Friday, August 22, 2014
6

Spain Can Still Rise

MADRID – July will enter Spanish history as having started on a tremendous high, spurred by Spain’s recent triumph in the 2012 Euro Soccer Championship. But all signs indicate that the month will end in doubt and pessimism. The image of joyful crowds and Spanish flags draped from cars and windows has given way to that of throngs of demonstrators holding banners protesting the government’s latest austerity measures. With one in four Spaniards unemployed and Spain’s sovereign bonds rated just above junk status, Spain seems to be on the edge of falling into the abyss.

But very few analyses delve beneath the surface of immediate figures and assess the core of Spain’s strengths and weaknesses. Observers today tend to forget that, until the early 1980’s, Spain qualified as a developing country, according to World Bank standards. Indeed, together with Singapore and Ireland, Spain represents the biggest economic success story of the last quarter of the twentieth century. And it should not be forgotten that, together with an astounding leap in GDP per capita (from $7,284 in 1980 to over $30,000 in 2010), Spain, under King Juan Carlos’s invaluable leadership, carried out a successful transition to democracy and joined the European Union.

Such feats always entail important asymmetries and political pacts; though fundamental to the post-Franco transition, when Spaniards were still fearful of reviving the deep divisions of the civil war, they plague the country to this day. Furthermore, Spain’s success, coupled with lax credit policy in the eurozone, resulted in a financial bubble whose collapse exposed structural challenges. As a result, Spain now requires a concerted effort from its citizens, one rooted in confidence in their achievements of the last 30 years.

One area in grave need of reform is the labor market. The foundations of Spain’s current labor laws date to 1938, when the civil war was tearing the country apart. The system created by Generalissimo Francisco Franco following his victory offered workers job security and strong collective-bargaining rights, which helped to maintain social stability in the absence of democracy.

Paradoxically, the bulk of this platform has survived as a banner of the left. Changing it is, therefore, not only vital for regaining competitiveness; it is also a critical test of the maturity of Spain’s democracy.

The current system underpins Spain’s soaring unemployment rate. Since the second half of the 1980’s, when net emigration abruptly reversed, Spain has experienced high levels of structural unemployment, even when annual growth was above 4%, in part owing to the high quality and generous provisions of Spain’s social-welfare system, which was also consolidated in the post-Franco period. As of 2011, an estimated 5.7 million residents (12% of the population) were immigrants – over a million more than in the significantly larger United Kingdom (with a population of 62 million).

International observers often also target the need to reduce public employment. Here, too, the problem is a direct consequence of the political agreements reached at the beginning of the transition to democracy. The public sector underwent rapid and radical decentralization as part of the transition, owing to the creation of the country’s quasi-federal governmental structure, which created significant overlap and duplication, both in terms of effort and resources.

Meanwhile, it distorts reality to view Spain’s entire banking sector through the prism of the cajas, the savings banks that are the soft underbelly of the Spanish financial system. Indeed, Santander and BBVA rank among today’s most successful international banks. Nevertheless, it was the cajas that concentrated the risk associated with the housing bubble, and whose governance presented the worst face of public ownership. The cajas had neither the corporate governance structures nor the management skills to withstand the crisis.

Moreover, Spanish schools trail behind in the international ranking system; the relatively effective Franco-era vocational training system became collateral damage in the transition; and the low number of patent applications reveals severe shortcomings in research and development. This hindrance to competitiveness is also linked to an underperforming, state-regulated higher-education system, with no Spanish public university among the top 150 ranked in the 2012 Academic Ranking of World Universities, whereas three private institutions (IE, IESE, and ESADE) are all ranked among the top business schools worldwide.

Today, Spain has some of Europe’s best infrastructure, including high-speed trains, high-tech airports, fast highways, and top-notch green-energy networks. Its entrepreneurial class has pioneered business ventures, such as Inditex and Mercadona, whose models are case studies in the best business schools.

Spain counts a fair number of successful, cutting-edge multinationals, from Ferrovial and FCC in public works to Iberdrola and Abengoa in the energy sector. It is also important to emphasize the political stability – and public maturity – that allowed aparty whose program called for rationalization of spending to win an absolute majority in the parliamentary election held six months ago.

Spain’s soccer victory was not a fluke but the culmination of a long evolution to emerge as a winning machine from its Francoist furia española past. After Spain’s victories at Euro 2008 and the 2010 World Cup, the national team demonstrated once again how diversity can coalesce into a winning formula through identification with a common goal.  

