Bullish on Spain

Last week’s tug of war between the Greek government and the so-called troika—the European Central Bank, the European Commission, and the International Monetary Fund (IMF)—over a bailout package to rescue Greece’s failing economy, drew attention to Spain, another Southern European economy that, in recent years, has struggled with a mountain of debt, declining GDP, and sky-high unemployment, all of which make it a perceived threat to the stability of the eurozone. Yet Spanish politicians were quick to reassure the world that the Greek drama would not be playing in Spain.

In an interview with the television network “Telecinco,” given soon after word got out from Athens that a panel of austerity reforms had been defeated in a referendum, conservative Prime Minister Mariano Rajoy avoided any talk of contagion of the Greek situation, and he showed little sympathy for the Greeks. Instead, he embraced the tough stance taken by Greece’s international creditors, especially Germany. He noted that Greek assistance would not be possible “without responsibility and reforms on Athens’ part,” and added that: “What matters is that Greece knows we are willing to help, but that this will require that in exchange that reforms needed for growth and job creation are carried out.” 

For his part, Pablo Iglesias, the head of Podemos (We Can), Spain’s fiery left-wing party, which is often thought of as a corollary to Syriza, Greece’s ruling party, and is Syriza’s closest ally in Europe, was full of praise for the referendum. Speaking to the radio network “Cadena SER,” Iglesias exalted the outcome as “a triumph for democracy.” But he was quick to distance his party and Spain from the situation in Greece. “We have a great friendship with Syriza, but Spain is not Greece.” He added that: “We are an economy with much more weight in the Eurozone, we are a country with a stronger administration and with a better economic situation. The circumstances are different and I think that it makes no sense to draw parallels.” 

BOUNCING BACK

Spanish politicians are so confident in their claims that “Spain is not Greece” because of unambiguous economic indicators that signal that the brutal Spanish economic crisis that began in 2009 and that brought up unwelcome comparisons to Greece in the international media, is over. According to the Bank of Spain, Spain officially exited recession in the first quarter of 2013 after nine consecutive quarters of economic contraction; and in 2015, Spain is expected to see 3.3 percent growth, one of the highest rates in Europe. According to a recent IMF report, if Spain is able to sustain this pace through next year, the Spanish economy will have made up for any ground lost since 2009. By contrast, Greece is well into its sixth straight year of economic contraction, and the end is nowhere in sight.

According to The Economist, Spain’s “surprisingly strong economic recovery” is the result of an export boom. Last year, exports made up 35 percent of the country’s GDP (an increase of 15 percent before the crisis) and were led by high-value items, such as automobiles, heavy machinery, pharmaceuticals, and chemicals. More cars were made in Spain last year than in any other European country save for Germany, a trend pushed by the addition of some 25,000 new jobs at the Spanish plants of foreign carmakers General Motors, Ford, and Renault SA. In fact, the export boom is already making a serious dent on Spanish unemployment, which is down to 23.8 percent of the active population, from a high of 27 percent at the peak of the economic crisis in early 2013. Some 600,000 new jobs are expected by the end of the year, contributing to one of the biggest drops in unemployment in Spanish history. 

Tourism, a mainstay of the Spanish economy since the country opened up to foreign tourists in the early 1960s that accounts for almost 12 percent of GDP, is another bright spot in the economy. The international economic crisis hit the Spanish tourism industry hard in 2009, when many people, facing economic recessions in their own countries, deferred vacations abroad and stayed home. But by 2014, the number of foreign visitors to Spain had exceeded the pre-2009 level, reaching 65 million visitors and making Spain the third biggest tourist destination in the world after France and the United States.

To be sure, many problems still cast a cloud over Spain’s economic future. The country remains saddled with debt, which stands at above 100 percent of GDP.

Last but not least, foreign investors, who after 2009 fled Spain fearing an epic economic meltdown, are rushing back into the Spanish market, with portfolio investments high on their lists of priorities. This reflects the strong performance of Spain’s IBEX-35 blue chip share index over the last two years. Curiously, banks, which only a few years ago required massive bailouts to prevent an outright collapse of the banking sector, are one of the hottest stocks in the Spanish market. Boosting such financial institutions’ appeal is that, as part of the bailout terms, they cut their exposure to bad real estate deals. By 2013, exposure to real estate stood at 110 billion euros, versus 400 billion euros in 2008. 

