Föhrenbergkreis Finanzwirtschaft

Unkonventionelle Lösungen für eine zukunftsfähige Gesellschaft

Bullish again: Spain’s reforms point the way for southern Europe

Posted by hkarner - 17. Juni 2017

Date: 15-06-2017
Source: The Economist

Having tackled its problems earlier than Italy or Greece, Spain is now seeing results

ON A back road in the Llobregat valley west of Barcelona, amid a jumble of old wine-growing villages and modern factories, stands a research centre owned by Gestamp, a Spanish firm that in just two decades has become one of the world’s leading makers of car body-parts, doors and bonnets. With 100 plants in 21 countries and sales last year of €7.5bn ($8.4bn), Gestamp is a specialist in hot stamping. This process makes parts six times more resistant than if they are cold-stamped, allowing cars to be safer, lighter and less polluting. What was once mere metal-bashing has become a high-tech operation.

Gestamp invests 3.8% of its sales in research and development, and holds more than 900 patents. “We are working on cars that will only go into production in five or six years’ time,” says Juan José Matarranz, one of the 58 scientists and engineers at the research centre. Alongside, in a factory equipped with robots, laser-cutters and high-temperature forges, Gestamp churns out parts for shipment to Ford and Audi in the United States as well as for SEAT’s large plant down the road at Martorell.Globalised and innovative, Gestamp is a symbol of the transformation of Spain’s economy. In 2012 the country was a vortex which threatened to suck down the euro. The conservative government of Mariano Rajoy had to go cap in hand to Brussels for a €100bn bail-out for Spain’s broken savings banks. A housing bust and the financial crunch plunged the country into a five-year slump, from 2009 to 2013.

Now Spain is heading for its third consecutive year of economic growth of just over 3%, the fastest of any large economy in the euro area (see chart 1). It is creating about 500,000 jobs a year. According to Luis de Guindos, the economy minister, last month the country’s GDP surpassed its pre-crisis peak. Much of the credit for this recovery goes to structural reforms the government pushed through in 2012.

Europe’s economy as a whole is picking up, too. But apart from Spain, the European Union’s Mediterranean countries remain its weakest links. In Italy and Greece growth has been disappointing. Italy’s labour reforms have been tentative, and it is only now tackling its banks’ bad debts. Greece is being dragged into reform by its EU creditors, but has howled all the way. Spain tackled these issues earlier and more decisively. Its efforts are bearing fruit.

Once more, but with exports
Spain’s renewed growth has sounder foundations than in the past. In the early years of this century the economy was powered by construction, which accounted for up to a fifth of GDP, and by foreign loans. This time the growth is led by exports, which have reached 33% of GDP (up from 23% in 2009). “We’ve recovered competitiveness,” says Mr de Guindos.

Spain is now continental Europe’s second-biggest car producer and exporter after Germany. Tourism is booming, too. The country has diversified its exports into chemicals, pharmaceuticals, machinery and professional services. More than 150,000 Spanish companies export, half as many again as in 2007, according to Jesús Sainz of the Círculo de Empresarios, a think-tank. A digital startup economy is sprouting in Madrid and Barcelona, and growth is spreading from exports to the domestic economy. “It was a dispirited country. That’s changed a lot,” says Iñigo Méndez de Vigo, the education minister.

Good fortune, in the form of low oil prices and interest rates, has played a part. The export boom owes something to the recent pickup in world trade and the cheapness of the euro. But these have helped all euro-zone countries; they do not explain the fact that Spain is gaining global market share, notes José Manuel González-Páramo, a director of BBVA, a bank.

Rather, much of Spain’s success is down to its structural reforms. In an election in November 2011, Mr Rajoy won an absolute majority, displacing the hapless Socialist government of José Luis Rodríguez Zapatero. The new team took three fundamental measures: reforming the labour market, cleaning up the financial system and curbing a burgeoning fiscal deficit.

The labour reform brought flexibility to a rigid system. It cut severance pay from 45 days to 33 days per year worked; in the past companies sometimes closed because they could not afford to lay off workers. More importantly, Spain devolved wage bargaining to firm level, helping to make companies competitive.

Spanish banks still have more dud loans than their European peers, but credit is flowing again. This month euro-zone banking supervisors forced the shaky Banco Popular, the country’s sixth-largest, into a takeover by Santander; that led bond yields for some smaller lenders to rise. But “nobody is confusing Popular’s situation with the system as a whole”, says Mr González-Páramo. The debt of households and firms has fallen. Meanwhile, tax increases and spending cuts shrank the budget deficit from 10.6% in 2012 to 4.3% last year.