Spaniards in general, and particularly their political leaders, must rediscover what it takes to succeed. Dealt a difficult hand, Spain can overcome its critical situation only through collective hard work, responsibility, respect, and loyalty, thereby ensuring its standing in Europe and beyond.

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  1. CommentedEyOM k

    Spain is a country with great potential, but the gaps have been with the economic crisis of 2008 and the present.

    Politics, where politicians work for pay undeserved and not a better country (http://wp.me/p2npkO-v)

    Moreover, there was a very strong financial system, which exceeded the 2008 crisis, but the strong politicization of part of the sector (Savings), made to explode with the real state crisis in Spain. (http://wp.me/p2npkO-1f)

    Now, it's time to change things, starting with the politicians, continuing the business and financial system, with the goal of changing the mentality of the whole society

  2. Commentedjuan carlos

    "Spain can overcome its critical situation only through collective hard work, responsibility, respect, and loyalty, thereby ensuring its standing in Europe and beyond." you mean by ordinary people simply accepting the destruction of a functioning welfare system while the political/corporate elite continue increasing their personal profits, sure. No need to mention political corruption and incompetence?
    "It is also important to emphasize the political stability – and public maturity – that allowed aparty whose program called for rationalization of spending to win an absolute majority..." Public maturity? The public simply alternates between PP and PSOE, that is not maturity, it's stupidity. The only maturity was demonstrated where other alternative parties increased their votes, while PSOE and PP decreased compared to previous elections.
    "Paradoxically, the bulk of this platform has survived as a banner of the left." The only paradox here is a member of the PP saying that something created by the Franco regime is actually wrong or not working.

  3. CommentedN. H.

    Recognising Spain's achievements and potential, this article still makes one wonder...

    Or rather, the salaries of Spanish top football players, which an 'ordinary wo/man' can only dream of, and the soaring tax debt of Spanish top football clubs makes one wonder whether it is not this "winning formula" that is - if not part, yet - at least one expression of the problem...

  4. CommentedJoão Tiago Barriga Negra Ascensão

    Interesting articles. It ressembles, as one should expect, a lot of the Portuguese contemporary economic path. Said this, and taking into consideration the comment made below by Zsolf Hermann, I struggle to understand why there'se no increasing more cooperation between the PIGS in targeting the crisis. Spain, Italy and, in some extent, Portugal are case-studies of rapid development in the last decades of the 20th century, solely comparable to the outstandind economic performance of the Asian Tigers relatively in the same period. More than rediscover what it takes to succeed, I would say we need to understand what it takes to succeed in today's world of emerging superpowers with continent size economies. Economies must also adapt to new velocity of the world economics and invest in the creation of more resilient and change prone institutional systems, capable of sustain a process of development in the long run.

    In the end, we all need a little luck as well. Think about the last penalties shootout in the recent Protugal vs. Spain matchup in the eurocup and how close we all were to see such a winning machine coming out of the contention.

  5. CommentedAldo Dias

    The author makes it seem like Santander or BBVA have solid assets. They issued mortgage loans and therefore engaged and exposed themselves to the real estate bubble. Santander, for instance, just announced an operating loss in the billions of euros, due to this depreciation of the guarantees that support their loans. And I doubt that the adjustment has been "complete" - whatever this means, because if the real estate keeps depreciating then what is left? -, as in there is a significant "lag" in reavaluations.

    My point is simply that even aspects of the spanish economy that this this article tries to portray as strengths aren't so, or at least not absolutely. Unfortunately for all of us.

  6. CommentedZsolt Hermann

    Yes Spain can still rise, but not alone.
    Today on the real world stage there are no national teams any longer.
    We evolved into such a tightly interconnected and interdependent network with each other, that either we all rise or we all fall.
    The problems Spain is facing are not Spanish problem, just as there is no Euro problem, or European problem.
    We have a global problem that shows itself regionally dressed into specific cultures, flavors but the underlying source of the problem is the same: we are stubbornly pushing on with the wrong socio-economic structure in the wrong system, conditions.
    As mentioned above we exist in a global, integral network, thus we have to change our fragmented, polarized, angular worldview, decision making to a global, mutual, round worldview and decision making.
    Alongside this structure we also use an illusorical, unnatural and harmful excessive, constant quantitative growth economic model that has turned on itself, eating, consuming itself and the system around it as cancer.
    There are no Hollywood type happy endings here unless we understand and apply the above principles, building a totally new human system.
    Then we will all rise, but only together as a single, united Humanity.

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