Since the implosion of its construction market in 2008, Spain has faced serious economic difficulties, including record unemployment, collapsing domestic demand, and a banking crisis. The crisis culminated in 2012, when Spain was forced by circumstance to turn to the European Union for help. At that time, it negotiated a European Union bailout of up to €100 billion to avoid the failure of its largest banks and the enormous liquidity crisis that would ensue. Since that time, it has spent approximately €41 billion of the agreed-upon limit on recapitalizing its banks.
Despite the doom and gloom of the past, including two years of unpopular austerity and economic restructuring, things are looking up in Spain. According to figures released last week from the Spanish National Statistics Institute, the past 3-months have seen Spain achieve positive growth, albeit at 0.1%, for the first time in two years.
Next to Spaniards, the news of growth is most encouraging for defenders of a Eurozone that is struggling to remain integrated under the weight of what some have termed Europe’s economic “basket cases”. These are countries like Greece, Spain, Ireland, and Portugal – the European nations which have most acutely felt the effects of the global economic crisis of the past 5 years.
What 0.1% Means
Along with Greece, Spain’s economic performance since 2008 has been one of the greatest political challenges to the survival of the Euro. Euro-skeptics have long argued that Spain’s continued membership in the Euro would require either mutualization of its national debts across the eurozone, or direct bailouts. To the extent that bailouts have been provided, these skeptics were correct. However, Spain’s recent step 0.1% of the way back from recession removes some of these fears from the calculus, and is an indication that it will be able to make good on bailouts already provided. In this way, the news of growth is a huge boon to proponents of European integration.
With its 2011 election, Spain chose a path towards economic growth through structural reform and austerity. Such policies are widely condemned by those who favor expansionary fiscal policy in times of crisis. Economist Paul Krugman, for example, called increased austerity in Spain a “pointless pain” in a 2012 Op-ed for the New York Times, arguing that spending cuts to entitlements and other programming would only accelerate the decline of an economy already spiraling out of control.
Spain has grown in the last quarter despite such admonitions. In August, signs of the growth to come lead analysts at the Wall Street Journal to declare Spain’s austerity experiment a tentative success. Such analysis and this month’s numbers lend some vindication and political leverage to unpopular policymakers in Berlin and elsewhere who have long advocated deep austerity as Europe’s best pathway out of its sovereign debt crisis.
On the Horizon
Notwithstanding progress made, Spain has serious problems to contend with. The unemployment rate hit a record high of 26.6% in April – a figure second only to Greece in the Eurozone. Many analysts point to a problem of training as one factor holding back the country’s recovery. According to a recent report from the Christian Science Monitor, Spain suffers from a dearth of mid-level skilled workers. Although the country produces more university graduates per-year than the European Union average, 46% of Spanish adults only possess an elementary school education. The result is what has been called a “bar-bell” economy. In such a system, workers are distributed towards the extremes of education, and few people are available to fill the gaps in-between.
Such facts suggest that long-term growth will remain flat unless significant steps are taken to alter Spain’s economic structure, raise productivity across sectors, and, despite the government’s obsession with cutting costs, stimulate spending to create jobs.
As things look up, Spain’s export sector remains the only driver of economic growth. Spain’s domestic economy remains immobile, as its Conservative Prime Minister Mariano Rajoy hopes to stabilize the nation’s debt load by significantly shrinking the Spanish deficit. Such ambitions have led to deep spending cuts across all public sectors and widespread public protest. Amongst the domestic austerity, Spanish hopes for sustained growth rest on export demand and foreign investment, both buoyed by Spain’s new, lower unit-labor costs, the silver lining of its high unemployment rate.
Though not the first time Spain has showed signs of recovery – it found itself in similar positions of marginal growth, briefly, in 2010 and 2011 – there is reason to hope that this time, the economy will not tip back into recession. Though domestic consumption remains bleak overall, Spanish retail sales increased for the first time since 2010 this September. Prime Minister Rajoy’s early 2013 promises to add stimulus to his deep austerity over the course of this year, in the form of tax incentives and unemployment benefits are also providing hope for the ailing domestic market. More support comes in the form of further data out of Spain’s National Statistics office this Thursday. That information reveals that Spain’s industrial output rose by 1.4% year-on-year, despite expectations of a 1.5% contraction.
The effect that Spain’s tilt towards growth will have on foreign-investor confidence and the overall state of Spain’s economy remains to be seen. For a country that has endured five years of recession, and for a monetary union in the midst of a five year fight to remain integrated, however, marginally good news is good news.