September 20, 2012 6:50 pm
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Spain: Unfinished business
By Tony Barber
Iberian ire: while austerity measures have sparked protests, Spain’s economic woes have masked deeper political failings
Effort is only effort when it begins to hurt. José Ortega y Gasset, Spanish philosopher (1883-1955)
When Santiago Carrillo, the guiding light of 20th-century Spanish communism, died on Tuesday at the age of 97, one of the first to pay his respects at the late politician’s Madrid home was King Juan Carlos. “A person fundamental for democracy,” the monarch reflected.
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But as the beleaguered government of Mariano Rajoy, prime minister, edges closer to a request for emergency international financial aid, joining Greece, Ireland and Portugal in Europe’s intensive care unit, old Spanish wounds are festering again and new sources of political and social tension are emerging. It is a moment of truth for Spain and for the post-1945 cause of European unity, but the potential repercussions extend beyond Europe to the rest of the world.
Spain has the fourth-biggest economy in the 17-nation eurozone, almost five times larger than that of Greece, and the 13th largest in the world. A failure on the part of European leaders to help Spain through its troubles, and a failure on Spain’s part to execute its ambitious economic reform plans, might wreck Europe’s monetary union and destabilise the global financial system.
Spain’s most visible challenges are financial and economic in nature: banks devastated by the bursting of a 15-year economic bubble, rising public debt, a steep budget deficit, high and potentially unsustainable government bond yields, deep recession and severe unemployment. Collectively, they explain why Spain’s banking system would have collapsed this year without European Central Bank support, why economic growth is unlikely to return until 2014, and why bankers in Madrid think Mr Rajoy probably has no choice but to ask his European allies as early as next month for a formal rescue programme.
Yet these challenges mask a more profound crisis of the Spanish state, a crisis that demands a substantial overhaul of the structures established during the post-Franco transition to democracy in the late 1970s. Spain’s national drama is not just about banks and bond yields; it is political, institutional and regional.
The political dimension of the crisis was captured in an excoriating essay published this month in El País, Spain’s leading liberal newspaper, by César Molinas, a former investment banker who has also worked in government. Within days the article was a talking point all over Spain. “My daughter says it went viral on Twitter,” the author says gleefully.
Mr Molinas blasted Spain’s political classes as a closed elite, deaf to society and blind to the nation’s general interest because of an electoral system in which party leaders restrict voters to choosing between lists of candidates drawn up by the leaders themselves. In such circumstances it should come as little surprise that the main parties – Mr Rajoy’s centre-right Partido Popular (the “People’s party”) and the opposition Socialists – had no credible strategy for hauling Spain out of crisis, Mr Molinas argued.
The gulf between politicians and society is, however, a deformity of Spanish public life that dates from the early post-Franco years. With political and civic freedoms suppressed under the dictator, the founding fathers of modern Spanish democracy were determined to foster strong political parties. They guaranteed the parties various privileges, including access to public funds, and devised the electoral system that minimises voters’ influence over party leaderships.
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The innovations were well intentioned and Spain in most respects established itself in the family of European democracies. But the long-term effects were more pernicious. Mr Molinas, a left-leaning thinker, compares the youthful democracy to Doctor Frankenstein, unwittingly creating a monstrous political class.
Holding this elite directly responsible for a disastrous property bubble, Mr Molinas now believes that electoral reform is essential to produce a ruling class that is less self-serving and more conscious of its responsibilities to the nation. But rightwing critics are no less scathing about certain features of public life. Luis María Anson, a former editor of ABC, a conservative monarchist paper, says politics at national, regional, provincial and local level is far too costly because of the proliferation of asesores – political advisers or consultants – since the late 1970s.
“The asesores, as everyone knows, are a pure invention of the political class and trade union caste to find cosy jobs for relatives, cronies and hirelings,” Mr Anson railed in a polemic seven weeks ago.
Such opinions are often viewed with suspicion in Spain’s outlying regions because they come from the right, closely identified in the political tradition with centralised rule from Madrid and even authoritarianism.
