The Spanish Numbers Game

By Allston Mitchell, February 13, 2014

Protestor at an ATM machine in Spain

Protester at an ATM machine in Spain

A positive spin can clearly be put on recent financial data coming out of Spain but many Spaniards are cynical about the “success story” being trumpeted by the government. This enthusiasm for the “tough decisions” of austerity comes at a high price for ordinary Spaniards.

You might be forgiven for thinking that the Spanish economy was in robust shape given the flurry of news about the “green shoots” of growth and flickering lights at the end of tunnels.  In recent weeks, the IMF has been  posting uplifting figures and members of Mariano Rajoy’s Partido Popular (PP) government in Spain have been trumpeting a cautious success story, as proof that their austerity reforms are beginning to bear fruit.  After all, it is election season and the PP are on the back foot, with European elections due in May of this year and a January poll published in “El Pais” showed the conservative  PP (32%) losing ground to the centre-left PSOE (33.5%).

The rallying cries have been many: Prime Minister Rajoy called 2014 the “inicio de la recuperación” and the boisterous 80-year-old President of Santander Bank Emilio Botín, while road-showing his bank’s positive performance, claimed that “Hay un cambio de ciclo clarisimo”.  Spain’s famously dour finance minister Luis De Guindos, speaking to the European Parliament’s Economic and Monetary Affairs Committee recently, claimed that reforms were making him “mildly optimistic” about the outlook for Spain and that banking sector reforms made him “very confident” that Spain’s banks would successfully negotiate the European Central Bank’s stress tests to be carried out later this year.

There is clearly an attempt to talk up national confidence and convince insitutional investors that change is coming and that Spain  is primed for foreign investment.

The positive numbers

So is there really any good news?  Indeed there is, but the message is a mixed one.  Some of the numbers tell a positive (or less negative) story but do suggest that a cautious optimism for 2014/2015 may be warranted.  The government itself has forecasted that growth will hit a positive 0.6% in 2014 and De Guindos has even suggested that the government’s own growth forecast is too conservative and that the reality will be nearer to 1%.

The IMF concurs and has recently raised its forecast for Spanish economic growth for 2014 from 0.2% to 0.6% and to 0.8% for 2015.

Most importantly, Spain withdrew from the EU’s banking assistance scheme in December 2013 after having accepted funds to the tune of €41.3 billion;  suggesting that Spain’s banking system is now on an even, albeit delicate, keel.  Foreign investment has increased,  especially from private equity firms eyeing Spain’s real estate portfolio and the great bellwether of the risk premium for sovereign bonds – the spread between Spanish and German bonds – has fallen below the totemic 200 basis points level.  All good news.

2013 also saw a significant increase in the international financial markets’ appetite for Spanish debt.  Foreign investors are buying the good news story.

Spain announced that its tourist industry was in good shape, with Spain now number three for international tourist arrivals (60.6 million tourists – up 5.6%) in 2013, overtaking China. Spain is now competing directly with France with its 83 million tourists arrivals and the USA with its 67 million.

The Spanish stock market is continuing  its steady climb up from the depths it sank to in 2012 after Spain’s double dip – ironically a stock market recovery fuelled by the healthy performance of some previously toxic banking stocks.

Luis de Guindos Jurado - Minister of Economy and Competitiveness of Spain

Luis de Guindos Jurado – Minister of Economy and Competitiveness of Spain

Yes but….

As a counterpart to the positive numbers being bandied about, some hard facts still need to be remembered. Spain has lived through nearly six years of a debilitating recession, the near collapse of its banking system and chronic unemployment that has reached catastrophic levels of over 26%, with the real burden being borne by young people between the ages of 16 and 24, over 57% of whom are unemployed – a negative European record.

Most Spaniards are very wary of the success story being touted by the government – which has come at too high a price. The austerity reforms have been mostly limited to stabilising (recapitalising) the banking sector with massive funding from Europe – something which appears to have now worked – as Spanish banks are proudly publicising their solid balance sheets.  However, many have asked why this new found stability and wealth has not led to greater credit being passed on to individuals and small businesses.  How was all that European funding used?  It certainly has not created any new jobs.

A terrible sense of injustice remains.  Banks may now be more stable but, as has happened elsewhere, it is the taxpayer who has picked up the tab for rescuing those institutions which led the world into the financial crisis in the first place. This has bred the sort of resentment that will express itself in Spanish ballot boxes for years to come.

The government’s reforms also took aim at the labour market, mostly liberalising it and making it easier to lay people off or pay them less if a company was struggling.  They concentrated on the elimination of collective bargaining, which in turn has generated greater instability and created a labour market characterised by low salaries, temporary employment and job insecurity.

