Spain’s economic recovery languishes amid graft scandals

Agora Contributor: Arturo Lopo

Overwhelmed by corruption cases, Spain is struggling to recover from a two-year-long recession that is reflected in an unemployment rate that still remains over 25 percent -the second highest in the euro zone after Greece- and in a sluggish credit flow. 

The Spanish Prime Minister, Mariano Rajoy, has rebuffed opposition criticism over his economic policies by pointing to a trade balance surplus, January’s three-year bond yield falling to a record-low and a declining risk premium that has intermittently dropped below the 200 basis points for the first time in two-and-a-half years.

Analysts and European officials agree that these are signs which confirm their belief that “the worst is over” and praise the tough reforms carried out by the right-wing People’s Party government.  Despite these figures apparently signaling an imminent economic recovery, seven out of ten businessmen said they would not be hiring extra employees for another year or two, a Deloitte-El País survey has shown.  

Indeed, the International Monetary Fund (IMF) and the European Commission advised Rajoy to launch a second round of labor market reforms, easing its rigidity and narrowing differences between temporary and permanent contracts. What official data tell us is that, even in high tourism periods, the labor force is decreasing, the destruction of jobs continues and salaries’ keep falling.

Moreover, the youth unemployment rate climbed up to 57.7 percent in November; double the European Union average in (EU) and the highest in the 28-member bloc, according to Eurostat.  Given the unprecedented wave of emigration among well-educated youngsters, the Spanish government vowed to make the struggle against youth unemployment a pivotal policy during this parliament.

Esther, 26, worked for a leading construction company in Madrid as an intern for eight months. She had just graduated as a computing engineer but did not receive any remuneration. Esther, who refused to give her surname for fear of losing her current job, moved to an IT company that pays her 350 euros per month with no hope of improving her work conditions in the long-term. As a consequence, she had to move back in with her parents.

“One of my former colleagues told me that when she had the final interview, the head of the human resources department suggested to her and another candidate that the one who would reduce her salary the most would be chosen for that job,” Esther added that it was “not the first time it had happened”.

Better finances, weak growth

In this context, a progressive improvement in the Spanish financial sector is fomenting certain optimism in the Government; though, it is a double-edge rationale.

As big companies do not expect an increase in hiring despite reporting profits last year, a push on lending is not expected even though the main Spanish banks’ saw their profits surge in 2013. Analysts warn that Small and Medium Enterprises (SMEs) could face an even worse year after seeing the highest rate of company shutdowns since 2007.

In their last report on Spain’s rescue programme, the troika warned thatprivate sector lending is expected to bottom out in 2014.”

This banking sector sensitivity can be explained by the Spanish banks’ strong dependence on emerging markets, such as Latin America and, as some analysts point out, by the fact that they are still paying for the real estate bubble’s excesses. For instance, Spain’s BBVA, Caixabank and Popular reported better capital strength but rising bad loans in 2013.

Beyond these timid financial symptoms of recovery, Rajoy yearns for positive growth figures that can vindicate two years of tax rises, social welfare cuts and controversial reforms, which broke the majority of his electoral promises and undermined his political credibility.

The latest forecasts came with good news to Spain, the fourth largest economy in the eurozone. In January, the IMF upgraded the growth outlook for 2014 to 0.6 percent of Gross Domestic Product (GDP), above the 0.5 percent rate calculated by the European Commission but lower than the 1 percent estimated by Spain’s government. 

Madrid hails these figures as the long-awaited green shoots of the economic recovery, leaving behind a 1.2 percent of GDP contraction in 2013 and building on the upturn of 0.3 percent in the last quarter of the year.   

That is Rajoy’s trump card. He trusts that he can get Spaniards’ confidence back and can conceal not only his highly unpopular measures to gain competitiveness -Berlin and Brussels’ sacrosanct mandate to tackle the crisis- but some of his government’s most controversial reforms and the array of corruption scandals that has engulfed the ruling People’s Party.

No peace for Rajoy

The latest reform has been the abortion law, which permits the termination of pregnancies only in cases of rape or serious physical health risks to the mother. Becoming one of the most restrictive abortion laws in Europe, it rolls back a constraint-free law until the 14th week of pregnancy.

