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A Building Hangover for Spain’s Economy

Oscar Agudo, an architect who has designed everything from apartment blocks to soccer camps along the Mediterranean coast of Spain, is now keeping busy mostly by valuing repossessed houses and analyzing real estate disputes for the courts.

In less than a year, Spain has gone from brisk growth to acute distress as a housing collapse, high energy prices and the world financial crisis have drained its lifeblood — a building boom built on rising property values.

“The longer the crisis goes,” Mr. Agudo said, “the harder it will be to live off the past.”

It may be time for Spain to look to a different future. The country’s love affair with building made construction a signature industry, even larger as a share of the economy than it was in Germany in the early 1990s, when the rebuilding of the former East Germany was under way.

But now, with the industry in tatters, Spaniards are re-examining the sustainability of their once-thriving economic model.

On Wednesday, the prime minister, José Luis Rodríguez Zapatero, called an emergency cabinet meeting to consider responses to an economy that is facing a stream of bad news.

Data released the same day showed that inflation rose to 5.3 percent in July from a year earlier, the highest level in 15 years, additional evidence that prices are soaring.

“We cannot just grow from real estate and construction,” said José Manuel Campa, a professor of finance at the IESE Business School of the University of Navarra. “We need to produce goods and services that we can sell to the rest of the world.”

“The question is,” Professor Campa asked, “can you build that up in the next 18 months?”

Probably not, which is why Spain is likely to feel the brunt of the current economic downturn. Not only did it play the housing game to the fullest, but its quandary has been exacerbated by the global financial vortex that has only seemed to gather speed.

New housing starts peaked at over 900,000 in 2006, but home building in Spain is likely to fall to about half that level this year, the country’s minister of economy and housing, Pedro Solbes, said recently. Home prices fell 4 percent in the second quarter, and most economists say that they expect years of stagnation.

Unwinding that imbalance, economists say, would be painful enough even in the best of times. But gyrations on world financial markets have raised the cost of the adjustable-rate mortgages that most Spaniards chose.

“It is getting far worse than we would have expected at the beginning of the year,” said Julián Cubero, chief Spain economist at Banco Bilbao Vizcaya Argentaria, one of the largest Spanish banks. “We’re suffering a perfect storm.”

Mr. Zapatero belatedly used the word “crisis” to describe the country’s situation last month, touching a nerve with Spaniards who have not suffered a significant economic recession since the big downturn after the Barcelona Olympics in 1992.

“There was a state of denial,” said Roger Cook, managing director for Spain at Cushman & Wakefield in Madrid. “There was not an appreciation that this was not a slowdown, but a serious crisis.”

Here on the Costa del Sol, where business leaders say that they expect flat or declining business through the end of 2009, the sun is still shining. But the outlook is decidedly cloudy.

Synonymous with tourism, the Costa del Sol runs along a strip of the Mediterranean that begins east of Málaga and ends near Gibraltar.

Its natural attributes in the summer are stunning. Azure seas wash up on grayish sandy beaches, or lap against rocky outcroppings. Mountains colored a soothing ochre but punctuated by deep-green vegetation seem to leap upward from the ribbon of land that leads to the water, all beneath a sky unacquainted with clouds.

But the region is also a monument to bricks and mortar.

Málaga, the birthplace of Picasso, has a city center with ruins that testify to its birthplace as a Phoenician trading post, but they quickly give way to endless apartment high-rises. A winding coastal highway leads to Torremolinos, a Spanish holiday spot since the 1950s, through Fuengirola, a town notorious for unruly tourists, to Marbella, a fashionable resort town that has lost a bit of its shine in recent years.

And unless geography or building regulations stop them — and sometimes not even then — there are densely packed buildings. High-rise apartments occupy much of the prime territory, while ridges and valleys are filled with wedding-cake constructions in the signature whitewashed Mediterranean style.

Manuel Ecijas, owner of Constru España 2000, has watched the cycle turn along the Costa del Sol and in much of southern Spain.

His construction business used to employ 66 people, but they all lost their jobs in March when one of Mr. Ecijas’s main clients went bankrupt. New contracts have largely dried up, and he is owed 270,000 euros, or $402,000, by developers.

“A lot of these companies have disappeared,” Mr. Ecijas said. “I simply cannot find them.”

The Spanish government now projects unemployment, which slid to 8 percent last year, to rise to 12.5 percent in 2009. Distress is spreading rapidly in associated industries; Roca, a bathroom equipment supplier, recently laid off 400 people.

Spaniards are being squeezed not only by their own excesses but by the global reach of ravages emanating from the depressed mortgage market in the United States.

Spanish mortgages have variable rates linked to the 12-month Euribor contract, an interbank lending benchmark for the 15-nation euro area that has swerved sharply upward over the past year.

The rise reflects suspicions among bankers that their peers, many of whom made bad bets on mortgages in the United States, may still have hidden losses on the books that could cost them billions of euros or even tip them into bankruptcy.

People like Mr. Agudo, the architect, pay directly for this lack of trust. The mortgage payment on one of his properties — he owns three — has risen to 750 euros a month from 600 euros. The days of eating out five nights a week, he said, are long gone.

“This,” Mr. Agudo said, “is the first crisis I have ever seen.”