Spain in crisis: the role of the EU

Summary

Until 2007, Spain was the EU’s ‘economic miracle’ but now is the EU member state with the highest unemployment rate as well as a number of other serious problems. The present economic crisis has led to severe problems for the country’s economy and society. Part of the European periphery, Spain is now being subjected to tough austerity policies because of its level of debt, particularly its high level of external debt. Spain’s integration in the European Union and the Eurozone has played a major role in the boom and deep crisis of the country.

A brief snapshot of the Spanish economy

During the period from 2000-2007, the Spanish economy was booming. Alongside the “Irish Tiger”, the Spanish economy grew rapidly; it was admired for its liberalisation processes, its new openness to international markets, and for its new emerging global players such as Telefónica, Ferrovial and Banco Santander. US President Barack Obama’s Transport Secretary visited Spain to see the impressive new high speed train lines. In 2007 unemployment was at its lowest since the transition to democracy, even after the country had absorbed more than 4 million economic immigrants in the preceding decade. The housing market was highly dynamic and prices surged. After having surpassed Italy in GDP per capita terms in 2007, the then prime minister J.L Rodriguez Zapatero felt so confident that he announced Spain would soon surpass France as well.

However, the social picture was less favourable. Real wages had increased very little since Spain joined the EU, while the share of wages in GDP had decreased. Expenditure on social services such as education and health was well below many other European countries. The overall distribution of income was more unequal and the risk of poverty higher than in the rest of EU15. The so-called “Spanish economic miracle”, as we will see, was based on very shaky foundations. So, when the global financial and economic crisis erupted in 2008, the Spanish economy’s house of cards collapsed.

Economic integration and the European periphery

European economic integration has brought together countries with very different productive models and varying degrees of competitiveness. Industrial specialisation in the European periphery economies has been mainly based on maintaining competitiveness by keeping costs low, in particular labour costs. This means using productive processes which have a lower added value, second rate technology and a high proportion of low qualified labour. This has been Spain’s model of industrialisation. To add to the problem, during the last few decades, European investment and industry has increasingly relocated to countries such as China, India, and particularly to the Central and Eastern European states.

The process happened in reverse in the core EU member states such as Germany and The Netherlands. Specialising in high-tech industrial sectors and services and profiting from their privileged competitive situation in the European and global context they were able to maintain a constant current account surplus thanks, in large part, to demand from the European periphery. The result of these very different dynamics in the European Union has been a trade imbalance and a growing divergence in competitiveness between the centre and the periphery.

Therefore, a feature of Eurozone economies is the confluence of countries with continuous current-account deficits, geographically located in the periphery, while countries located primarily in the central area, particularly Germany, have a surplus. Both dynamics are negatively correlated in the sense that the deficits of the first are the surpluses of the latter, a situation that has resulted in a structural divergence between both groups of countries.

The peripheral European countries’ external debt has been financed mainly by financial institutions in the central countries, with funds which originate from the above-mentioned trade surpluses. Thus a circle was established: the banks of the central countries provided credit to the periphery countries for them to buy goods produced in the central countries.

Before the crisis, Spain had one of the highest levels of external debt. Without downplaying the competitive decline of the Spanish economy, the adoption of the euro has been key in this process as it allowed an unfeasibly high external deficit for many years without anybody in power reacting to correct this. Less competitive EU member states, like Spain, lost their main strategy for correcting external imbalances (devaluation) and were submitted to the ECB’s monetary regime, an institution primarily concerned with the interests of the core EU member states.

The role of the European Union in the integration of the Spanish economy

The EU has had a huge impact on the Spanish economy. Immediately after Spain’s accession (in 1986, the year of the Single European Act, establishing the Single Market) European investors were attracted to this market. However, they were more interested in buying existing industries than expanding or improving productive capacity. The Single Market also turned Spain into a good market for products manufactured in the central countries. An important number of small industries disappeared. A high external deficit developed that could only be solved by devaluing four times in two years (92-94) but of course, after the euro no such instrument could be used.

The Maastricht Treaty (1992) and the conditions to join the Economic and Monetary Union led to a tough adjustment programme at the start of the nineties which the economy did not recover from until 1995. The country became a full member of the eurozone in the first group of countries.

The Spanish are proud of being in the European Union and using the euro, but the general population has not seen many improvements come from ‘Europe’ even though the country has been a net recipient of European funds of around 1-1.5% of its GDP since accession and will remain so until 2013, when Spain should become a net contributor to the Union. But no policies exist in the Union to improve the productivity of member countries. EU funding, mostly from structural and cohesion funds, was mainly directed towards agriculture and regional development. Additonally, a large proportion of these funds were used to build infrastructure (many absurd, fi only China has more km of high speed train).

Nevertheless most of the population and especially those in any position of leadership or power considered that being a member of the EU brought advantages.

