Government and Institutions

A statist agenda would destroy all the gains Spain has made since joining the EU


SUGGESTED ARTICLES

Tax and Fiscal Policy
In many ways, Spain is the EU’s poster child. The country’s determination to be part of the European project was a major driver of political consensus in its successful transition to democracy after 1975. The opening up of the economy in the late 1970s and 1980s, which entailed the closure of loss-making state enterprises and the exposure of national incumbents to foreign competition, was facilitated by the prospect of membership in the European Community. When Spain finally joined the EC in 1986, two decades of economic expansion – albeit punctured by the occasional recession – followed. According to the World Bank, Spanish GDP per capita almost quintupled between 1986 and 2006, from $6,500 to $28,500. During this period, the Spanish economy was liberalised, large state-owned conglomerates were transferred to the private sector, trade with other countries increased and foreign direct investment poured in. Even high inflation, a chronic affliction since the 1973 oil crisis, and the budget deficit were tamed in the pursuit of the Maastricht criteria, mandatory for participation in the euro.

The golden era ended in 2007, when an enormous housing bubble burst, throwing Spain into a double-dip recession. The bubble was fed by low interest rates and political encouragement for public banks – which then accounted for over half of the Spanish banking sector – to lend profusely to mortgage applicants. Furthermore, the country’s rigid labour market laws and an inefficient state education system made matters worse, throwing many young and old Spaniards into long-term unemployment. The government’s initial attempts to spend its way out of the slump only compounded problems.

Still, eight years later Spain is back in the game. As 2015 came to an end, Spanish GDP was growing at a salutary 3.2 per cent. Unemployment was finally budging, down to 21.4 per cent after peaking at 26.3 per cent in early 2013. This is, obviously, still extremely high in absolute terms, but not historically unprecedented for Spain, and falling at a healthy clip. These benign developments followed a range of market reforms, limited but significant, since 2012. They were aided by the ECB’s loose monetary policy and the improving climate elsewhere in the Eurozone – although Spain’s recovery began before the central bank’s launch of QE, and it continued even during the Greek stand-off in the summer. Together with Ireland, Spain shows the benefits of structural reforms and fiscal consolidation as promoted by the EU.

However, and despite the positive economic news, the 20 December general election resulted in a backlash against the incumbent government. Not only that, but for the first time since the first post-Franco elections, no clear winner emerged who would be able to govern on its own or with support from smaller parties. The two-party hegemony characteristic of the last four decades is no longer – instead, the two old parties, Conservatives (PP) and Socialists (PSOE), have been joined by two new formations, Podemos on the far left and Ciudadanos in the centre.

The biggest winners from 20 December were Podemos, who came third in parliamentary seats and within a whisker of beating the Socialists for second place in the popular vote. This hard-left group, founded by young academics and social activists, gathered just over a fifth of the ballots. In a country where the Communist Party was relegated to the fringes even before the fall of the Soviet Union, what explains the rise of a similarly statist party?

The first reason is that they were the first to pose an alternative to the old parties. As scandal after scandal of corrupt practices and embezzlement of public funds by PP and PSOE officials has emerged, there has been a strong popular reaction against such behaviour. Podemos were the first mover to cater to this discontent and offer change.

The second factor is the existence of a large proportion of excluded among the Spanish population. By this I mean people who are shut out of the mainstream labour market by expensive regulation and have to make do with temporary contracts; who waste years of their lives at state universities studying subjects for which there is little demand by employers; who lack the family and kinship connections so necessary to obtain many jobs in Spain; who, in sum, have little prospect of improving their condition in the foreseeable future. These people have little to lose by voting for those who promise radical change.

A third factor has been Podemos’ ability to present itself in regions with large pro-independence movements – Catalonia, the Basque Country, Galicia – as a middle-of-the-road alternative that is against independence, but in favour of granting people in those regions a referendum on their status (although such a referendum would likely be ruled unconstitutional as things stand today). That has channelled many left-wing votes which traditionally went to separatist parties towards Podemos instead.

Yet, like so many movements for change and ‘a new politics,’ Podemos is really more a rehash of old socialist and communist recipes. The party is strongly inspired by Latin American ‘Chavista’ socialism, which has brought misery to Venezuela, as well as the Peronist-style populism and patronage which has plunged Argentina into economic crisis. Podemos’ policy recipes have already been amply tried, and their track record is, to put it mildly, unimpressive. Podemos’ leaders are almost exclusively political scientists on the ideological fringes who have no executive experience or any training in public management, let alone economics.

Moreover, their proposals for Spain are eerily reminiscent of what Greece’s Syriza was talking about around this time last year: a resumption of reckless spending above the country’s means, a return to the even more rigid labour market rules prevalent before 2012 (the very opposite of what is required to tackle Spain’s chronic problem of unemployment and social exclusion), the renationalisation of utilities, and confrontation with EU authorities in Brussels and Frankfurt. We know how those turned out in the Hellenic Republic.

With a grand coalition of centre-right and centre-left à la Merkel highly unlikely, and with many Socialist grandees reluctant to support negotiations with Podemos and regional separatists for a left-wing government, the prospect of new elections before the spring looms. Whatever the final outcome, there can be little doubt that the pursuit of an economic agenda akin to what Podemos proposes would bring uncertainty and impoverishment to Spanish households, particularly the most vulnerable – as has been the case everywhere where such an agenda has been implemented.

The recent history of Spain is testimony to the promise of what economic liberalisation and European integration can bring: trade, investment, mobility and wealth, and a sense that the horizons of individual ambition can be expanded. Rather than backtrack from that agenda, what Spain needs to do now is to extend that agenda to its labour market, which is still far too rigid and insider-oriented. A statist and anti-European agenda, in contrast, would throw all the gains made over the last forty years out the window – all for the vague promise of change managed by an inexperienced and doctrinaire faction. It would scarcely be worth it.

Diego Zuluaga is the IEA’s Financial Services Research Fellow.

Policy Analyst at the Cato Institute's Center for Monetary and Financial Alternatives

Diego was educated at McGill University and Keble College, Oxford, from which he holds degrees in economics and finance. His policy interests are mainly in consumer finance and banking, capital markets regulation, and multi-sided markets. However, he has written on a range of economic issues including the taxation of capital income, the regulation of online platforms and the reform of electricity markets after Brexit. Diego’s articles have featured in UK and foreign outlets such as Newsweek, City AM, CapX and L’Opinion. He is also a frequent speaker on broadcast media and at public events, as well as a lecturer at the University of Buckingham.



SIGN UP FOR IEA EMAILS