Alleviating the Pain of Spain
Until the beginning of 2008, it appeared that Spain would be able to defy the doomsayers and avoid a repeat of the boom-bust cycle which has prevented it from joining the ranks of the most competitive economies in the world. After an extraordinary streak of 14 consecutive years of growth averaging more than 3% and generating 40% of the jobs in the eurozone from 1999 to 2007, the government assured voters and investors that Spain’s economic growth model -based on construction, internal consumption, tourism and transfers from the EU budget- could be transformed without suffering a dramatic slowdown.
Skyrocketing food and oil prices and the financial crisis have combined with the bursting of Spain’s real-estate bubble and sent the economy into a tailspin. After growth of 3.8% in 2007, the IMF’s latest estimates expect growth of 1.8% this year and 1.2% in 2009. Half a million workers have lost their jobs in the past year, unemployment now stands at 10.5% (the highest rate since 1998) and is forecast to reach 12.5% by the end of 2008. The housing sector is shedding jobs (122,000 in the second quarter alone) faster than the government can revise its GDP growth estimates downwards (now 1.6% for 2008 and 1% for 2009). Inflation eased somewhat in August 4.9%) after hitting a 16-year high in July.
When the current crisis is overcome, will Spain be performing like the Italy which it surpassed in per capita GDP, Portugal or Greece or more like the Mediterranean tiger of the past 15 years?
Spain still has a lot going for it. The government is now spending the budget surpluses it recorded in the last 3 years in order to spur demand with tax rebates for individuals and SMEs and to retrain workers, especially immigrants and others laid off in the construction sector. With a debt-to-GDP ratio of 36%, Spain’s central and regional governments can afford to crank up spending.
Despite its low level of debt, Spain cannot and should not spend its way out of the crisis. During the boom years the government was slow to increase investment in R+D and education and implement structural reforms to increase low productivity. These will now be harder to sell to Spaniards struggling to meet mortgage payments. The government is attempting to negotiate a broad package of economic reforms with labor unions and employers and the right-wing opposition Partido Popular is interested in negotiating its possible parliamentary support for the government’s 2009 draft budget. If the talks fail, however, Mr. Zapatero will have to show real determination to tackle the crisis.
Spain’s labor maket needs more flexibility (especially in cutting severance pay for workers on indefinite contracts), its corporate taxes should be lowered (they currently stand at 30%) and the paralyzing red tape spawned by Spain’s decentralized multi-layered administration urgently cut. Moreover, the trend of decreasing FDI into Spain will only be reversed if the aforementioned structural reforms are enacted and the perception of economic nationalism by the government is erased.
In short, Mr. Zapatero needs to ditch his recent gimmicks (his Industry Ministry is giving Spaniards high-efficiency bulbs, asking for reduced air-conditioning use and lowering speed limits) stop blaming international factors for the crisis and pursue real reforms. Investment in energy and transportation infrastructure must remain high so Spain can continue to close the gap with northern European countries. Its successful multinationals like Iberdrola, Acciona, Abengoa, BSCH and Repsol-YPF should continue to aggressively invest in the US, the rest of Europe and emerging countries. Spain is now the first investor in renewable energy in the US and its highly-successful renewable-energy model has turned it into the world’s leading producer of wind energy per capita.
Spain boasts a young and entrepreneurial population which racks up longing worker hours than any other country in western Europe. But, despite its tremendous development, Spain still tends to be perceived as the Florida of Europe. Its government and institutions need to confront the crisis head on by liberalizing the labor market, increasing labor market participation by women, cutting taxes, enticing foreign investors, injecting competition into many product and services markets and confidently projecting the image of a modern Spain which produces windmills rather than fights them.
Dr. Alexandre Muns is Director of Studies of the American Chamber of Commerce in Spain