Thousands of people have marched in the streets of several Spanish cities, demanding its withdrawal and the resignation of Justice Minister Alberto Ruiz-Gallardón, the driving force behind the new regulation.

As criticism swelled, division started to emerge from the ruling party and many of its prominent members called for a revision. In Spain, it is rare that lawmakers speak out against any of their party’s policies.

Furthermore, cuts in education and healthcare fueled massive protests against the reduction of the national scholarships and Erasmus scheme as well as the privatization of the health care system in the Region of Madrid, which has sinsce been barred by the region’s Supreme Court. This is considered the first victory instigated by the continued protests.

Yet, Rajoy’s greatest political challenge is poised to be Catalonia’s referendum of independence, expected to be held on November 9. Spain’s prime minister argues that the vote is “illegal” and that an independent Catalonia would be out of the euro and the European Union, whereas the Catalan president, Artur Mas, cites the people’s will to proceed.

Thus, the Spanish and the Catalan governments have found themselves in a standoff, waiting to see who gives up first. The Constitutional Court will have the ultimate word and may end this political turmoil. In saying this, nationalism in Catalonia has been reinvigorated in such a way that a simple cancellation of the referendum would irrevocably deepen the wounds between Madrid and Barcelona.

“Rajoy did not know how to answer [to the referendum], sparking a popular reaction in Spain in favor of the territorial unity and against the secessionist pirouette”, says Luis María Anson, an analyst and columnist of El Mundo newspaper.

Josep Ramoneda, a Catalan philosopher and journalist, justifies these developments as the outcome of the prime minister’s lack of a political project. “That is because it is shameful. Rajoy is not acting on politics as a way of dissimulating the policies he is carrying out,” Ramoneda noted.

As the European elections approach, polls have shown an alarming fragmentation of the vote that threatens the hegemony of the two main parties in Spain –the PP and the Socialist Party (PSOE). Not because of the PSOE’s rise, but a colossal fall of the PP, the centrist and leftist parties are gaining presence as alternative voices –and also virtually free of corruption.

Sweeping corruption

Signaling that the crisis has also an ethical side, corruption and politicians have become the second and third biggest concerns for Spaniards respectively, the latest CIS barometer said. In addition to this, the European Commission published a report that indicates that 95 percent of the Spanish people think corruption is widespread in the system, just behind Greece.    

Adding to the political specter, the Royal House has not averted corruption scandals either. As a consequence, the popularity of the Royal Family, that has been pursuing more transparency, has plunged. The King’s son in law, Uñaki Urdangarin, a former handball player, is accused of tax evasion, embezzlement, perversion of justice and false statements after diverting public funds through a non-profit organization. His wife, Princess Cristina de Borbón, has also been accused of money laundering and tax crimes using the same procedure, which originated in a probe over the irregular public tender of a sports centre in Majorca.

The ramifications of the case resulted in the implication of some of the most influential members of the Royal House, but also of several high-level officials in the Region of Valencia, including the former regional president, Francisco Camps, who was also linked to probably most widespread corruption scandal in Spain, known as ‘the Gürtel case’.

Popular Party ministers and former ministers, regional presidents, senior officials and businessmen have been embroiled in the ‘Gürtel case’, whose investigation stretches on five years. Handbags, suits, birthday parties, trips, wine and ultimately illegal extra payments -uncovered by the former PP’s treasurer Luis Bárcenas- were given to politicians of very diverse ranks but especially those in power. According to the leaked Bárcenas’ documents, Rajoy also received extra payments over several years, although he denies it.

The region of Andalusia, governed by the PSOE since 1978, is the epicenter of two other major corruption scandals. For years, the second largest trade union, the UGT, handed over false bills to the regional government that, as an official estimation indicated, could amount to around 1.8 million euros. In the second graft case, seven former officials from Andalusia’s government were imprisoned for belonging to a network that, as the judge put, “favored relatives, friends and people related to high-level officials of the government or PSOE”, diverting €136 million of funds aimed at training, unemployed people and SMEs.

Spain is back?

