The miracle that turned into a nightmare

The flamboyant economy of the noughties failed to survive the explosion of the financial bubble — a setback that early general elections announced for November are unlikely to remedy.

Published on 1 August 2011 at 13:52
The new town of Seseña to the south of Madrid

Reeling in state of technical knockout and too winded to endure another blow, the Spanish economy is crawling towards the next milestone, which will be the end of the line for the government of José Luis Rodríguez Zapatero. Over the last few months, the socialist leader has been experimenting with a radical change in economic policy in the hoping of overcoming the crisis.

But the figures stubbornly show that in a best-case scenario, the plethora of reforms undertaken by the current government will no real impact before the end of its mandate. Just three hours before Zapatero announced the early general election [scheduled for 20 November], we were treated to one of the key figures that summarises the plight of the country: 4.8 million unemployed.

For the Zapatero government, the issue of the economy has been like a ladder to paradise, which collapsed beneath its feet when the country was plunged into the worst recession since the Spanish Civil War. On the eve of the 2008 elections, it could boast of the lowest rate of unemployment since Franco (8% at the end of 2007), budgetary surpluses, and steady and stable growth that had propelled Spain into the Champions League of the world economy. With a level of per capita income that had overtaken Italy, convergence with heavyweight European economies of France and Germany had ceased to be a pipe dream for Zapatero.

A mirage swamped by the crisis

But sadly, this idyllic vision of the Spanish economy failed to survive for the duration of his administration. In 2008, the mirage was swamped by the global financial crisis. When the waters finally settled, Spain had been transformed into a country laid-low by recession with spiraling unemployment and spectacularly out-of-control public spending… The clique of Anglo-Saxon analysts, speculators and specialist journalists who determine the mood on the markets ceased to speak of the “Spanish economic miracle,” and instead banished the country to face an unenviable future among the PIGS.

The formidable consequences of the international crisis in Spain shed a wholly new light on the boom years: for years the economy had buoyed by a speculative bubble on financial and property markets, which the Aznar government, and later the Zapatero administration had failed to acknowledge.Hardly anyone could have foreseen a situation in which sub-prime mortgages in the United States were to trigger the worst crisis since the Great Depression. And when the credit dried up, the invisible bubble exploded to reveal an economy marked by high levels of household and corporate indebtedness. Everything came to a head at the worst possible moment.

With hindsight, Zapatero’s first mandate now appears as a missed opportunity, even if the figures at the time painted a completely different picture: the socialist government refused to acknowledge warning signs, like Spain’s low level of productivity or its rapidly rising external debt, and barely made any changes to the economic model left behind by the People’s party — in some cases, it even continued to pursue policies, like the reduction of income taxes, inherited from its predecessor.

A metamorphosis that came too late

Then the 2008 financial crisis plunged Zapatero into a state of stupor, from which he seemed unable to recover. For months, he denied there was a crisis, before announcing that its impact would be relatively minor. Only when the markets and the EU began to demonstrate their increasing concern over Spain’s future in the near term did he finally consent to controversial shift in policy, which amounted to a radical metamorphosis. The socially benign measures and Keynesian approach of the early days of the crisis were suddenly replaced by stringent budget cuts. Zapatero’s Damascus moment took place in the wake of the second weekend of May 2010, at a time when the markets and his European partners were demanding a major about-turn. Germany was insisting that Spain implement draconian spending cuts, to reduce its budget by 35 billion euros. But at the end of the day, the cuts only amounted to 15 billion: which included lower public service pay, a pension freeze, a reduction in public spending and a pledge to embark on the road to reform. Zapatero forged ahead with a hangdog air as if to say, we will accept our penance “regardless of the cost and regardless of the cost to me.”

A subsequent reform of the labour market and the pension system reinforced the idea that May 2010 had marked a major turning point. However, the reality was quite different: in fact Zapatero’s government could do little more than stem the flow of blood from a hemorrhaging economy that resumed bleeding whenever the markets increased the cost of funding for local governments, households and companies.

The announcement of early general elections should have provided an occasion for a review of the financial difficulties that Zapatero will pass on to his successor. But when called on to account for the most serious economic upheaval in recent memory, the head of state once again succumbed to the temptation of excessive optimism. In particular, he remarked that the second quarter employment figures showed a “certain change in the trend” in the labour market. However, the truth is that the change is due to the seasonal effect of the tourist industry. Adjusted figures would have told a much bleaker story.


Markets to exert pressure on elections

Arguing that “certainty is stability,” on July 29 Spanish Prime Minister José Luís Rodríguez Zapatero announced early elections to be held on 20 November — a decision which theFinancial Times points out will not give much room for manoeuvre to either of the two main candidates. “Neither Mr Rubalcaba and the Socialists nor Mr Rajoy and the PP have much influence over the most important constituency of all in such a crisis: international sovereign bond market investors”. “In fact, the choice of November may also help limit the scale of the likely Socialist defeat”, writes the FT. If polls show a wide distance between PP and PSOE of 14 points (44% and 30% respectively), the profile of Socialist candidate Alfredo Pérez Rubalcaba, ” a seasoned politician more popular amongst voters”, could reduce the chance that Mariano Rajoy´s PP will win the elections by a landslide majority. But “neither the certainty of an election date nor the probable victory of the right-wing opposition People’s Party will necessarily soothe investors’ fears about the “sovereign debt whirlpool” where Spain is headed, adds the economic daily. A report published by IMF on July 29 affirms that “Spain is not out of the danger zone”, while praising ongoing economic reforms.

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