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Political turmoil threatens to rock Spain’s recovery

Spain is attempting to perform a tightrope act as it emerges from recession. However, current political developments risk upsetting the economy’s recovery.

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Zapatero faces a testing few months. Photo: European Parliament.

Only a few weeks ago, the big argument raging about Spain was whether or not it was “the next Greece”. The size of its deficit, difficulties in getting the economy growing again and its harsh treatment at the hands of international markets all made it look like the prize candidate for the EU’s next massive bailout. Many observers suspected a visit by IMF head Dominique Strauss-Khan to Madrid in June was the prelude to just such a move as José Luis Rodríguez Zapatero’s handling of the economy came under immense scrutiny.

Now, however, the situation is slightly different. The bailout has not transpired and while the country has certainly not emerged blinking in the sunlight of market approval, or even seen any major improvements in its basic indicators, there are reasons for optimism.

The most obvious is the fact that technically, Spain has (only just) come out of recession, following two consecutive quarters of positive growth, at 0.1 percent and 0.2 percent, making it the last OECD country to do so. Further good news comes in the form of household spending, which was up 2.0 percent in the second quarter year-on-year, helping fuel an increase in imports. Exports jumped 10.5 percent in the second quarter and tourism is also perking up.

“After two horrendous years, demand has recovered, and with a vengeance,” noted Antón Costas, an Economic Policy expert at Barcelona’s UB university. “That’s not just a dry statistic, it’s also a barometer of the state of mind of consumers and their confidence in the future.”

Meanwhile, the bank sector, whose shady accounts were blamed for much of the “Greek tragedy” fears earlier in the year, acquitted itself relatively well in the European stress test of financial institutions. Seven failed (five of those were, as expected, regional savings banks, or cajas), but the rest of the system came through with a clean bill of health, and fortified by a cajas restructuring reform. Moreover, the credit crunch that had been squeezing those banks in Spain appears to have eased a little as confidence starts to return.

For the moment, at least, the market vultures appear to have backed off.

However, some of these encouraging figures have to be qualified. The surge in consumption leading up to the summer can at least partly be explained by a two-point increase in VAT to 18 percent implemented on July 1. A more sobering statistic comes in the form of car sales, which saw a 22.9-percent annual plummet in the second quarter after a government-sponsored vehicle purchase incentive scheme ended.

A less quantifiable factor is the impact the government’s €15-billion, deficit-slashing austerity package, announced in May, will have on growth at such a sensitive time for the Spanish economy.

César Cantalapiedra, of Analistas Financieros Internacionales in Madrid, sees an austerity drive that seeks to cut the deficit from 11.2 percent of GDP last year to 3 percent by 2013 as necessary. But he expects it to slow GDP down from zero growth to -0.3 percent this year as a whole, and from 0.6 percent growth to 0.4 percent next year.

“What’s good for the deficit isn’t good for GDP,” he told Iberosphere. “The austerity package is going make it difficult for the country to stay out of recession. It’s going to be noticed above all in public infrastructure works, which have virtually been paralysed.”

Another undesired repercussion of the belt-tightening, of course, is that it allows unemployment –which is at around 20 percent– to remain high. With the deficit looking less daunting than it did three months ago, the nightmare now for the government is the jobless rate, with its knock-on effects for the economy as well as the social havoc it wreaks.

The Socialist administration, which was so reluctant to introduce drastic deficit-cutting measures, is now walking a fine line as it attempts to navigate between market-spooking laxness and double-dip recession, all the while with a painfully high unemployment rate.

You say tomato, I say tax increases

It hasn’t been helped by a barrage of gaffs and mixed messages from the Zapatero Cabinet. Public Works Minister José Blanco and Economy Minister Elena Salgado played out one such episode when the former publicly mooted a possible tax increase, only to be overruled by Salgado almost immediately. The announcement that €500 million in suspended public works as part of the austerity package was in fact being restored, due to improved interest rates, also raised eyebrows as observers questioned the administration’s resolve on cutting back. That news sparked a brief rise in Spanish-German bond spreads but seems not to have hurt the government’s credibility in the longer term.

However, with the economy at a crossroads, Zapatero has more than just his own ministers’ poor communications skills to worry about. The next couple of months are likely to be as testing as any period in the prime minister’s six-year tenure.

On September 29, a general strike is scheduled, which might not deliver an overwhelming turnout, but it will confirm the government’s rupture with the powerful unions and create a new front on which it will have to defend itself.

Also at the end of September, and probably of more importance, the government must present the 2011 budget before Congress. If the Socialists, who are seven seats short of a majority, fail to push the budget bill through, they will quite possibly be forced to call early elections – possibly in the spring of 2011, instead of in the spring of 2012 as scheduled. With all other parties shunning the Socialists in Congress, the only lifeline available is in the form of the PNV Basque nationalists.

A Socialist-PNV pact is looking likely, possibly for the medium term. While this would ensure the budget’s passage through the legislature, the Basque nationalists would be more interested in wringing out specific political concessions for their northern region than in helping a beleaguered government manage the national economy.

“This wouldn’t be good in the sense that the PNV is defending the interests of the Basque people, which isn’t good for the rest of Spain, Ramón Pacheco-Pardo, a lecturer in European Studies and Spanish Contemporary Politics at London’s King’s College, told Iberosphere. “But at least if the budget is passed the markets will be reassured.”

A conservative alternative

If that budget-passing partnership fails to materialise, however, the polls show the main opposition Popular Party to be on course for an early general election victory. While in theory, many in the private sector and the international community might prefer to see conservatives handling the Spanish economy, PP leader Mariano Rajoy inspires little confidence and at times has even struggled to control his party. Moreover, despite attacking the government over its handling of the economy ad nauseum in recent months, the PP has not presented a clear alternative vision.

The famously optimistic Zapatero now seems to accept that Spain’s journey out of recession will be long and arduous. “There’s a chance that third quarter growth won’t be quite as good (as the previous quarters),” he said after a meeting with King Juan Carlos in the summer. If he can come through the tests of this month -and not suffer too badly in November’s Catalan elections- he really will have reason to smile again.

Incidentally, the end of September will also see Moody’s revise its credit rating for Spain. The indications are that it will revise the rating down, as other agencies have done in recent months. But by then, Zapatero just might have other things on his mind.





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Published: Sep 9 2010
Category: Uncategorized
Republication: Creative Commons, non-commercial
Short URL: http://iberosphere.com/?p=1354
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1 Comment for “Political turmoil threatens to rock Spain’s recovery”

  1. Well, Mr. Bean is no where near out of the woods. The so called labor reforms are nothing more than a bandaid and are more oriented towards making it easier to fire employees than towards creating jobs. The increase in consumer spending is probaly due to the increase in the IVA to 18% than actual spending. The upcoming strike is really going to be a sham as only 9% of the workers plan to strike. Why? Because ZP has been paying off the unions to the tune of millions to keep them in line, and the workers have finally awakened to the fact that the unions are in the pocket of ZP, rather than representing their interests. For example, the unions are running an ad now that points the finger at industry, rather than the government. All indications are that the country is on the brink of total bankruptcy, rather than "crawling out of the recession."

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