With a report entitled ‘Spain Is Back!,’ JP Morgan recently celebrated the “encouraging” and “significant progress” in implementing reforms and adjustments that have triggered “enough dynamism” for growth of 1 percent of the GDP this year.

Today’s tumultuous political environment cannot be ignored. The stagnant public deficit and growing debt will define the coming years’ agendas, provided financial stability remains. According to the European Commission’s economic forecasts, Spain’s deficit won’t be lower than 6 percent by 2015. Brussels set a 3-percent deficit target for 2016.

Meanwhile, the debt will be climbing above 100 percent, to dangerous limits that could result in more austerity measures. Since the beginning of the crisis, Spanish debt has doubled in size. Spain, which was one of the few countries without a debt problem previously, now has one.

“In the context of global economic stability, the Spanish economy is expected to continue its moderate recovery in 2014. While we expect some improvement in housing and credit market conditions, lack of progress on fiscal consolidation raises concerns over the outlook for public debt,” Ángel Laborda and María Jesús Fernández, both economists at Funcas, argued in a recent report.

As ECB officials have said, unless it changes its trend, public indebtedness will “become a great problem”. Spain could go“from being a country with deficit problems, to having debt problems.” It’s certain that there is still a long way to go.

*Arturo Lopo is a journalist working at the Spanish news agency Europa Press and author of the blog Spanish Sphere. You can follow Arturo on Twitter: @ArturoLopo

3 Comment(s)

  • Posted by: Atrium

    In moments like these the citizens need high-level politicians in Europe and, also or more, in Spain. We don't have it.

    Our politicians are wrapped in their own loops, prioritizing actions increasingly remote from the needs of the citizenry.

    Where there is such an aggressive plan, equal that to lower the State deficit, for a drastic reduction of youth unemployment? Where?.

    That's not important .... They are young, they have time, but my re-election is in the short term.
    It's life.

  • Posted by: Still_Another_Greekboy

    I would be wary of assuming that the austerity measures implemented in the periphery countries and their subsequent impact on EU common goods do not have a counterpart in the other EU countries.

    Even German with its (not so) "booming" economy has its share of low wage workers and "mini" jobs. And what to say of Agenda 2010 whose aim was to make the economy more competitive and largely accomplished this by slashing welfare payments and making it easier to hire and fire employees. And what to say about France where such moves are in the works.

    In fact, I would argue that today Greece is being used as a scarecrow and a bogeyman to scare European nations into accepting what would otherwise be unacceptable to them - e.g. "if we don't cut social spending (raise taxes, change labor laws, [fill in the blank], etc.) we will end up like Greece.

  • Posted by: Tsigantes

    Mr. Lopo does not mention Rajoy's roll back of the Spanish Constitution's right to protest, and police clampdown in Spain on political protest. That is, it has become an inditeable crime to protest without government permission.

    Granted that Macropolis is a political economic blog, it is striking to a mere citizen like myself that the sum total of EU implementations in the periphery countries always depends on the destruction of EU common goods (health, education, pensions etc.) and rollback of rights (labour rights, access to health, minimal standard of living as defined by the EU, right of assembly, etc). Of course these rights and goods can be intellectually dismisssed as fantasies, but the EU was sold in its later stages to its constituent nations on exactly these terms and are enshrined in its law and acquis.

    The simple fact now is that not only the 'working class' but also the middle and upper middle class without powerful connections (the majority) in periphery countries face a future of salaries insufficient to support life (if they have jobs) and elimination from social welfare access altogether if they don't. We watch also the step-by-step elimination of social welfare too. And this is apparently only a mid-point on the way to economic 'competitiveness'.

    Thus there are 2 conversations. One about the 'success' of EU / ECB measures from those comfortably placed and (one assumes) benefitting from them. The other conversation is amongst the marginalised, affected majority - the citizens, including doctors etc. - who see no future but poverty and death. Unless they can change things or escape. This state of affairs is dismissed by minority 'haves' and viewed as a mere political persuasion problem.
    .

    The various citizen political groupings are dismissed with contempt as populist, conspiracy theorist, selfish, nationalist etc, as if the majority affected has no intellectual ability whatsoever to understand or analyse what is happening at EU and inte

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