Step change in Spain

by David Mathieson

Labour Uncut? Maybe, but our sister party in Spain, the PSOE has just been sliced, diced and stuck through the democratic mincer. The general election on Sunday put an end to the centre left government in Madrid. It gave the conservative Popular party an overall majority, a rare event in a country used to being governed by coalitions of one sort or another.

These results come on top of some disastrous regional election results for the PSOE earlier this year when voters handed the PP power in almost all of Spain’s powerful autonomous regions. 2011 is without doubt the PSOE’s annus horribilis and will rank amongst the troughs for a party which has had more than its share of bleak moments since it was founded well over a century ago.

For Spaniards and the Euro zone the key question is what happens next? But first a quick post mortem. The numbers were always against a PSOE victory. A rocketing deficit, near doubling of the national debt since the onset of the current crisis, five million unemployed, and eight years in power left the socialist government of Jose Luis Rodriguez Zapatero without much in the way of a narrative or alibi. And Zapatero played a poor hand poorly. Until early 2010 he appeared to be in a state of denial about the extent of the problems, insisting that the Spanish economy was fundamentally sound and “playing in the Champeon’s League”.

It was painfully reminisent of Jim Callaghan’s “crisis, what crisis”? during the winter of discontent. The only slight difference, was that while Callaghan never actually uttered the phrase attributed to him, clips of Zapatero using the football analogy have been replayed ad infinitum across Spain. When Zapatero finally U-turned in May last year and introduced swinging cuts across the public sector, his credibility – and that of his government – was shot. On top of the dismal economic data many voters concluded that the government was out if its depth just at the time when they were looking to their leaders for solidity and competence.

As a consequence, the PSOE vote collapsed. The PP won big, but their victory comes without any real popular enthusiasm. Their vote increased only marginally over that of four years ago. The problem for the left is that many of their traditional voters stayed at home, whilst some others deserted to the communist led United Left party. Winning those voters back with coherent, credible messages in opposition must be the priority for the PSOE leadership.

Even more importantly, the election comes at a crucial moment for both Spain and the Euro. As one Spanish headline put it, “big majority for the PP, little room for manoeuvre”.  Last week Spain was forced to pay 7% interest on its long term debt – the same level as Italy. It is an unsustainable rate. The PP leader, Mariano Rajoy, pleaded with the bond traders that he “would need more than half an hour to put the country straight”, but markets which work in fractions of a second are unlikely to be so benevolent.

Spain is currently in the classic bind of other European economies: it faces an immediate crisis to which most viable solutions are long term. The short term crunch is how to finance the public and private debt. It is estimated that the country will need to refinance some €120 billion of debt in the coming months as governments (national and regional), households and firms struggle to stay afloat. Under the current conditions this is a tall order.

To reduce the structural deficits long term supply side policies are needed to rebuild the economy. Spain faces decisions not just about cutting to reduce the deficit or spending to stimulate the economy: although that is certainly a major headache. The central problem is re-orientating the economy.

The current debate in Britain about rebalancing the economy and rebuilding our atrophied industrial base has a deafening echo in Spain, which has become over dependent on sectors such as construction and tourism. Both been hit by the crisis and a new economic model is now needed to solve the chronic unemployment problem – especially for young people nearly 50% of whom are out of work.

History suggests that it will be a huge task. The last time the country faced unemployment at the current levels, well over 20%, was in the mid 1990s. It then took well over a decade to bring the rate down to just below the European average of 9% by 2007. This, however, happened under a set of extraordinarily benign conditions. The consumer and construction boom, which took off at the end of the 1990s, soaked up labour as interest rates fell when Spain joined the Euro and the global economy experienced a decade and half of exceptional, sustained growth. It is impossible to see how this scenario will be repeated.

Rajoy may well succeed in forcing through a new round of cuts to reduce the Spanish deficit, but he will also need to find a new vision for sustainable growth in the future.  There are calls for the Germans to become more like southern Europeans, spend more and stimulate growth. But if the Germans should become more like the Spanish, the Spanish need to become more like the Germans and increase both their competitiveness and productivity.

If it happens, it will take time. To ease the pain of the transition, either the bond markets will have to give Rajoy a lot longer than half an hour or the Germans and the European central bank will have to lend a hand. And most people wouldn’t bet on either. Last week one of Angela Merkel’s closest parliamentary allies claimed that “Europe now speaks German” and for many Spaniards that may just mean “angst”.

David Mathieson is Chair of Labour International.


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3 Responses to “Step change in Spain”

  1. Nick says:

    It’s the same problem Labour face in the UK.

    You are in denial. In particular about the debt. You rely on the Bernie Maddoff set of accounts that leaves off the pension liabilities with the fig leaf that its spending. Parliament deems spending as a promise that doesn’t have to be kept as no parliament can be bound by the spending promises of a previous one. In other words the plan is to default. The reason is that taxation is 550bn, but the total liabilities accrued comes to 7,000bn and that ignores bailing out those with no pensions at all.

    14 times geared, if all the money goes on pensions. It’s not going to happen because taxpayers will insist on some services for their money.

    Reducing deficits is irrelevant if you haven’t a plan to cut debts. After all, its immoral for children in the 3rd world to pay the debts of failed politicians and thieves. Same in the UK

  2. A fine summary, David. I’d add that there are a bunch of fundamental problems (such as Spain’s dysfunctional, two-tier labour market) which respectable growth covered up and are now laid bare. Plus, there are serious constitutional problems (a politicised judiciary, a jobs-for-the-boys political system and gridlock over Catalonian demands) which are unfinished business from the transition to democracy and are undermining the public’s faith in the whole political process.

  3. ‘Spain playing in the champion’s league’ says it all.

    By joining the Euro the governments of the peripheral members of the Eurozone (and France may soon be joining them) did so in the fond belief that the Euro; fiat money backed by nothing more than solemn and binding assurances by politicians to play to the rules would be embraced by the money markets.

    They didn’t play by the rules. Greece in fact was way over the 60% convergence requirement when she was admitted to the club and the rest of them, Germany included started to break them almost as soon as they joined.

    The arrogance of the political leaders of the Euro members in continuing to spend more cash than they were collecting, with no thought as to how the world’s money markets would react is what has brought this crisis about. Spain is just the latest domino and it won’t be the last.

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