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They say that the expansion of regional self-government since the adoption of Spain’s 1978 constitution is one reason why the nation’s political classes, like the ranks of their advisers and hangers-on, have evolved into an ever bigger leech on the public purse and obstacle to change.
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After Franco, the case for granting autonomy to the Basque Country, Catalonia and to a lesser degree Galicia and Andalucia was unanswerable. The first two regions were home to proud, self-conscious nationalities.
However, autonomy came to be granted to all 17 regions in a compact termed café para todos or “coffee for everyone”. Consequently, the regions have spawned homegrown parties, administrations and interest groups whose raison d’être combines self-perpetuation with the expenditure of centrally allocated public money for which, in most cases, they are not accountable to local voters.
Regions and lower tiers of government are under pressure from Madrid to exercise far more fiscal self-discipline. A constitutional amendment, passed last year, requires the regions to observe strict debt and deficit limits and commands local authorities to submit balanced budgets. It was an overdue reform: the budget deficits of the regions, now denied access to international capital markets, accounted in the first quarter of this year for almost 19 per cent of Spain’s general government deficit.
Tightening the fiscal relationship between Madrid and the regions is, however, an exercise fraught with peril. Hundreds of thousands of Catalans rallied last week in Barcelona, the region’s capital, under the slogan “Catalonia: a new European state”. The demonstration underlined how swiftly secession has caught the public imagination in Catalonia since Spain descended into acute financial crisis in 2010. Short of breaking up the Spanish state, the Catalans might settle at present for a “fiscal pact” giving them more control of their own taxes.
But Mr Rajoy, at a meeting on Thursday with Artur Mas, Catalonia’s leader, yielded no ground on this demand. The uncertainty over Catalonia’s future points to a deeper problem with the post-Franco settlement.
Since 1978 the legal and political balance of power between Madrid and the regions has been in an almost permanent state of renegotiation. The stability that characterises the US and German federal systems is absent in Spain. A comprehensive constitutional reform would help but it will be difficult as long as the economic crisis persists and the Catalan question remains filled with tension.
There are, in any case, other institutional issues that demand attention. One is Spain’s judicial system, penetrated by political interests and plagued with slow-moving courts. (In one cause célèbre, which involved the deaths of hundreds of people from contaminated cooking oil, it took 15 years for government officials to be put on trial.) A second is Spain’s poor education system, even though it boasts some of the world’s highest- ranked business schools.
A third issue is the monarchy. Juan Carlos won admiration for his role in the defeat of a 1981 attempted military coup, but with his advancing years – he is 74 – he has occasionally seemed out of touch. Attacked for making an elephant-hunting trip to Botswana in April while his countrymen were battling hardships at home, he delivered a public apology.
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In coming weeks, the focus will understandably be on the timing and terms of a possible European rescue operation, on the health of the banks and on the prospects for economic recovery. For the medium to long term, the outlook is brighter than often supposed, say some high-level bankers in Madrid.
Spanish business is demonstrating its resilience. Exports are 26 per cent up from their 2009 trough and exceed by 7 per cent the pre-crisis heights achieved in early 2008. In two years, business will regain the competitiveness lost between 1998 and 2008.
Successful companies such as Inditex, the fashion industry leader which is the only European company to have entered the Fortune 500 list since 1975, and Mercadona, Spain’s largest supermarket chain and food distributor, are expertly managed.
Structural economic change is making progress, too. The Rajoy government’s labour market reforms are more far-reaching than measures agreed in Italy or proposed in France. In work contracts they are already eroding the practice of automatic indexation of wages to inflation.
With living standards squeezed and unemployment darkening the horizons of young people, the road ahead will be long and hard – as José Ortega y Gasset, the liberal philosopher, would have appreciated.
But street protests are overwhelmingly peaceful and there is so far no sign that voters will flock to an anti-establishment party of the radical left similar to Syriza of Greece. Such social calm may reflect the closeness of Spain’s family networks but job losses are so widespread that some families lack any breadwinner.
