It has been just over a decade since the beginning of the Spanish financial crisis. Enough time has passed to enable one to analyse objectively whether the changes undertaken by the Spanish government and institutions are producing the desired results. Comparisons with the situation in Italy are revealing.
The Spanish economy officially entered in a recession towards the end of 2018. The spark that brought this about was the collapse of the property market that for more than a decade gave the impression to most developers, bankers, the government and many ordinary people that over-development was the manna falling from heaven to save the country from undertaking much-needed economic and labour market reforms.
Early in 2009 Standard and Poor’s downgraded Spain from its valuable AAA rating to AA+. As usually happens, the Spanish government and international institutions underestimated the seriousness of the debt crisis that soon turned into a financial crisis, and soon after into an economic slump.
The Bank of Spain bailed out Caja Castilla-La Mancha in its first bank rescue operation. It soon had to intervene to rescue other saving banks that were exposed to the crushing property market. It is interesting that Spain’s larger banks avoided the worst consequences of the financial crisis as their business model was built on more international diversification of their activities.
In early 2010 Spain’s economy exited recession and attention was now focused on Greece. However, Spain’s underlying problems soon resurfaced. In 2009 the public deficit hit 11.2 per cent of GDP. The then socialist Prime Minister José Luis Rodríguez Zapatero announced austerity measures including a steep hike in VAT. The Spanish cabinet also approved a labour market and pension’s reform that saw retirement age raised to 65.
In 2011 a centre-right government led by Mariano Rajoy won an absolute majority. Almost one-in-four of Spain’s economically active population was out of work – the highest unemployment rate in the EU. In 2012 recession set in again as weak public finances continued to persist. In June 2012 eurozone finance ministers agreed to lend Spain €100bn to shore up its banks.
In the last decade, Spain recovered fast from its euro-crisis with exports and foreign direct investment surging
Italy was never in need of asking for a bailout, but most analysts agree that the Italian economy poses a more significant threat to the euro than the Spanish one. Contrary to many forecasts the centre-right has failed to garner enough support in Spain’s elections on April 28. At the time or writing, it is not clear what coalition will be governing Spain in the next few years. The socialists led by Pedro Sanchez bucked the trend of other social democratic parties and improved their performance thanks partly to a People’s Party that was tainted by claims of corruption and a divided centre-right that inspired insufficient confidence in the electorate.
However, Spain still faces formidable challenges that relate to the urgent need to reform the pension system, education and labour market. Seemingly endemic corruption and migration from North Africa are other issues that the new government needs to address. The pro-EU socialist coalition is more likely to succeed in addressing these challenges than the hotchpotch coalition that is leading Italy.
The fact that Spain managed to recover and grow economically in the last decade while Italy continues to stagnate is an indication of the more productive strategies adopted by the Spaniards. Spaniards are more open to social change that Italians who remain among the most conservative people in Europe.
In the last decade, Spain recovered fast from its euro-crisis with exports and foreign direct investment surging. Its GDP per person in purchasing-power terms overtook that of Italy in 2017 and is forecast to be seven per cent higher within five years. According to the World Economic Forum, Spain’s infrastructure is the tenth best in the world, while Italy’s in the 21st place.
A significant threat to both Spain’s and Italy’s economic prospects is the fragmentation of the political system. Spain’s ruling coalition is likely to remain weak as party interests will continue to come before national priorities. The separatist agenda of the Catalans will not go away. Educational reform will drag on as it does in other Mediterranean countries whose politicians are locked on short-term political objectives.
If the new EU political leadership after the coming European Parliament continues to be as weak as it is today, political instability throughout the Union will continue to reveal the structural weaknesses that remain unaddressed. However, Italy’s factitiousness and stagnation are more likely to spark the next eurozone crisis than Spain’s political fragmentation.