To be sure, many problems still cast a cloud over Spain’s economic future. The country remains saddled with debt, which stands at above 100 percent of GDP. The forecast for 2016 sees the debt to GDP ratio falling to 98.5 percent, but this would still be above the Eurozone average of 92.1. The real estate market, which imploded after 2008, a consequence of a reckless expansion, could still experience further decline. At the depth of the crisis, housing prices in Spain fell by some 30 percent. But that was considerably less than in other countries where housing markets also crashed. It will take years, if not decades, for the psychological toll of the crisis on the Spanish people to wear off, especially among the young, who had only known a democratic, peaceful, and prosperous Spain, with nary a memory of the violence, repression, and economic desperation of the post-Civil War years.

BROKE AND BROKER 

In understanding how Spain managed to find its way back to economic growth while Greece remains trapped in a deep recession, it helps to put things into perspective. As I noted in a February 2015 Foreign Affairs article about the rise of Podemos, the Spanish-Greek comparison is a flawed one, since it fails to appreciate key structural economic differences between the two countries. Befitting its role as the eurozone’s fourth largest economy, after Germany, France, and Italy, Spain is a vastly larger and more diversified economy than Greece’s, which is about one-sixth the size (as of 2014) and relies primarily on tourism and shipping. Moreover, the Spanish economy never hit the skids as hard as Greece.

Whereas in Spain, Iceland, Ireland, and the United States, the root of the crisis was business greed and malfeasance, in Greece, it was state incompetence and corruption.

The toll of the economic crisis on Spain’s GDP was severe—a seven percent loss. But this pales in comparison to Greece’s staggering GDP drop of more than 25 percent. Such a drastic decline puts the Greek situation on the same page as Argentina’s Great Depression of 1998­–2002, during which the economy shrank by more than 20 percent. Actually, the Greek situation is worse than Argentina’s, since Argentina saw a very quick and robust recovery. Greatly aided by the ability to devalue its currency—an option not available to Greece unless it exits the eurozone—by 2005, the Argentine economy had recovered all lost ground and household incomes had risen by almost 50 percent.

Unsurprisingly, life in Greece at present is not for the faint of heart—quite literally. The country’s healthcare system is on the brink of collapse, with government spending on health falling by some 25 percent since 2009 and hospitals and clinics reporting medicine shortages. Unemployment has skyrocketed, from 10.4 percent in 2004 to 26.4 percent in 2014, the highest in Europe. The spike in unemployment has helped drive Greece’s poverty rate to the very top of the EU ranks. It is estimated that more than 20 percent of the population of Athens is homeless, and that the suicide rate has increased by some 35 percent since the onset of the crisis in 2010.

More important, however, is what caused the crisis in the first place. Whereas in Spain, Iceland, Ireland, and the United States, the root of the crisis was business greed and malfeasance, in Greece, it was state incompetence and corruption. It is worth recalling that it was the revelation that the Greek government had cooked its books for years, to hide profligate borrowing and spending, that triggered the economic crisis in Greece. Consequently, the bailouts for that country have been vastly larger than those for Spain. The bailouts have also played a very different role in the economy. Since the economic crisis began in 2009, Greece has been given about 240 billion euros ($272 billion), in 2010 and 2012, intended to cover shortfalls in public finances, including domestic obligations such as pensions and debt payments to international lenders. By contrast, Spain has had one bailout, of 42 billion euros ($47 billion) to prevent the banking sector from collapsing. 

CRISIS MANAGEMENT 

Another key difference between Greece and Spain is how much better Spanish political institutions have managed the economic crisis and how this, in turn, has helped Spain find a way out of the crisis. In November 2011, unable to cope with a growing debt crisis, the government of Greek Prime Minister George Papandreou of the Socialist PASOK party collapsed. Such a sudden disruption in governance triggered considerable political uncertainty at home, and sowed even more fear abroad about the capacity of Greek politicians to pull Greece out of the crisis. In subsequent elections, Greece’s establishment parties—the PASOK and the center-right New Democracy—were eclipsed by more radical alternatives seeking to capitalize on popular discontent and despair, such as the ruling Syriza Party, whose capacity for managing the economic crisis appears limited.

After allowing Greece to default on an IMF loan on June 20, the first for a developed economy, Syriza Prime Minister Alexis Tsipras put the troika’s austerity package for a bailout to a popular referendum, hoping that a negative vote would strengthen his bargaining position. Tsipras got his wish with the referendum, but the strategy backfired spectacularly, since the vote only stiffened the spine of international creditors. Facing the prospect of the dreaded Grexit, only a week after winning the referendum, Tsipras accepted harsher terms than those offered to Greece prior to the poll. The contrast with Spain is striking. 