The ‘domestic’ pattern of growth: housing bubble and ‘national champions’

In brief, during the 1990s the Spanish economy was heavily dependent on foreign capital that had already started to relocate towards Eastern Europe, Asia and North Africa. Locally owned capital, in general terms, remained uncompetitive internationally. The economy was driven by internal demand, tourism and thanks to the EU’s Structural and Cohesion Funds investment in infrastructure went beyond what would have been possible through the Spanish state. Yet, in the late 1990s and early 2000s, this recipe for failure was transformed into the “Spanish Economic Miracle”. This so-called miracle was sustained by two major sets of events. The most prominent, the housing bubble; the other, the internationalisation of a few Spanish-based holdings created from the privatisation of state companies and monopolies.

From 2000 the expansion of the construction industry in Spain was spectacular. There were several reasons, including the lack of profitability in the manufacturing and service economy which led to small profit margins in the real part of the economy and the shift of investment to other undertakings. Also a significant building industry existed already. To add to this, during the second half of the nineties, very permissive legislation for building and urbanisation was introduced, alongside a number of important deregulation measures. This was coupled with the availability of abundant and cheap credit both for the building and real estate industry and apparently cheap mortgages for families.

From 2004 more than 500,000 apartments and houses were built per year, and in 2005 more houses were built in Spain than in France, Germany and the United Kingdom combined. This created a housing stock of 23 million units in a country of 45 million inhabitants. The construction boom led to a period of apparent prosperity between 2003 and 2007, because building is labour intensive and uses less qualified labour, resulting in providing plentiful employment. By 2004, 1.8 million new jobs had been created, unemployment had fallen to a record low of 8.1 per cent of the active workforce, and 60 per cent of all new jobs in Europe were created in Spain.

But it soon turned out that this prosperity was artificial. At the end of 2006 the big construction companies were already showing signs that the building boom could not continue given the extremely high price of houses. And in the second semester of 2007, with the United States’ financial crisis and the global freezing of credit, the whole house of cards came down.

Another ‘domestic’ aspect of Spanish economic development is the existence of a few powerful firms in strategic sectors, popularly known as ‘national champions’. The capitalist development of Spain has also meant that a few big Spanish holdings have been developed, some of them from former public industries that were privatised during the 90s. At the beginning these holdings tended to develop in Latin America, but their power permitted them later to expand the world over.

Yet, at present, few firms and banks are significant in the global economy: Repsol (petroleum), Sacyr (building), Aguas de Barcelona (itself owned by Suez-EDF, but highly active in Latin America), Telefónica, Banco Santander & Banco Bilbao Vizcaya Argentaria (BBVA) and some others such as Ferrovial (civil engineering, utilities), Abertis (utilities) Zara and Mango (fashion).

Spain has had no solid and permanent productive development but has been surviving through a model of low productivity, low wages, high labour precariousness and enormous ecological deterioration. For many years, the boom in the real estate industry hid the weaknesses of the Spanish productive system, but the crisis has exposed the poor foundations that the Spanish economy was based on. A heavily-indebted country, with very few advanced sectors, a lack of technological development and a hypertrophied building and real estate sector. A poor recipe for future development.

The crises, indebtedness and adjustment policies

When the financial crisis started in the United States and spread through the world, the Spanish authorities and even the financial sector reacted quite optimistically. But after the general election in March 2008 the government had to face the crisis. For two years, 2008-2009, the Socialist Spanish Government adopted a whole set of rather chaotic measures. They were mostly aimed at helping the financial industry which was under pressure from international markets and Spanish big investors. Yet, unemployment was already above 19% of the working population in 2009.

But this was only the beginning. The situation kept deteriorating. Growth, investment and consumption collapsed, unemployment increased and many firms asked their workers to accept lower wages in exchange for not increasing lay-offs, and workers accepted. Temporary jobs increased (more than 94% of new contracts were temporary). The two biggest unions in the country (CC.OO and UGT) were totally amenable to the government’s wishes.

Between 2008-2010, the deficit and debt of the Spanish economy increased rapidly and its dependence on external credit became clear. But debt has to be classified: the Spanish public debt is low in comparison with other countries but private debt is high, especially external private debt. Therefore a question may be, why does the Spanish population have to tackle private debt (mainly banks and big enterprises), is it not possible to leave the debtors of private debt deal with their creditors and both with their financial problems?

The IMF and especially the EU demanded the Spanish government apply adjustment programmes and in 2010 there was an important change in policy. The government of Zapatero approved a tough austerity program in May 2010.The budget was cut by 50,000 million euro for the next three years, leading to, among other things, a reduction of 5% on average in public sector wages, a one-year freeze in pensions, and reform of labour legislation (liberalisation) and reform of public pensions (privatisation). The government totally changed its priorities and the only objective of policy from then on became the reduction of the public deficit and control of public debt.

The crisis has deepened as would be expected from these measures, but this has not prevented that many similar steps have been adopted since. The situation of the country in 2010-2011 is one of high unemployment, weak demand, a significantlevel of debt, especially external debt, and a very weak productive system. Spain’s real problem is not its debt, but the weakness of its productive system.