If the social peace is holding, it may owe more to the buoyancy of an underground economy that accounts for up to 20 per cent of gross domestic product. Official statistics that estimate unemployment at almost 25 cent of the workforce are significantly overstated. They take no account either of those who claim jobless benefit while working clandestinely or of others who, like their employers, pay no social security contributions.
Spain still needs large-scale external help to recapitalise its banks and ease it through the debt crisis. But it is building a platform for recovery and its people have not lost faith in their European vocation. What remains is to modernise the structures of government and public life that were designed 35 years ago for a nation only just emerging from decades of repression into the varied and vibrant society it is today.
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Madrid takes wind out of inflated industry
Among the casualties of Spain’s burst economic bubble is an electricity industry that has twice as much capacity as necessary, thanks to lavish subsidies in the boom years for renewable energy companies.
Not before time, the government is getting to grips with a particularly acute aspect of the problem – a €24bn deficit in the power sector that represents the difference between the cost of producing electricity and the subsidised prices paid by consumers.
After months of internal wrangling and disputes with the country’s big energy companies, Madrid proposed last week to slap a 6 per cent tax on power-generation revenues, including renewable energy, as well as levies on coal, nuclear waste output, and petrol and diesel used to produce electricity.
According to the government, these taxes will, assuming the bill is passed, raise €2.7bn a year from next year and prevent the deficit from rising even higher. But the beauty of the proposal, for power companies, is that they will in large part be able to pass the taxes on to consumers. Industry experts estimate that average household bills could rise by 7 per cent from next year.
The implications for economic growth are not so rosy. Consumer demand is already suffering because of mass unemployment, higher income taxes, stagnation or even cuts in wages, and a 3 percentage point increase in value added tax that took the standard rate this month to 21 per cent.
Still, Madrid had little choice but to address the distortions in the electricity market. The subsidies doled out to renewable energy producers during the euro’s first decade transformed Spain into one of Europe’s “greenest” nations, but also encouraged too much investment in wind and solar.
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“The planning and timing of the renewable energy expansion were wrong,” says Pedro Mielgo, a former chief executive of Spain’s electricity network. Wind energy alone accounted last year for 16.4 per cent of electricity generation, but there is so much overcapacity in wind and solar that there is unlikely to be much fresh investment until 2018 or so, says Mr Mielgo.
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With the market looking dormant, investors and developers are moving their business elsewhere, creating a risk that Spain will lose its position at the cutting edge of the renewable energy industry.
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Not before time, the government is getting to grips with a particularly acute aspect of the problem – a €24bn deficit in the power sector that represents the difference between the cost of producing electricity and the subsidised prices paid by consumers.
After months of internal wrangling and disputes with the country’s big energy companies, Madrid proposed last week to slap a 6 per cent tax on power-generation revenues, including renewable energy, as well as levies on coal, nuclear waste output, and petrol and diesel used to produce electricity.
According to the government, these taxes will, assuming the bill is passed, raise €2.7bn a year from next year and prevent the deficit from rising even higher. But the beauty of the proposal, for power companies, is that they will in large part be able to pass the taxes on to consumers. Industry experts estimate that average household bills could rise by 7 per cent from next year.
The implications for economic growth are not so rosy. Consumer demand is already suffering because of mass unemployment, higher income taxes, stagnation or even cuts in wages, and a 3 percentage point increase in value added tax that took the standard rate this month to 21 per cent.
Still, Madrid had little choice but to address the distortions in the electricity market. The subsidies doled out to renewable energy producers during the euro’s first decade transformed Spain into one of Europe’s “greenest” nations, but also encouraged too much investment in wind and solar.
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“The planning and timing of the renewable energy expansion were wrong,” says Pedro Mielgo, a former chief executive of Spain’s electricity network. Wind energy alone accounted last year for 16.4 per cent of electricity generation, but there is so much overcapacity in wind and solar that there is unlikely to be much fresh investment until 2018 or so, says Mr Mielgo.
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With the market looking dormant, investors and developers are moving their business elsewhere, creating a risk that Spain will lose its position at the cutting edge of the renewable energy industry.
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Copyright The Financial Times Limited 2012.
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