Gonzalo Bernardos, Professor of Economic Theory at the University of Barcelona, recently stated openly that a person earning €1,600 per month is considered at risk of vulnerability. For our American readers, a salary of €1,600 per month sounds absolutely ridiculous, but unfortunately it is the reality for many European workers. The average annual salary in Spain is around €27,500 (just under $29,000). Meanwhile, the average annual salary in the United States exceeds $65,000, more than double that amount. Even the poorest state in the United States, Mississippi, has an average income –$47,500– higher than the Spanish average .
And this is the reality: while Americans dream of going on vacation to Europe to eat good food and enjoy the weather and historical museums, the average European citizen has a totally ridiculous salary. From housing and inflation —that governments want to ignore— to the pulverized purchasing power of the average Spanish worker. What was once considered the European middle class is now nothing more than a sweet memory. The reality is that the average worker lives from month to month, and sometimes falls short of money.
Vulnerability Threshold
The concept of a vulnerable person is not sensationalism on the part of economist Gonzalo Bernardos, but rather a legal designation based on the IPREM (Public Indicator of Multiple Effect Income), the state’s low-income scale. The legal income threshold for being considered a vulnerable person is three times the IPREM.
This threshold currently stands at around €1,613 per month (for a standard family unit). In other words, the average young European living with a partner who earns €1,600 per month is literally on the verge of legal poverty if they live in an HCOL. The fact is that right now, large cities are offering rents that can easily consume 50-60% of that income.
Lack of affordable Housing
The issue is not that there is no housing available; it is that the owners of these homes are afraid to rent them out. This is because, under Spanish law, the status of tenant in a vulnerable situation means that if they stop paying their rent, eviction proceedings will be suspended and they will be allowed to live there for months or years until social services find alternative housing.
Meanwhile, the landlord who rented out the apartment must, by law, continue to pay the electricity and gas bills, with the threat of jail time if any of these utilities are cut off for the person who has remained in the home. This legal risk and enormous risk for landlords means that many simply withdraw their homes from the traditional rental market. Poor regulation and overprotection of tenants reduces supply and drives up prices.
Most economists advise not paying more than 30% of income on rent, but the reality is that large cities such as Madrid, Barcelona, and Malaga have reached prices where rent is at stratospheric levels. Young Spaniards have no choice but to rent a room sharing a flat with other people or continue living with their parents.
Stagnant wages
While the cost of living and housing have risen dramatically, wages have not kept pace. This has led to a huge impoverishment of the middle and lower classes. With a salary of €1,600 or more, they cannot guarantee decent housing without resorting to family or loans. The difficulty of saving money today forces many people to remain in the rental market. Economist Bernardos sees this as a financial trap, as it prevents people from accumulating the capital necessary to buy their own home, which is a sure way to build wealth in Spain and achieve the financial peace of mind that everyone desires.
The economic crisis is affecting the majority of European workers who once proudly considered themselves middle class. This distinction between social strata is now just a distant memory. Wages have become more equal… but in a downward direction.