From Crisis to Crisis in Spain

by Graeme Herbert

Spain's economic problems and mounting regional tensions cannot be deferred indefinitely.

First published: 15 April, 2014 | Category: Economy, Employment & Welfare, Europe, Spain

On 22 March demonstrators from across Spain converged on Madrid. The size of the protest was impressive. Many had walked to the capital in columns from different areas of the country as a reminder of the hardship being felt by so many Spaniards in the seventh year of economic crisis. Ignored at first by Spain's media, coverage of the 'March of Dignity' has been overshadowed by violent clashes with riot police that broke up the closing stages of what had previously been an entirely peaceful day. 

Media coverage of Spain has been upbeat of late, replete with stories about how the country's economy has turned a corner. The Spanish government has worked hard to sell this message, and for it and its supporters resurgent protest is an unwelcome reminder that for many in this country there are no visible signs of economic recovery. Pro-government media, most of the media now in Spain, seized on the violence to launch a furious campaign to discredit the protest. It seems likely that the riot police were sent in when some demonstrators showed signs of setting up roughly constructed tents in an echo of the protest camp that occupied Madrid's Puerta del Sol in May 2011. At a smaller protest the following week several journalists were amongst those attacked by riot police. 

The ruling Partido Popular (PP) hated the way in which the previous government led by José Luis Rodriguez Zapatero permitted the 2011 camp to continue for several weeks,  and the 15M indignados movement has been one of their targets since coming to power at the end of 2011. An ambitious PP politician, Cristina Cifuentes, was put in charge of security for the capital and has used the position as a political springboard. Two years ago it was relatively rare to see rubber bullets used on the streets of Madrid. As time passes the riot police seem increasingly paramilitary and the use of rubber bullets has become routine. 

The government, unhappy at some judges' refusal to seek exemplary punishments for those detained in demonstrations, is now planning to introduce a security law that will allow it to bypass the courts and impose huge fines (as high as €600,000) on those deemed by the police to have infringed the new legislation. In a country where direct political appointees are placed in senior police positions it is not hard to imagine how the new law will be used. The same law will restrict the right to publish images of riot police in action. Regional and municipal governments in Madrid (both controlled by the PP) are pushing for measures to restrict freedom to demonstrate including the confinement of protests to a dedicated area (manifestódromo). Spain's right may have reluctantly adapted to parliamentary democracy in the transition following Franco's death but in a party where few speak out of turn the authoritarian reflex remains deeply ingrained. 

A hollow recovery 

The government’s economic optimism is not wholly without foundation. Spain is no longer in recession, and the once very real threat of being forced into a situation like that of Greece is no longer on the cards. But the goods news ends there. Two recessions have left the Spanish economy seriously damaged. Even the architects of austerity can find little to be cheerful about for Spain following the application of the policies they advocated. The IMF predicts GDP growth won't go above 1% either this year or next. The European Commission is a bit more optimistic, but no serious prediction suggests a return to growth levels that might make any difference to an unemployment rate running at over 26% at the end of 2013. 40% of the unemployed have used up their entitlement to benefits, creating a long term poverty trap. 

Some observers estimate that Spain will not reach pre-crisis levels of output before the end of this decade, twelve years from the beginning of the crisis. The most likely outlook is that recession has been replaced by stagnation. The government is betting all on 'internal devaluation'—a euphemism for cutting real wages. The argument is that Spain became uncompetitive during the boom years and that given the country's low projected growth rate the only way to create jobs is for wages to drop. 

Key to this strategy was the most recent of a series of labour market 'reforms' that have been introduced in Spain in recent years, removing sectorial agreements and allowing companies to let wage and condition agreements with unions lapse. Coupled with a further relaxing of the conditions in which workers can be legally sacked, this change has spurred a steady decline in the number of workers employed with permanent contracts and a corresponding shift to temporary contracts and part time work. Over 90% of new jobs come with some variety of temporary contract. The result: wage levels are indeed falling. Whether this will reduce unemployment is, however, a matter for some doubt. 

To put the competitiveness argument into perspective, the Spanish economy's only success story in the last few years has been exports. Unfortunately for advocates of internal devaluation the improvement in export performance pre-dates the adoption of any austerity measures. The pro-austerity lobby cherry picks data that makes Spain's situation look better than it really is. One of the things it chooses to highlight has been the balance of payments which, unusually for Spain, has occasionally been positive in the crisis years. You wouldn't think the effect of close to six million unemployed and falling wages on domestic consumption and imports needed spelling out. 