During the course of 2011 and 2012, Spain has been subjected to a number of increasingly severe adjustment programmes as well as to the erratic measures imposed by the EU. In the summer of 2011 the Spanish government changed the Constitution to make it impossible to incur a budget deficit. A few months later, the Spanish people voted overwhelmingly in favour of the conservative party (Partido Popular), which has since then intensified austerity measures and imposed further structural adjustments. One of the more recent and most contested measures has been labour reform to liberalise labour standards and make dismissal cheap, which has triggered the Unions, until now quite passive, to call for a general strike for March 29.

The role of the European Union in Spanish crisis management

In the first phase of the crisis the presence of the EU was limited to the ECB’s monetary rescue policy. Only when the euro itself came under question, did the EU begin to react more actively. Since 2010, the Union has taken a great number of rather erratic measures in order to maintain the euro and the survival of the Community (the Six Pack on economic governance, Competitiveness Pact, Pact for the Euro, Fiscal Compact). It is to be strongly doubted if these measures will ever achieve their objectives.

The effects of the austerity drive are frightening for Spain. Besides the negative consequences that the lack of growth in the main European countries of the Union may have for Spanish exports and the Spanish economy, the measures in themselves are very worrying since they strengthen the austerity requirements in an endless process that seems to induce more and more exigent and unjust measures every day, requiring that balanced budgets be written into the constitutions of the eurozone countries and proposing even the withdrawal of European funds from those countries that do not fulfil the requirements of ‘fiscal stability’. Once more the weakest will have to pay. The proposals on economic governance are extremely dangerous since it seems that the little space that was left previously for progressive policies from member states is being seriously eroded.

As far as Spain is concerned this Europe, the neoliberal and post-neoliberal Europe that has presided over the Community since our accession has not been of great value to our country. It may be that our economy has grown by a few points more than if we had not joined, and even that is not certain, but it seems to us that belonging to the Union has instead exacerbated the previous imbalances we traditionally had. The prospect of a more powerful European Union is not that attractive seen from the perspective of a peripheral country like Spain. No surprise that most people in a country who used to be deeply pro-European are increasingly eurosceptic.

The effects of the crisis

Unemployment is the key problem for the Spanish population, together with uncertainty for those who are working and the degradation of wages and labour conditions. Unemployment is now higher than ever: over 5 million workers, 23% of the working population, with youth unemployment above 50%. Temporary work has become the norm, more and more people are being evicted from their houses, social services have deteriorated, and no improvement is even on the table. A general atmosphere of hopelessness, fear for the future and despair dominates the country.

The heaviest cuts imposed by the austerity measures are affecting the nucleus of the welfare state: pensions, health care and education. That Spain cannot grow and create employment with these austerity policies is absolutely clear. Even business is not doing so well: overall in 2011 there was a 5.5% decrease in profits compared to 2010 when companies did very well. Nevertheless in 2011 the 35 biggest companies quoted on the Stock Exchange had 33,000 million euro in profits, and three of the main corporations – Telefónica, Banco Santander and Banco BBVA – accounted for 13,755 million euros profit.

The measures that are being taken will make the recession permanent and deeper. What is more, they are not helping to pay the debt and even paying for its interest might be difficult.

A glass ball for the next decade and beyond

If the measures are not going to solve the problems of the countries concerned, why are these measures being taken? Do the decision makers still believe that saving on other expenses will allow them to pay off the debt? The difficulty is evident. Or is it possible that decisions makers have been persuaded that supply economics work? That by creating the ‘right’ conditions for business – low wages, ‘very flexible’ conditions of work, low taxes, minimal regulation, etc – growth and employment will resume?. The evidence points directly in the opposite direction. That leaves only one possible explanation: mounting government debt is being used to scare populations into accepting all these austerity policies as unavoidable and necessary. In this way the economy is being restructured fundamentally along lines that have been set out by national and transnational corporate elites, leading to a devastating attack on workers’ rights and on the wider rights of European citizens.

By redesigning macroeconomic policies, productive systems and labour relations, and by destroying the welfare state in favour of the interests of private capital, this corporate agenda is leading the EU countries into a new phase of capitalism in which profits for a minority will be the only relevant variable and everything else has to totally submit to this.

Since May 2011, young and not so young people have started to react. Thousands of them gathered in the main public squares of cities and towns to protest. Many different kinds of people gathered: young people who were angry because the general situation (Indignados), others because of the fake nature of our democracy (Democracia real ya), others because of the lack of opportunities (Jóvenes sin futuro), and many others who were there because of their shared anger. Existing social movements have integrated themselves into the groups and have helped to give more political content to the gatherings. The movement is known under many names but perhaps most often as the M-15 movement, named after the day when it all started (May 15, 2011). Against all expectations these movements have continued. They are debating and discussing politics and social issues with creative and interesting horizontal structures for doing things (assemblies without leaders). Public opinion is totally on their side.

Nobody knows what will come out of that movement. They are so different from most political and social work taking place until now that it is difficult to assess their future. But for the time being they have reacted, shown their rejection of the present situation, expressed their frustration and anger, and brought a spark of hope.