their minds: the Icelandic Ministry of Health has set up an emergency mental-health center in downtown Reykjavík to help citizens distressed by the country's economic implosion. Located on the second floor of an old health clinic, it stands ready to treat a torrent of mentally anguished Icelanders. As yet, business has been slow. Dr. Ragnar Ólafsson, one of two full-time psychologists assigned to the clinic, was savoring a sandwich alone in his office a few days ago.

"Not many people have come so far," he says.

At first glance, there are still plenty of signs of the good life to which this nation of 320,000 had grown accustomed. The parking lot of Kringlan shopping center in Reykjavík is filled with sparkling Audis, Range Rovers and Mercedes. But inside the mall, bleary, blond-haired Icelanders pace the floor like zombies going through the motions of their former existence.

"How can I rest easy knowing that everything I've saved all my life is gone?" asks a red-eyed advertising consultant dressed in a woolly cardigan and slippers as he sits in the food court. At age 61, he has lost almost all of his retirement savings in the banking meltdown. "It's a matter of pride as a man and an Icelander," he says, "and it was yanked out from under from me."

Minister of Health Gudlaugur Thór Thórdarson agrees that Iceland has sustained a blow to its psyche — "especially when Gordon Brown uses antiterrorism laws against Iceland," he says, referring to the British Prime Minister's move to invoke an antiterrorism law to freeze Icelandic companies' assets in the U.K. "The people here not only suffer financially — it also makes us feel

bad." Indeed, says psychologist Ólafsson, "Icelanders have always seen themselves as an independent people, and now we simply can't be as self-sufficient."

Local businesses are trying to cheer people up by throwing open their doors. One Reykjavík restaurant, Á naestum grösum, has changed itself into a "soup kitchen" offering cast-down Icelanders a free bowl of barley-vegetable soup and a slice of bread, while just down the street a few local bars have begun selling "recession beer" at $2.60 a glass, compared with the normal price of $6 or so. But with more layoffs and further turmoil expected, it will take more than hearty stew and a pint of cheap cheer to rescue this nation from economic despair. — by Jonas Moody Dublin, Ireland Inside a black-and-white half-timbered building in central Dublin late last month, some 9,000 people — from plumbers to bankers — gathered with a common purpose: finding a new job. Almost all "were skilled, professional people," says Stephen McLarnon, who runs the firm that put on the event, and they were "looking to make a committed move." And a long-distance one. At the Down Under Expo, a forum for recruitment agencies and immigration officials, the prize for job hunters was a new start, not in Ireland, but in Australia or New Zealand.

Irish emigration is nothing new, of course. From the millions who fled poverty and famine over the last century and a half to the many thousands who have regularly quit the country in search of work right up to the end of the 1980s, Ireland's best and brightest have a long history of leaving in search of opportunity and sunnier climates. But a decade and a half of red-hot growth all but wiped out large-scale emigration, and Ireland has instead found itself a destination for immigrants from Africa, Asia and Eastern Europe.

Until now. In recent weeks, Ireland became the first country in the euro zone officially to stumble into recession. House prices — after rising almost threefold in the decade to 2007 — have slumped 10% in the past year, weakening Ireland's construction industry, which plays an outsized role in the country's economy. Throw in frozen credit markets, high inflation, soaring unemployment and a new tax to pay for the financial crisis bailout, and it's little wonder Ireland's workers are again pondering a move abroad. Dublin's Economic and Social Research Institute, a think tank, forecasts a net migratory outflow of 30,000 in 2009, the highest rate for

20 years. The stalled economy, McLarnon says, has "created a sense of urgency."

Recent immigrants to Ireland are among those wondering whether it's time to leave. Some 150,000 Poles came to Ireland in the two years after Poland joined the E.U. in 2004, for instance, but thousands are now heading home. At a recruitment fair in Dublin a few days ago, a panicked former economics student from the west of Ireland wondered if it might be time for her to leave the country, too. Unable to land a financial-services job in Ireland since graduating in May, this 24-year-old woman is now considering a move to England. "I haven't given up yet," she says, but "all options are open." Inside the cavernous hall hosting the fair, recruiters — from big banks to software makers — offer candy to graduates willing to chat. Getting them to stay in Ireland may soon require a little more persuasion. — by Adam Smith Eisenach, Germany Great historic forces once spread from Eisenach, where Martin Luther translated the New Testament into German to drive the Reformation. Today, this town of 40,000 is notable for the more prosaic fact that it's at the receiving end of a chilling secular influence: slowing demand for automobiles. Opel, a European subsidiary of the beleaguered American giant General Motors, is the town's biggest employer — and when Opel's in trouble, so is Eisenach.