Meanwhile, Spain's public debt continues to rise as the policies we were told would solve the problem have yielded a deficit reduction of less than 2.5% at the cost of an extra million unemployed. The EU did eventually recognise, albeit privately, that the recipe it foisted on Spain wasn't working. The relaxation of deficit targets is what stopped the slide towards a Greek style catastrophe. Recognition that things are not going to improve significantly for several years is leading many Spaniards to try their luck overseas. Often these emigrants are the better educated. In an economy where most of the new jobs created have been in tourism and seasonal agriculture there are few prospects for those who hope for a long-term career. The government is delighted with this development which, along with those who simply abandon the labour market, helps to bring down the unemployment total. 

Crony capitalism 

Spain has no economic model for the future. Education, including investment in research and development, has been one of the main victims of austerity. Spain's employers have never had much interest in stable long-term employment, a key reason why Spain's unemployment increased so dramatically when the crisis hit. None of this is changing in the exit from the crisis. The economy looks more like it did 50 years ago than one prepared for the future. Except that much of the industry has gone and construction has halted with hundreds of thousands of unsold homes awaiting buyers. 

Crony capitalism counts for more than sustainable development. The decisive factor shaping economic policy is a nexus of interests enmeshing the political class and the energy, banking and construction sectors. The bailout of Spain's financial sector, done at significant and irrecoverable public cost, was a banker's dream. The cajas—regional savings banks that had been the main lenders for the local economy, and which were hardest hit by the end of the construction bubble—have been wiped out in the restructuring process. The bigger banks have picked over the wreckage and taken the bits they like the look of, leaving the rest for the public debt. Bankia, Spain's biggest defaulter, had very close connections to the PP. The larger banks have spent the crisis years feeding off the funds made available by the European Central Bank, far more profitable than the real economy. 

Cronyism reaches beyond the banking sector, as illustrated by a recent decision to use public funds to rescue several toll motorways that have failed to produce the expected returns. Construction of these roads was closely linked to property development projects and based on hugely optimistic estimates that did not survive the property bubble's collapse. The consortiums running these roads are effectively bankrupt, but the companies forming them are amongst Spain's largest and for the most part are financially secure. Socialisation of private losses becomes the norm.

The energy sector is another beneficiary of these cozy arrangements. Electricity prices increased significantly during the crisis years, yet consumers are told that we owe ever greater sums to the electricity companies to compensate for past price regulation. The system becomes ever more complex and opaque as former ministers fill the boards of the energy companies. Renewables have been dealt a death blow, even though it is an area where Spain has unarguable potential. Exporting companies or individuals who generate their own energy have been hit with a bizarre new toll to compensate the private monopolies. 

Political backlash 

The government has ridden the storm of austerity and set itself the task of preserving power whilst managing declining living standards for all except the wealthiest, who inhabit a de facto internal tax haven. The PP has also survived, for the moment, the impact of a series of corruption and illegal party financing cases that have implicated the whole PP hierarchy up to and including Prime Minister Mariano Rajoy. Even the king's daughter is awaiting a decision on whether she will be charged with tax fraud. Spain's elite have operated for years with a sense of impunity. Only the determination of a few judges ensures these cases continue, while the government exercises its influence over prosecutors, the police and even the tax authorities in their bid to ensure the trials never happen. 

This corruption has provoked widespread anger against what many people rightly see as a political caste living a life of privilege at public expense. Opinion polls since 2011 have shown a significant drop in support for both the PP and its main rival, the Spanish Socialist Workers' Party (PSOE). It is unclear whether this decline will persist—recent polls suggest it may have bottomed out—and where disillusioned voters are going. Two smaller parties have clearly benefited: Izquierda Unida (IU), to the left of the PSOE, showing poll ratings of 13-14% compared to 6-7% in the last election, and Unión Progreso y Democracia (UPyD), formed by a breakaway from the PSOE but fishing for votes on the right with a strong Spanish nationalist message. Abstention also seems to be increasing. 

The true map of public opinion will be revealed next month in elections for the European Parliament. The vote will be Rajoy's only electoral test before municipal and regional elections next year. These elections traditionally have a low turnout and the PP seems to have adopted a strategy designed to keep it that way. Abstention in Spanish elections is traditionally more of a problem for the left than for the right and the PP will claim victory with a minimal advantage over the PSOE. Like the UK, Spain has an electoral system which favours the bigger parties but this advantage doesn't count in European elections where the result is proportional to votes received. Smaller parties can therefore expect to achieve real gains, even if a Syriza style breakthrough looks unlikely. 

