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Unemployment, Deflation Felt Acutely In Spain

MELISSA BLOCK, HOST:

Spain's economy is growing again but not fast enough to bring a sky-high employment rate and not fast enough to boost wages either. Spain, like the rest of Europe, has deflation concerns. Lauren Frayer reports from Madrid.

(SOUNDBITE OF HOLIDAY MUSIC)

LAUREN FRAYER, BYLINE: Holiday music still pipes through downtown Madrid where Luis Fernandez and his, wife Rosana Mateos, take their children on one last lap of a giant nativity scene before it's packed up for the season. Luis' New Year's wish is the same as it has been for the past five years. He's hoping for a better economy.

LUIS FERNANDEZ: It's growing, OK, it is growing. The figures say that, but it is very slow, really slow.

FRAYER: Spain's economy is out of recession with about half a percent growth last quarter. But everything is not back to normal for the Fernandez family. Luis lost his IT job last summer and then luckily got rehired, but with lower pay.

FERNANDEZ: It's more or less 35, 40 percent less than before. They sack you and then contract for less money because you have the need, because you have a family, you have children to look after.

ROSANA MATEOS: (Through interpreter) We didn't do a big Christmas. It was pretty simple, says his wife Rosana.

FRAYER: They're managing to get by on less.

FERNANDEZ: That's because we organize the budget. For instance, we didn't travel during the Christmas holiday.

FRAYER: The Fernandez family is both experiencing and contributing to deflation. With lower wages, they're spending less and that means falling prices across the euro zone. Shops and restaurants are all scrambling to lower their prices and compete. At a nearby coffee shop, manager Irina Vovyzhyna serves up cafe con leche to her regulars.

IRINA VOVYZHYNA: (Speaking Spanish) A cup of coffee here costs about a $1.60, she says. And we haven't lowered that, but we also haven't raised it for six years, she says. Normally, we'd raise the price every year by three cents or so, but we're trying to keep our prices low.

(Speaking Spanish) Irina says it's stressful. Her margins are tighter, competitors are lowering their prices. She's not making profits like before.

FRAYER: Although it's little consolation to Irina or the Fernandez family, deflation is actually making Spain more competitive, exports are up, and the recession is over. But with unemployment here still above 23 percent and wages falling, people are not optimistic about the future. Anti-austerity parties are challenging the status quo and are expected to do well at the polls this year in both Spain and Greece. For NPR News, I'm Lauren Frayer in Madrid. Transcript provided by NPR, Copyright NPR.