The number of temporary contracts in the job market has sky-rocketed and the minimum wage has just been confirmed at 645.30 euros per month (paid over 14 months), the same as it was in 2013. The minimum wage has in fact only increased by .06% since 2011. These reforms have been criticized by Keynesian economists as counter-productive for actually stifling growth, the very thing that they are meant to be promoting.

Those questioning the positive spin are not just members of Alfredo Pérez Rubalcaba’s Socialist opposition party, the PSOE,  which inexplicably appears to be in a state of fearful paralysis. The European Union commissioner for economic and monetary affairs, Olli Rehn also went on record to say that Spain will need another 10 years before it sees pre-2008 employment levels.  This was a rather sobering appraisal.

“Trabajo para todos!”

New Year’s Eve 2014 in Toledo’s main square – after the traditional ingestion of the twelve grapes of good luck las doce uvas de la suerte at midnight, the message from the presenter on stage was unequivocal “Happy New Year and jobs for everyone!”  Not even the festive cheer could let them forget the state the country was in – the problem is ever-present. Unemployment “el paro”  has cut deeply into the Spanish social fabric albeit with regional fluctuations –  jobless figures in Andalucía and Extremadura peaking at over 34% while the Basque country lies at just 16% and the Madrid region at around 20%.  The lives of millions of people have been ripped apart, according to the charity group Caritas, which regularly feeds and assists over 1.3 million people (a 2012 figure), by no means all of the 3 million people who are officially living in poverty.

The government is resisting any direct action on unemployment,  such as practical assistance for job-seekers and job creation schemes, so the impression is that there is just the one mantra: push through structural reforms at whatever the cost, in order to gain access to the international financial markets – and let the devil take the hindmost.

Some hard facts: almost 700.000 households have no income whatsoever ; 3.5 million of the almost 6 million unemployed have spent more than one year out of work;  youth unemployment (16-24 years) is at 57%; since 2007, 15% of  Spain’s companies and 20% of its jobs have been wiped out. And it is not over yet. Just days ago, CocaCola’s Iberian Partners recently announced the shutting down of four of its eleven bottling plants in Spain prompting strike action and protest marches. (The company has the second largest volume of sales in Europe and is the 11th highest consumer of CocaCola products in the world).

Protesting against the mass evictions by banks

Protesting against the mass evictions by banks

Leadership and political instability

The country’s problems are chronic and despite the fact that Rajoy’s government has only been in power since 2011, the fact that it has such a hefty majority is leading people to expect more.  Many are beginning to entertain the possibility that Rajoy does not have the leadership skills or the imagination to deal with the problem.  He has been overly busy pushing through obscurantist and frankly authoritarian legislation that is leaving many perplexed.  His mind-boggling Citizens’ Security legislation imposes absurdly high fines of up to €35,000 on people participating in unapproved demonstrations  – well down from the initially posited €600,000!.  The bill also bans anyone from making offensive remarks about Spain by shouting or carrying signs “that are harmful or abusive to Spain or any region”. This along with the abortion bill (that critics say drags the country back 30 years) were frankly a pointless digression from the job in hand, merely pandering for votes from his hard line right-wing voter base.   If the aim was to steer the political agenda away from unemployment, it was successful, but this success will be brief. It even led respected editorialists like Javier Marías to suggest we were witnessing Neofranquismo, hardly a recipe for an economic upturn.

The swipes at the government come not only from the opposition (but also from within the ruling party itself:  Jose Maria Aznar (Spain’s prime minister from 1996 to 2004,)  recently called off his participation at the party conference, fuelling speculation that Mariano Rajoy’s political future may be in doubt if the PP’s showing in the European elections is poor.

Mariano Rajoy Brey (left) Prime Minister of Spain and José María Alfredo Aznar López (right) who served as Prime Minister of Spain from 1996 to 2004

Mariano Rajoy Brey (left) Prime Minister of Spain and José María Alfredo Aznar López (right) who served as Prime Minister of Spain from 1996 to 2004

There are murmurings at his lack of leadership qualities, reinforced by what seems to be his allergy to simple democratic processes: his strictly-video appearances at press conferences, at times with no questions from the press, and if there are, they are carefully scripted and selected from friendly journalists.

Sticking to the mantra that full access to international financial markets has to take precedence is leaving the Rajoy government trying to trigger a recovery based on no new employment, diminishing salaries, no available credit and weak private consumption.  Distracting the electorate with surreally draconian legislation merely reinforces the suspicion that the Rajoy may have taken his eye off the ball.  The Partido Popular are in danger of losing the thread of the story, as evidenced by a recent nonsensical statement by the Justice Minister Alberto Ruiz-Gallardón who was defending his highly unpopular new abortion bill by saying that it will be positive for the economy!  It makes for an unedifying and worrying spectacle.  The European election results in May will make interesting reading.

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