Another consequence of voter disenchantment is a multiplication of smaller platforms and parties looking for support in May. Some of these are very personal initiatives. Podemos (We Can) seeks support from the generally anti-party constituency surrounding 15M and the indignados but is based around a single leading figure. Elpidio Silvia, the judge who is facing trial for daring to imprison a banker, is also forming an electoral platform. Then there is the eco-socialist party Equo, looking to unite green politics with those on the left who reject the overbearing influence of the Spanish Communist Party inside IU. Even the PP's hegemony over the right is being threatened by the emergence of the ultra right Vox.  

Regional tensions 

There is also the issue, not trivial, of whether Spain in its current form can continue to exist. The constitutional settlement of the transition following Franco is coming under strain. Spain's parliament has rejected the attempt by the Catalan government to hold a referendum on independence for Catalonia, but the issue will not go away. The contrast with Scotland and the UK could not be sharper. Both the PP and the PSOE reject the idea of such a vote and Spain's written constitution doesn't permit any notion of regional self-determination. Rajoy cynically invites the Catalans to propose a constitutional amendment if they don't like the current system, knowing full well that the PP can and will veto any such attempt. 

Catalonia's independence movement has been strengthened by several factors. An attempt by Zapatero to reform the autonomy statute of Catalonia with mixed results left some nationalists seeing independence as the only solution. The economic crisis undoubtedly plays a part, as the Catalan government has shifted all responsibility for austerity measures on to Madrid. This is rather disingenuous, since Catalonia is governed by a right wing coalition every bit as reactionary and corrupt as the PP. Money is the central issue for many—Catalonia is a net contributor to Spain's central government tax receipts. There is a redistributive effect in play which means that other wealthier regions like Madrid also collect more money than they have to spend as a region. This essentially selfish argument is commonly used to present an image of the rest of Spain living the good life at Catalonia's expense. Anyone who knows the reality of Spain's situation after so many years in crisis ought to see through that one. 

Catalonia's premier, Artur Mas, is playing a game of calculated ambiguity in which his own political survival comes first. Yet with the PP in Madrid stonewalling any movement towards compromise, and with nationalist rivals leeching support from his governing coalition, Mas's room for manoeuvre is limited and he cannot afford to back down. Mas will no doubt continue with preparations for a referendum in November that legally he cannot hold. Or else he may call elections as a plebiscite on the issue, assuming his rivals will join with him in a nationalist front. Rajoy continues to act as if he sees no problem. The situation could turn very ugly, as the PP drives more Catalans into the pro-independence camp whilst denying the possibility of any test of popular will on the issue. 

The Basque Country, too, has a problem that cries out for a solution. ETA seems genuinely prepared to put an end to decades of armed activity, but there are no visible corresponding moves on the part of Spain's government to make normalization possible. The PP has spent years exploiting terrorism for electoral gain, its disgraceful attempt to manipulate the Madrid train bombings in 2004 being perhaps the best known example outside of Spain. By putting ultra right supporters in charge of terrorist victims associations to use as a political lobby it has created a monster which threatens any attempt to reach a final deal over ETA. International mediators trying to help the process are subjected to extraordinary abuse from the Spanish right, and the prospect of losing votes to Vox or UPyD deters the PP from acting. 

The situation recalls the attitude taken by John Major's government to the IRA truce in the 1990s, that if there are no bombs then nobody needs to do anything. ETA threw away its chance of a deal with Zapatero's government by planting a huge bomb in Madrid airport. There is little prospect of resurrecting the political process that bomb destroyed, but some kind of Northern Ireland style deal on ETA prisoners could offer a way forward. The government's demand for total ETA surrender is never likely to be met and letting the situation fester only increases the chances of some kind of ETA splinter group forming. 

Spain has a government intent on giving the impression of change whilst doing everything it can to maintain the status quo intact. Despite protests and occasional setbacks the PP remains very much in charge and able, thanks to an absolute majority and a disciplined party, to push through all of its measures with only cosmetic concessions. But the country's continuing economic problems and mounting regional tensions cannot be deferred indefinitely. 

Graeme Herbert has lived and worked in Spain for the last 17 years, arriving just as the country's economic boom began.

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