Europe must show Spain it is the answer

Spain’s economy needs a smart rescue which is not focused on deficit targets but one that provides the financial stability to make structural reforms work, revitalise the economy and keep the country together.  

Head, ECFR Madrid
Senior Policy Fellow
 
To some, Spain’s preparations to apply for a rescue programme mark the start of a solution to the country’s crisis. Others believe an application would breed a new set of problems. The crucial question, though, is not whether Madrid should apply for a rescue or not; it is what kind of rescue it will be offered. The risk is that it will be the kind of blind, incompetent programme implemented in Greece and Portugal, which has fuelled a downward economic spiral that deepens social and political divides.

With unemployment hovering at 25 per cent, Spain’s economy is heading for yet another year of recession. Despite severe budget cuts and tax rises, few believe the deficit targets agreed for 2012 or 2013 will be met. Further cuts will follow, even though poverty is already rising among the most vulnerable; young and qualified people are emigrating; homeowners being evicted; and families running out of resources to help relatives.

Financial markets remain closed to the government, credit has dried up in the banking sector and regional governments are broke. Only exports and Spain’s big multinational companies offer hope, but with unemployment in Europe at its highest since the euro’s launch, external demand seems unlikely to lift the country out of recession.

Spain is being squeezed from above as the EU insists on deeper cuts – even though similar measures taken a year ago reversed four quarters of growth, putting an abrupt end to a promising recovery.

EU institutions routinely praise Madrid’s structural reforms and adjustment measures. But since measures to stimulate growth are absent, tax revenues keep shrinking and expenditure keeps growing, making it impossible to meet deficit targets. Having entered the crisis with a debt-to-gross domestic product ratio of 36 per cent and a budgetary surplus of 1.9 per cent, interest payments are now Spain’s biggest budget item. But despite this vicious circle, Europe’s message remains: be patient and keep digging.

There is also pressure from below, as social tensions mount and citizens turn their rage on the political class. In less than a year, the ruling centre-right Popular party has lost more than 15 percentage points in voter support, eroding a majority it took eight years to build. With the opposition Socialists not ready to capitalise on this, the country risks a period of instability in which the main parties will be unable to govern effectively. As recent protests showed, the “indignados” who peacefully occupied the streets last spring to demand better democracy are fed up with the lack of response and are becoming more radical.

To add to these tensions, Madrid faces regional dissent. Catalonians, who 22 months ago were the guinea pigs of austerity policies, are now suffering from severe welfare cuts and unemployment running to almost 850,000. As Spain’s second richest region, with a strong national identity, they may now decide they would be better off leaving the kingdom, a move that might trigger a similar demand by the Basques.

Should the country finally break up, Spaniards will of course have to take responsibility for its split. But historians will surely conclude that the wrong set of austerity policies played a part in driving Spain to the edge of the cliff. This would be the final irony for a country that has built its democratic identity on Europe and on EU membership.

For decades, we lived with the inspiration provided by philosopher José Ortega y Gasset’s phrase: “Spain is the problem, Europe the solution.” But polls now speak of a crude awakening: only 30 per cent of Spaniards hold a positive view of the EU and 28 per cent a negative one. Spain is now, after Cyprus, the member state where the EU’s image is most negative. Spaniards will not revolt against Europe but they are learning a lot about tough love.

We definitely need a rescue. But it must be smart rescue – one that is not obsessed with deficit targets but provides the financial stability Spain needs to make structural reforms work, revitalise its economy, heal its society and keep the country together.

The article first appeared in the Financial Times.

The European Council on Foreign Relations does not take collective positions. ECFR publications only represent the views of its individual authors.

Author

Head, ECFR Madrid
Senior Policy Fellow