Focus on Spain 1 – the economy The Tablet
With unemployment now at 25 per cent, Spain is becoming the sickest man of a sick Europe. Its austerity solution to its debt-ridden economic woes has sapped people’s confidence about their future. Fears are growing that an almost inevitable bailout could be coupled with insurrection
It is just as well that Spaniards still have their fiestas. Spring is traditionally that time of year in Spain when Spaniards put the winter gloom behind them and usher in warmer weather, returning bird song, and a bountiful crop of early vegetables and fruit, with town festivities, from Holy Week processions in Seville in the south to less ritualistic parties in the north, that have survived civil wars, revolutions and dictatorships.
I was in the Catalan capital of Barcelona last week, attending the annual commemoration of Catalonia’s patron, Sant Jordi (St George). Catalans still managed to turn up in large numbers to the annual street book fair, and to give each other, as they always have done on this day as long as anyone can remember, red roses as a gesture of unconditional love. In nearby Sitges, teams made up of young men and women and children competed in seeing who built the highest and most intricate human tower, showing an extraordinary team spirit in mind and body.
There is nonetheless a palpable sense of vertigo gripping the country, a sense of government and voters no longer being in control of a nation’s destiny. For the first time since the Spanish Civil War and its aftermath, parents and children are facing up to the terrible existentialist implication of the crisis: that the children’s future, in terms of job security and social provision, looks far more negative than that faced by their parents at their age.
Young Spaniards are joining immigrants in giving up and looking outside Spain for some kind of deliverance from their plight. Spain is fast turning into Europe’s poor southern outpost again, the kind that mesmerised romantic travellers in the past but condemned the country’s inhabitants to underdevelopment.
“What is happening to our economy?” headlined the Spanish financial daily, Expansión, in a recent issue, which summarised a collective sense of doom and gloom. Hours earlier, the Bank of Spain’s latest set of statistics showed Spain lurching into recession for the second time since 2009, with GDP falling 0.4 per cent in the first three months of 2012, adding to a 0.3 per cent contraction in the previous quarter.
Spain’s banking sector, burdened by bad property and construction loans following the collapse of a long home-building spree is one area of concern. Another is the highly indebted state of Spain’s regions – partly the result of the boom/bust construction sector – which has translated into lower revenue from land and property taxes. This, combined with the run-away spending by local authorities in Spain’s 17 regions, left the incoming centre-right People’s Party Government last December inheriting a budget deficit equivalent to more than 8 per cent of GDP.
The problem for the new government is that it failed to hit the ground running after winning the election. It announced its austerity budget, belatedly in the aftermath of its first clear political setback since it took power, and failed to win the Andalucian regional elections in March. This has opened up the prospect of southern Spain developing into another source of political opposition, with the Socialists forming a tactical alliance with the left-wing Communist grouping, Izquierda Unida.
Meanwhile, Prime Minister Mariano Rajoy is facing some discreet pressure from within the right wing of his party led by Esperanza Aguirre, the charismatic and outspoken head of Madrid’s regional government, to be bolder on the autonomous issue with calls for a reorganised Spain of three or four regions, including the Basque country and Catalonia, instead of the 17 existing ones. Catalonia remains a major political minefield. While the regional CIU government has been ahead of central government and other regions in driving through austerity measures, it remains politically committed to securing more autonomy from Madrid while threatening a vote on independence.
Rajoy has told his European Union counterparts that he is using his majority in parliament to do what Brussels and Berlin demand of him in difficult circumstances. Measures have included labour and financial-sector reforms, and the announcement of a tough programme of public-sector cuts, committing Spain to a new budget deficit target of 3.2 per cent of GDP this year, bringing the targeted fiscal-adjustment amounts to 5.5 per cent of GDP over a period of two years.
This is one of the biggest fiscal adjustments ever attempted by a large industrial country, and legitimate questions are being asked as to whether it is realistic to think that such a target can be met. Spain deserves to be treated as more than just an accounting exercise.
As Wolfgang Münchau, the Financial Times’ astute European commentator, put it recently: “Spain’s effort at deficit reduction is not just bad economics, it is physically impossible, so something else will have to give. Either Spain will miss the target, or the Spanish Government will have to fire so many nurses and teachers that the result will be a political insurrection.”
“The only halfway benign solution”, argues Münchau, “involves a European rescue programme for Spain that focuses specifically on the recapitalisation and downsizing of the financial sector. Spain would also need to undershoot the eurozone’s average inflation rate over many years to redress some of the lost price competitiveness. At the same time, the country needs to go easy on austerity.”
The challenge of reforming the Spanish banking system while ensuring its survival was accurately reflected in the analogy drawn recently by the Spanish central bank governor, Miguel Angel Fernández Ordóñez. He likened the process to “doing a double on a ship in trouble – at the same time as ordering the evacuation of the passengers it was necessary to repair the lifeboats”.
The problem is that the lifeboats are looking vulnerable with share prices plummeting and no credit being made available to help companies expand. There is also concern among many economists that the fiscal hair shirt risks simply driving Spain into deeper recession, and this will in turn adversely affect the credit quality of private-sector debt against the background of further falls in already sagging house prices.
For the time being the official word in Madrid is that there can be no plan B, nor is there a need for one. Spain will see green shoots sprouting in 2013, predicts Spanish Economy Minister Luis de Guindos Jurado, who once worked for the ill-fated Lehman Brothers. Nevertheless, a more likely scenario is that as the recession gets worse and unemployment edges towards 30 per cent, Spain is likely to turn to the EU for a more coordinated programme aimed at growth stimulation while knowing that it might also need some kind of financial bailout sooner rather than later.
