September 20, 2012 6:50 pm

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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It was generous praise for Carrillo, whose involvement in the bloodletting of the 1936-39 civil war long scarred him in the eyes of the Spanish right. It was also an attempt by the king to persuade Spaniards that the painful divisions of the civil war and subsequent 36 years of Francoist dictatorship belong firmly to the nation’s history and matter less than the shared values of modern, democratic Spain.

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.

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 asesorespolitical 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.


Yet industrialists and economists of the moderate centre-right caution against dismissing the criticisms of Mr Anson, and others of his ilk, as empty of substance.

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.

. . .

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 sloganCatalonia: 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 pactgiving 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.

. . .

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.

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’sgreenestnations, but also encouraged too much investment in wind and solar.

“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.

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.

Copyright The Financial Times Limited 2012.


Time to Get Beyond the Crisis, Says IMF's Lagarde
IMF Survey
September 21, 2012

  • Cooperative action and implementation of agreed decisions needed to move beyond crisis in the eurozone

  • Anchoring of expectations will be key in Europe, United States, and Japan

  • Annual Meetings in Tokyo to focus on further action needed to achieve sustainable and inclusive growth

In order to move beyond the crisis in the eurozone and restore confidence in the global recovery, policymakers should implement agreed decisions that will help anchor medium-term expectations about economic policy, IMF Managing Director Christine Lagarde said in a taped video interview.
“It’s a question of really trying to get beyond the crisis in the eurozone, asserting a medium-term plan for countries like the United States and Japan, and making sure that some of the issues that actually created the crisis five years ago are really dealt with, not just half dealt with. And I’m particularly thinking about the financial sector,” she said, speaking ahead of a speech at the Peterson Institute for International Economics in Washington D.C. on September 24 that will preview the agenda for the upcoming Annual Meetings of the IMF and the World Bank.

In early October, about 10,000 policymakers, business leaders, academics, civil society representatives, and journalists will gather in Tokyo to discuss the outlook for the world economy, and how to address issues ranging from the eurozone crisis, to high unemployment, rising food prices, and better regulation of the financial sector.

Continued uncertainty

The Meetings are being held at a time of continued uncertainty for the world economy, and after further action in September by the European Central Bank, the U.S. Federal Reserve, and the Bank of Japan to restore confidence and stimulate growth and job creation.

In the interview, Lagarde discusses the challenges facing not just Europe but also the United States, emerging markets, and low-income countries. She also provides an update on the IMF’s efforts to implement an important governance reform that will give more say to fast-growing emerging markets in Asia and elsewhere.

The meetings will kick off with the IMF’s regular update of its World Economic Outlook on October 9, followed by more than 300 other events, including press briefings, seminars, and bilateral country meetings. The IMF’s policy steering committee will meet on October 13, and is expected to discuss further action needed to achieve sustainable and more inclusive economic growth.

IMF Survey: It’s been five years since the crisis first erupted in the U.S. mortgage market and the world economy still has not recovered its stride. In fact, many have warned of a second Lehman moment unless problems in the eurozone and elsewhere are addressed decisively. What will it take to really turn things around?

Lagarde: It’s obvious it will take a lot of cooperative action between all players―and not just cooperative talk, but cooperative action by way of implementing some of the decisions that have been made and some of the decisions that need to be made.

But if you were to ask me, it’s a question of really trying to get beyond the crisis in the eurozone, asserting a medium-term plan for countries like the United States and Japan, and making sure that some of the issues that actually created the crisis five years ago are really dealt with, not just half dealt with. And I’m particularly thinking about the financial sector.

IMF Survey: Looking around the world, and starting with Europe, what do you see as the main challenges?

Lagarde: We have challenges everywhere, not only in Europe. Europe is obviously the epicenter of the crisis and where the most urgent, coordinated action is needed.

We need action at all levels, first of all at the national level. There are many member states that are taking measures to reform their economy, to improve their competitiveness, to open up some boundaries and territories that have prevented the creation of value and the creation of jobs.

At the regional level, the institutions and the member states have to come together and to put in place short-term actions and set a vision for the future. Short-term actions revolve around implementing the framework that has been laid out by the European Central Bank, and the vision has to do with confidence in a real currency zone that is complemented by a banking union and a fiscal union.

