November 15, 2011 8:44 pm
Spain’s new government will ‘have to act quickly’
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Mariano Rajoy (left), leader of the Popular party, and Socialist prime minister Jose Luis Rodriguez Zapatero
Juan Roig, chairman of the family owned supermarket chain Mercadona, captured Spain’s mood with characteristic bluntness when he made a prophetic comment about the country’s economy in March. “The year 2011 has one good thing going for it,” he said. “And that is that it’s better than 2012.”
Spaniards are desperate for change. They have endured more than three years of economic crisis that began with the collapse of Lehman Brothers in 2008 and led to bail-outs of Greece, Ireland and Portugal, followed by last week’s ousting of George Papandreou and Silvio Berlusconi, prime ministers of Greece and Italy. In the meantime, they have been squeezed by welfare cuts, reduced wages for civil servants and higher taxes.
Now Spain looks set to be the next eurozone country to throw out an incumbent government tainted by the way it has managed the crisis. In a general election on Sunday, Spanish voters are predicted by opinion polls to deliver a resounding victory to Mariano Rajoy and his centre-right Popular party (slogan: “Join the change”) after seven years and two Socialist administrations under José Luis Rodríguez Zapatero.
Mr Zapatero accepted months ago a change of government was inevitable when he stepped down as his party’s candidate and called the early election amid the escalating sovereign debt crisis, but even the prospect of a more technocratic administration from December has not soothed investors, who are now wary of almost any eurozone bonds except Germany’s.
At a Treasury bill auction on Tuesday Spain paid more than 5 per cent in annual interest to borrow money for a year, higher than the rate it paid for 10-year bonds only last month. Spanish bond yields, like those of Italy, are close to euro-era highs.
Spain, together with Italy, is therefore perilously close to needing a bail-out that neither the European Union nor the International Monetary Fund could afford and that could end in a financially catastrophic break-up of the euro. Spain is also saddled with 5m unemployed, equivalent to more than 21 per cent of the workforce, and recorded zero economic growth in the three months to September. The election campaign has been focused on domestic issues, but Mr Rajoy, if elected, will have to convince the bond markets and Spain’s European partners – and his fellow citizens – that he can engineer a recovery.
To understand what went wrong – and the scale of the challenges a new government will face – it is worth examining a Mediterranean region such as Valencia, where Mr Roig and Mercadona are based. Valencia displays many of the worst symptoms of the Spanish economic disease – a variant of the affliction that has struck parts of the eurozone and other western countries.
In the years until the market peaked in 2007, property developers built tens of thousands of homes and holiday apartments, spawning grandiose infrastructure projects, sucking in immigrant labour and luring teenagers out of school to take on well-paid building jobs.
These were the years that seemed to confirm Spain’s status as a developed nation whose living standards had finally caught up with those of its European partners.
Each “peripheral” eurozone nation handled the bonanza of easy credit from northern Europe in a different way. Successive Spanish governments at least invested in road and rail infrastructure that will serve the country well for decades to come, but also turned a blind eye to the follies of an overheated construction market.
It was, says Francesc Colomer, an ethics teacher turned Socialist politician and now the party’s leader in the Valencian province of Castellón, “the prodigal decade”. He likens the tale of Castellón’s new but empty €150m airport, and the unbuilt Mundo Ilusión theme park and housing estates that were to have supported it, to the Milkmaid’s Tale, an Aesop’s fable popular in Spain in which the girl dreams of a succession of increasingly lucrative business ventures starting with butter and ending with a successful marriage – before she drops the milk.
Valencia, like much of the rest of Spain, is now suffering the combined effects of the bursting of the country’s domestic housing bubble and the sovereign debt crisis that swept across the southern and western fringes of the eurozone shortly afterwards.
“We’ve had more than 10 years’ warning here in Valencia and in Murcia that we can’t base everything on the monoculture of construction,” says Mr Colomer, lamenting the “pharaonic caprice” of the theme park plan and the emblematic tragedy of Castellón airport. “We have an empty airport and we have nothing of the industry, of the dynamism, of the activity that justified its existence.”
One person in four in the Valencia region is unemployed, and for those under 25 the number rises to one in two. Companies that profited from the construction bonanza have been hard hit. More than 130,000 new homes lie empty.
Two of the region’s banks are struggling under the weight of bad loans. Banco Cam, the old Caja Mediterráneo, was bailed out with €2.8bn of taxpayers’ money and its director-general fired by the official bank rescue fund. Banco de Valencia, a listed bank, might also need a bail-out, according to Elena Salgado, the Spanish finance minister.
Francisco Camps, the Valencian regional premier, has resigned and faces trial on a charge of bribery. Prosecutors allege he received at least a dozen expensive suits in exchange for awarding event management contracts, but he says he is innocent.
For those unfamiliar with the political geography of Spain, it might seem obvious that Mr Rajoy and the PP are the right team to sweep away the policies and practices that have so evidently failed Valencia and the rest of Spain under the Socialists during the crisis.
Unfortunately, it is not as simple as that. Mr Camps is from the PP and it has run Valencia since 1995 under the highly devolved political system. Indeed, so strong is the PP in Valencia that, despite the party’s problems in the region, the normally undemonstrative Mr Rajoy leapt into the air at a rally there on Sunday and said publicly for the first time he thought his party would win the election.