Until June, the local Opel plant was enjoying a record year as Germany's economy hummed healthily along. In April, the company turned up the speed on its assembly lines to churn out even more cars. Instead of shutting as usual for three weeks during the summer, Opel closed the plant for just two and hired temps to supplement its full-time workforce of 1,800.

Now that boom has come to a halt. On Oct. 13 Opel suspended production at Eisenach for three weeks to help sell off a stockpile of excess cars, hundreds of which crowd a parking lot inside the factory complex. Opel electrician Katrin Huber, 29, isn't happy about this vacation. "The plant shutdown is going to cost me more than $400," she says. "But worse is that we just don't know what the future holds. I'm afraid that the plant could close."

Opel was one of the first Western firms to move east to Eisenach after the Berlin Wall fell in 1989, and it pulled an army of suppliers and service companies in its wake. On Adam Opel Street, Lear Corporation makes seats for the Corsa, while parts makers Mitec AG and Robert

Bosch are across town. Uwe Laubach, head of the local chapter of the IG Metall union, says as many as 900 temporary workers in the local auto industry have lost their jobs in recent weeks.

"The situation is dramatic," says Michael Lison, head of the industry association Automotive ThĂźringen.

The uncertainty that Huber and other autoworkers feel is spreading. While an organ grinder plays German folk songs in the street outside, Lilian Arndt, 51, is tying up a bouquet in her tiny flower shop. She has never seen Wall Street, but she is feeling the fallout from the global crisis that began in the U.S. "The situation is frightening and we just don't know how bad it will get," she says. "People order smaller bouquets. The hotels still order arrangements. And there are funerals, of course. But for many people, flowers have become a luxury." Eisenach faces the unsettling prospect that new cars are now a luxury, too. — by William Boston La Sagra, Spain Spaniards refer to the crash of their once booming real estate and construction industries as a "crisis of bricks." In La Sagra, they take that phrase literally.

Located about 40 miles (65 km) south of Madrid, the clay-rich county produces roughly 30% of Spain's bricks, and boasts the greatest concentration of brick works in Europe. But right now, La Sagra's factories aren't making much of anything. "The warehouses are full," says Carlos Duque, general secretary for the Castilla-La Mancha branch of MCA-UGT, the construction workers' trade union. "They just don't have anyone to sell to."

Residents of the county don't have to look far for the reason why. The outskirts of towns like Alameda de la Sagra are dotted with partially built developments where construction has been halted for months. The bursting of Spain's real estate bubble sent several major developers into bankruptcy, and halted new home construction across the country. The number of houses built in 2008 is expected to fall by 70% from 2007. That's also fueling unemployment, which jumped by almost a third in September to reach 11.3%, Spain's highest rate since 1997.

In La Sagra, they first felt the pinch months ago. "Construction started to really slow in February or March, with the subprime crisis in the U.S.," says Duque, "and that's when the brick warehouses started to fill up." Many brick works in the area closed over summer, but things have hardly improved since then. Duque says most of the brick companies in La Sagra have suspended workers temporarily in a program that allows them to receive unemployment

benefits for three months and then return to a guaranteed job. With the financial meltdown adding to Spain's troubles and the country now teetering on the edge of recession, Duque worries about what lies ahead. La Sagra's brick works employ about 2,600 workers directly, and another 10,000 indirectly. If the economy worsens, says Duque, "We're going to start seeing factories closing for good, and then we'll have serious problems."