As in Greece, newcomers to the political scene in Spain are driven by an anti-austerity sentiment; but these newcomers do not share the anti-system attitudes of their Greek brethren

Unlike in Greece, the economic crisis in Spain did not cause the collapse of the government; rather, the administration of Jose Luis Rodriguez Zapatero of the Socialist PSOE was kicked out of office in 2011 in ordinary elections, and voters rewarded the conservative Popular Party (PP) with a majority of votes in the Spanish parliament. Before leaving office, however, Zapatero negotiated with the right an amendment to the Spanish constitution that places a cap on how much the government can borrow at all levels. The cap can only be broken under extraordinary circumstances, such as a natural disaster. While in office, the PP has used its parliamentary majority to implement a wide array of structural adjustment policies, such as labor market reforms intended to allow businesses to fire and hire with greater ease, and deeply unpopular measures, such as tax increases and big cuts in the public sector and social programs, even as the economic recession was deepening. Although the economic reforms have exacted a high toll on those who could least afford them, such as the poor and the middle class, they have succeeded in making the economy more competitive and in restoring investors’ confidence.

More importantly, the reforms implemented in Spain during the crisis prevented the extreme medicine currently being prescribed for Greece, to say nothing of averting the external coerciveness with which the reforms are being implemented. The deal struck by Greece in exchange for a third bailout in the sum of 86 billion euros ($94.6 billion) calls for the Greek government to slash pensions, raise taxes dramatically, liberalize the labor market, privatize state assets worth some 50 billion euros ($55 billion), and adhere to a strict debt repayment schedule; and there will be no “hair-cut,” or a reduction of the debt, which the Greek government desperately wanted. In essence, the creditors got all that they wanted from Greece. The deal will have to be approved by the Greek parliament, which promises to be a bruising process; only then will bailout money start flowing into the country. Tsipras’ own fate also hangs in the balance, as he will likely be forced to call for a snap election in order to re-legitimize his government.

GOING TO EXTREMES

A final factor to consider is the divergent political cultures created by the economic crisis in both countries. It is a political science maxim rooted in the horrors of Germany’s interwar years that hard economic times are a breeding ground for extremism, as political leaders and movements from both ends of the political spectrum outdo each other in feeding citizens’ cynicism and exploiting their mistrust of a discredited political system. This specter has come a long way in realizing itself in Greece since the advent of the economic crisis, as can be seen in the rise of anti-system politics that preach democratic skepticism mixed with an anti-colonial attitude that stresses how the troika is violating Greek dignity and sovereignty. Purveyors of these views include the ruling Syriza, Europe’s largest far-left party, and the neo-Nazi New Dawn Party, Europe’s most violent right-wing force, which managed to come in third in the 2015 general elections, garnering 6.28 percent of the vote.

In Spain, however, the political environment is appreciably different, as attested by the political movements unleashed by that country’s economic crisis. As in Greece, newcomers to the political scene in Spain are driven by an anti-austerity sentiment; but these newcomers do not share the anti-system attitudes of their Greek brethren. If anything, the opposite is the case. Owing to its roots in the “Indignant Movement,” the massive anti-corruption protests that rocked Spain between 2011–12, Podemos is driven less by ideology than by the desire to cleanse the political system. The party’s biggest electoral wins so far, the election of two progressive women, Manuela Carmena and Ada Colau, to the mayoralty of Madrid and Barcelona, prove the point. Both leaders have made transparency and inequality the centerpiece of their administrations. As it prepares for the national elections, Podemos has dialed down its attacks on capitalism, which makes sense since the party’s goal is to replace the PSOE as the top choice for middle class voters.

Podemos’ counterpart on the right is Ciudadanos, or Citizens. Like Podemos, Ciudadanos went national with the 2015 regional and municipal elections. The party appeals to conservative voters who are fed up with the status quo, especially the arrogance and corruption of the ruling PP, but are unwilling to support Podemos, which they view as too radical. Ciudadanos’ platform stresses individual liberties, transparency in government, and a mix of social democratic and classical liberal economic policies. Although born in Catalonia, Ciudadanos opposes Catalan nationalism, as can be seen in the claim by party leader Albert Rivera that: “Catalonia is my homeland, Spain is my country, and the European Union is our future.”

Certainly, a less desperate economic environment makes for a less radicalized political environment. But there is also something uniquely Spanish about the way in which political extremism has been kept at bay in Spain throughout the years of economic recession. Having endured a bloody civil war during the interwar years—one that claimed the lives of almost one million people—followed by four decades of right-wing dictatorship under Francisco Franco, political forces in Spain are leery of appealing to the masses with extremist proposals. They know full well that the public will not be receptive. It is telling that the Spanish parliament is perhaps the only one in Europe without any representation from the far right, a testament that political moderation remains a trademark of post-Francoist politics.