Yet the power of the regions (some of those run by the Socialists have been equally wasteful) is only one of the obstacles Mr Rajoy will face if he defeats Alfredo Pérez Rubalcaba, the Socialist candidate. Assuming the polls are right and the PP wins an absolute majority in the lower house of parliament, Mr Rajoy could immediately come under intense pressure from the bond markets to show that he can transform Spain’s economic prospects. Pressure, in fact, is already being applied, with the 10-year bond yield rising above 6 per cent on Monday for the first time since the European Central Bank started buying Italian and Spanish bonds in summer to try to soothe investors concerned about the eurozone.
“People talk about the dictatorship of the market and it’s true that markets are very cruel and very tough,” says Jordi Canals, dean of Iese, a Barcelona-based business school. “Things are changing really quickly and I think the new government will have to act very, very quickly.”
Mr Rajoy has unveiled a 100-point programme of reforms, almost half of them dealing with the economy. He says the party’s “obsession” is to create jobs with the help of incentives for small businesses, changes to labour laws and a complete overhaul of a collective bargaining system that dates back to the Franco era.
Without giving too many details for fear of alienating crisis-weary voters, Mr Rajoy has also promised to accelerate a clean-up of the banking system and pursue the budgetary austerity programme begun by Mr Zapatero.
“The situation we confront is difficult, perhaps the toughest that a government will have had to face in the democratic era,” Mr Rajoy said in a speech on the campaign trail.
As in other struggling European economies, the incoming government will have to impose the austerity demanded by financial markets without throttling the economic growth needed to help finance the budget and cut public debt, while simultaneously earning popular support at home and generating confidence abroad.
In its favour, the PP under the uncharismatic Mr Rajoy has overwhelming support from Spanish business leaders who accuse Mr Zapatero of economic incompetence.
Asked if Mr Rajoy, 56, who held various portfolios in the PP governments of José María Aznar between 1996 and 2004, would act boldly to save the Spanish economy, the head of one of Spain’s biggest companies said: “He has no sex appeal, so it’s difficult for him to entice voters to vote for him. But his record as a public administrator is good.”
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.Another advantage for the next government is the robust performance of Spain’s tourism businesses and its industrial exporters, whose successes have helped to cut the country’s current account deficit from 10 per cent of gross domestic product in 2007 to less than 4 per cent forecast for this year.
While Spain’s construction-heavy domestic economy is notorious for having lost competitiveness since the advent of the euro a decade ago, the country has maintained its market share of world exports since 1999.
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“Spain is not a competitiveness problem, it’s a construction problem,” says Jacques Cailloux, chief European economist at Royal Bank of Scotland.
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This suggests, according to Iese’s Prof Canals, that a new government could restore confidence in Spain provided it creates jobs, persuades the whole country to embrace austerity and hard work, rationalises the public sector and lays out a strategy for economic growth just as both the Socialists and the PP did – in 1985 and 1996 respectively – after previous crises.
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Mr Roig attributes Spain’s poor image abroad to the fact that it has lived beyond its means. The crisis, he said when he made his gloomy prediction for next year, “will end when the country’s productivity corresponds to its living standards”.
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From Sunday, it is likely to fall to Mr Rajoy to engineer that adjustment to the satisfaction of two very different constituencies: the Spanish people and the international bond markets. No one thinks it will be easy.
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ZAPATERO’S LEGACY: social reforms likely to survive
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José Luis Rodríguez Zapatero, the Socialist prime minister who will step down after Sunday’s election, has never been enthused by economic policy. He responded dutifully to the 2008 crisis, however, first with stimulus measures and then with austerity programmes, writes Victor Mallet.
On social issues, however, he is passionate. Mr Zapatero’s mood would brighten when interviewers at the prime minister’s Moncloa palace turned their attention from budget deficits to women’s rights or abortion.
“The gay marriage law has actually made me feel extremely proud,” he told the Financial Times last year when asked whether he had polarised Spanish society with the social legislation enacted since he first won power in 2004.
“We were told that we were killing the family in Spain and yet the Spanish family is in rude health, and a lot more people are happy. We’ve managed to recognise the right of people who have been discriminated against and harassed for many years because of their sexual orientation, and I hope that is an unstoppable trend in advanced societies.”
This and other social laws – including one decriminalising abortion, another on equality of the sexes and yet another to allow accelerated divorces – angered some conservative Roman Catholics and members of the opposition Popular party.
The PP is expected to win a sweeping victory on November 20, but opinion polls suggest voters will punish the Socialists for high unemployment and other economic failures, not because abortion is easier.
Mariano Rajoy, PP leader, has tried to move his party to the centre and attract undecided voters, including young, socially liberal Spaniards who might previously have voted for the Socialists. The best way to succeed, his advisers say, is to create jobs and govern competently.
That is why Mr Rajoy has been reluctant to yield to the PP hardliners by promising any wholesale reversal of Mr Zapatero’s liberal legacy. His most specific commitment is to tweak the abortion law to prevent 16 and 17-year-old girls undergoing the operation without the consent of their parents.
Mr Zapatero’s reputation as an economic manager is just another piece of wreckage in the ruins of the eurozone sovereign debt crisis. But his social reforms are likely to remain largely intact.
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Copyright The Financial Times Limited 2011.
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