I’m not suggesting that it has to happen now, but there has to be some anchoring of expectations about what Europe will be in a few years’ time.

IMF Survey: Looking to the United States, what are the key challenges there?

Lagarde: The United States has short-term and medium-term challenges as well, none of which are really properly addressed at the moment.

In the short term, there is the issue of the fiscal cliff, which is a combination of fiscal [tax] cuts that will stop early in 2013 and public spending that will be withdrawn in 2013, if nothing happens. That will be automatic, and it will create a major contraction of the deficit, yes, but also of growth, which would be a threat to the global economy. That’s for the short term.

In the longer term, there has to be again anchoring of expectations about the fiscal policy of the United States in order to address the issue of the deficit and the debt as well.

IMF Survey: What about emerging markets in Asia and elsewhere?

Lagarde: Well, the emerging market economies were those that were driving growth on a global basis, and they were going steady, not particularly affected by the global crisis that concerns essentially the advanced economies.

We’re now seeing emerging market economies being affected by the global crisis with slow growth, certainly high growth still if you look at China or if you look at even countries like Brazil or India, but slower, lower, in all cases.

IMF Survey: If we look at low-income countries in sub-Saharan Africa, they’ve been growing rather strongly as a group, but they also have face commodity price increases. What do you see as the key challenges there?

Lagarde: Low-income countries, sub-Saharan Africa, were the best news we had in many ways in the last 12 months if you look at some of the countries’ growth rates and determination to deal with some of the issues, such as subsidies, for instance.

But they clearly have the threat of commodity price increases in some corners and decreases in other corners. Increases that apply particularly to food and to energy, and decreases for some of the countries that are producers of raw materials in particular―they are seeing some decreases, which can threaten the current situation and their balance of payments.

IMF Survey: You mentioned the need for global cooperation and for policymakers to implement the reforms that have been agreed. The IMF’s Policy Steering Committee, the IMFC, has played a key role in the past. What do you expect will be discussed in Tokyo?

Lagarde: The IMFC is first and foremost a very good forum where representatives of all the membership can actually discuss, compare notes, share ideas, receive the policy advice and recommendations and work and study that we do on a constant basis for them.

Because coordination is at stake, the fact that they are together with a single focus, which is to get out of the crisis and start more sustainable and more inclusive growth, we see that as a principal purpose of this upcoming Annual Meeting and IMFC meeting.

IMF Survey: One of the items that will be discussed in Tokyo also is the efforts to reform the IMF’s governance structure. What is the status of implementing the reform package that was agreed back in 2010?

Lagarde: We have worked really hard in the last twelve months towards implementation and effectiveness of this reform. We’ve made huge progress.

The first threshold was [that members with] quotas of 70 percent [of the total] that had to be reached for the quota reform to be implementable. That is done. We are beyond 70 percent.

The second set of thresholds that I have in my mind relates to the governance reform. The first one is the number of members that are supporting and implementing the governance reform. We have to hit 113 countries. We are very close to that. I really hope that we get there in Tokyo.

The second threshold for the governance reform is that of the percentage of votes. We are working really hard, and my hope is that we can get as close as possible to the finishing line in Tokyo.

IMF Survey: The Annual Meetings this time will be held in Japan. Why Asia, and how do you see the role of the region going forward?

Lagarde: Asia has been a fantastic part of the world from many respects. First of all, it’s a big part of global GDP. Second, it has enjoyed, pretty much all over, very steady growth in the last few years, including up until last year.

It’s a part of the world where we hardly have any programs ongoing, but where we have a history of relationship. And, frankly, Asia has been a fantastic partner for the IMF.

I would obviously single out Japan, which has been extremely supportive of IMF action from two perspectives: technical assistance, where Japan is a great contributor, probably the single largest contributor financing technical assistance elsewhere in the world. And financiallyTokyo has always been the first one to pick up the phone and say we are contributing, we will be there, whether it was the quota increase, whether it was the New Arrangements to Borrow, and whether it was the bilateral loans most lately when we decided to build an IMF firewall, Japan was the first.