To the rest of southern Europe, this looks rather good. Italy’s GDP did not fall as far as Spain’s in the crisis, and its budget deficit and unemployment rate never went as high. But neither has it experienced a strong recovery: growth is stuck at around 1% and unemployment, still over 11%, is barely declining. While Spain’s labour costs fell, Italy’s kept rising, so its export growth has been far weaker. Greece’s labour costs have fallen, but it has scarcely any export industry to take advantage of them. And its grudging reforms and political bickering have deterred the investment that would be needed to create them.

Make Talavera great again
Spain may be an example to others, but its own recovery is far from complete. Public debt has surged to around 100% of GDP, and the government does not expect a primary fiscal surplus (ie, before interest payments) until next year. “We have lost a decade, and our GDP today should have been at least 20% higher than it is,” says Mr Guindos. “That is the legacy of the bust.” Almost 230,000 companies perished, says Mr Sainz. Real average wages are about where they were a decade ago. Unemployment is still close to 3.5m (or 17%), though that is well down on the peak of 5m. Spain’s once-stable two-party political system has been shaken, especially by the rise of Podemos, a far-left group which claimed 21% of the vote in an election last year.

Talavera de la Reina, in the Tagus valley an hour and 40 minutes south-west of Madrid by train, was long known chiefly for its blue and yellow hand-painted pottery. It is now notorious for unemployment. Although the town’s population has shrunk by 5,000 (to 85,000) since 2012, its jobless rate is still around 35%.

On the wall of the bullring someone has spray-painted, in English, “Make Talavera Great Again”. There is only the faintest hope of that. Its pottery has fallen out of fashion; nobody thinks its textile or construction jobs will come back in numbers. The exhibition centre, usually used for livestock fairs, hosted a two-day “Job and Enterprise Fair” earlier this month, but only about 100 jobs were on offer. “Talavera needs to change its economic structure,” says Joaquín Echeverría of the local chamber of commerce.

That applies to the country as a whole. Most Spanish companies are small, family-owned businesses which do not innovate, export or grow. That is partly because they face regulatory barriers. If a firm has 50 workers it must create a union committee. If its sales exceed €6m—a threshold unchanged for 20 years—it faces more onerous tax procedures.

Some digital startups must cope with too little regulation rather than too much. Fintech companies need a regulator if they are to be trusted by customers and funders, says Martha Planas, who co-founded Digital Origin, an electronic microloan and payment service. “If the government doesn’t make the [digital] ecosystem happen, we will have to leave,” she says.

Officials reel off a list of other reforms undertaken since 2012. But many have foundered on bureaucratic resistance and amiguismo (cronyism). Companies face a thicket of regulations by regional governments. Public bodies like employment offices or universities are not evaluated for effectiveness. “The main difference between Spain and others in Europe is its weakness in carrying out public policies,” says Raymond Torres of Funcas, a think-tank.

The 2012 reform did not give employers enough incentives to offer permanent contracts. “Many of the new jobs are highly unstable, low-paid and temporary,” notes Marcel Jansen, a labour economist at Fedea, a think-tank. And too little is being done to help the unemployed get back into work. During the boom, young Spanish men dropped out of school to work on construction sites. They have no other skills. Some 57% of the unemployed have been out of work for over a year, and a quarter for four years or more. “Spain is not developing the policies and institutions needed to deal with this problem,” Mr Jansen says. Training courses are patchy; employment offices offer almost no guidance.

At the height of the boom, 32% of young Spaniards dropped out before completing secondary school. The rate fell to 19% in 2016, but is still the highest in the EU (bar Malta). Mr Méndez de Vigo, the education minister, says he wants to halve it by 2025. A parliamentary committee is discussing a pact to overhaul the education system.

In an election in 2015 Mr Rajoy lost his majority. After almost a year of political limbo and a second election, he formed a minority government last November. With parliament split, he cannot unilaterally push through reforms. Compounding the problem, last month the opposition Socialists re-elected Pedro Sánchez, an uncompromising critic of Mr Rajoy and the labour reform, as their leader.

“We can live for ten or 12 years from what we did in 2012, provided we don’t make mistakes,” says Mr de Guindos. Certainly Spain deserves much credit for the reforms it has undertaken, and its outlook is much sunnier. But if the global economy becomes less favourable, Spaniards may come to lament that Mr Rajoy did not tackle more of the country’s problems when he had the chance.

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