According to Rafael Martín, the mayor of Alameda de la Sagra, the town's coffers have seen a drastic reduction in income — from an average of $140,000 in recent years to $35,000 — as building license fees have dried up. Although he is determined not to cut social services, he predicts that some planned investments will be revisited in the coming year. "Instead of building a new traffic circle or installing new streetlamps all at once," he says, "we'll have to spread them out over two or three years." But he's most concerned about the impact on his neighbors, some of whom are already in difficulties because their mortgage payments have jumped while their shifts have been reduced. "It doesn't just affect the people who work in the brick factories," he notes. "It affects the truckers who transport the bricks, and the mechanics who take care of the trucks, and eventually even the bars where those workers go for a drink. It's like the fish that bites its own tail." — by Lisa Abend Paris, France Wrapped in a brown apron as he greets visitors in a warm, booming voice, François Bonduel owns the kind of Parisian restaurant beloved by tourists and locals alike. But these days — with the euro still relatively strong and economies seizing up around the globe — the foreign visitors that typically make up a third of Bonduel's clientele have been thinning out and spending less. To make matters worse, many French visitors to his restaurant, Au Bon Saint-Pourçain — a stone's throw from the church of St. Sulpice in Paris' tony sixth arrondissement — are also eating and drinking less than usual. "I've checked the accounts," says Bonduel, "and I know I'll make no profit this month."

With 20 years of work and savings under his belt, Bonduel, 57, feels he can ride out the economic storm. But he acknowledges that his guests' more modest outlays have forced some changes on him. "For the first time ever, I closed the restaurant in August and went on vacation because no one was coming to eat," says Bonduel. "I do the cleaning myself, and to save money we've stopped sending the tablecloths out for laundering and pressing. I also had to let one of

the cooks go ... We'll be fine, but we're having to tighten the screws."

Not everyone is so lucky. Recent industry research shows that falling purchasing power and consumer fear of a looming downturn have caused spending in France's cafés and restaurants to slump around 20% this year. Nearly 3,000 of the nation's restaurants closed down or went bankrupt in the first half of 2008. That wave of failure may well rise as newcomers who relied on credit to get started find themselves stretched to make their payments as revenues slump. "If I were 30, starting out with loans to reimburse, I'd be in big trouble," says Bonduel, relieved that most of his clients are residents of his restaurant's affluent neighborhood. "I'm fortunate things for me are only tight, rather than untenable." — by Bruce Crumley Zalaegerszeg, Hungary Since the western Hungarian city of Zalaegerszeg was founded in the 11th century, it has been besieged by Ottoman hordes, devastated by plague and occupied by both the Nazi and Soviet armies. Today, this city of 62,000 faces another catastrophe, all thanks to the woes of its meat factory. Employing 650 people directly and providing a livelihood to hundreds more — from local farmers to shopkeepers — the Zalabaromfi meat-processing plant has long been one of Zalaegerszeg's most important businesses. But the credit crisis has complicated a long-running dispute between Zalabaromfi and Hungary's second largest commercial bank, CIB, over a credit line the plant says it needs in order to keep running.

Factory operations have been on hold since early September, and with credit tightening, its workers now face losing their jobs for good.

Teréz Kiss Tóthné, president of Zalabaromfi's work council, says the looming shutdown would hit particularly hard because many of Zalabaromfi's employees are 50 or older and have few other options in the region. "And there are a lot of couples working for Zalabaromfi, which means whole families will be out of a job," she says. At age 55, Kiss Tóthné worries that for her, too, it will be "impossible to find a new job ... At times like these, I feel that if I had a gun I would shoot myself."

Anger, tinged with desperation, is driving some to fight on. György Gergely, 55, says he has resigned from the factory because he can't wait to see whether it will reopen. Now he's hoping for work at a poultry operation in the city of Sárvár, 48 miles (77 km) away. "I have a family to support," he says. "I need to earn money."

"It's a strange situation," observes a 29 year-old shoe-store clerk and mother of one, who asks not to be named. "Zalaegerszeg is a factory town that may soon have no factories. Many people here will have to go to Austria or the U.K. for work." But despite the mounting anxiety, few blame the global forces that have exacerbated Zalabaromfi's predicament. As the IMF offers Hungary financial and technical assistance to stem the flow of millions of dollars in foreign investment out of the country, and to help steady the nation's sinking currency, Hungarians are pointing fingers at people much closer to home. Work-council president Kiss Tóthné is frank in her appraisal. "On second thought, if I had a gun I might not shoot myself," she says. "I might shoot the management instead." — by John Nadler

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