Has Spain Turned the Corner?

After almost two years of doom and gloom, the Spanish government has been trumpeting, perhaps rather too loudly, some good news on the economic front:

• The economy shrank by ‘only’ 0.1% in the second quarter over the first quarter.
• Exports continue to boom.
• The number of tourists this year looks like setting a new record.
• The overall balance of payments (current and capital accounts) in the first half notched up its first surplus since 1997.
• Net foreign direct investment in Spain is on the rise. Car companies Renault-Nissan, Ford, Iveco and Seat have all announced big investments for their Spanish plants.
• Bank results are finally beginning to improve.
• Almost two-thirds of the revenues of the companies that form the Ibex-35 benchmark index of the Madrid Stock Exchange were generated abroad in the first half of the year.
• The risk premium –that term that even taxi drivers are knowledgeable about– on 10-year government bonds over German equivalents has dropped substantially.
• The Madrid stock market has become bullish and is at its highest point this year.

All of this is music to the ears of the government’s economic team, the troika (the European Commission, the European Central Bank and the International Monetary Fund) that has Spain under its tutelage, analysts and foreign investors, but means little to the man in the street, particularly if he is unemployed.

Morgan Stanley’s rating analysts recommended in a long report earlier this month titled ‘Viva España’ that investors ditch Italian government bonds and buy Spanish ones. ‘We are bullish on Spain in outright terms and versus Italy’, wrote Anton Heese and Maggie Chidothe.

The other side of the coin of macroeconomic fundamentals is that the official jobless rate is 26% (I say official because I do not believe it, and this is not to deny the seriousness of the problem), gross public debt continues to rise (92.2% at the end of June, surpassing the forecast for the whole year) and also the ratio of non-performing loans of banks, which at 11.6% and excluding the toxic assets in the ‘bad bank’ Sareb is close to an historic high.

There is no doubt that the economy has improved since the Popular Party (PP) took office at the end of 2011, and the spectre of a full-blow bailout, as opposed to just the one for ailing banks, is now a distant memory. According to Miguel Ángel Fernández Ordóñez, the former and discredited Governor of the Bank of Spain, there was a very real threat of Spain leaving the euro zone because of the banking crisis triggered by Bankia.

The government, by and large, has stuck to its guns and done what it said it would do and what it said it would not do (for example, raising taxes), but then what political party has not broken its campaign promises, especially after winning power and looking at the dreadful state of the public accounts?

Spain is beginning to come out of the woods, but the recovery will be very slow and net job creation will remain the biggest problem for a very long time. Last year’s labour market reforms have had no notable effect on employment, except on part-time jobs and this should not be sniffed at. The number of these jobs reached a record 2.75 million at the end of June (16.4% of the working population). Many part-timers go from being subsidy receivers to tax payers, which improves government accounts both ways. Part-time jobs as a proportion of total employment is still low in Spain, however. The EU average is 20%, and it is no coincidence that the countries with low unemployment rates, such as Germany, the UK and the Netherlands, have a high proportion of part-time jobs.

When a government begins to see some light in the tunnel (in Spain’s case a long one) there is always the temptation to ease up and believe its job is finished.

Close examination of Spain’s position in the components of the World Economic Forum’s Global Competitiveness Index, released this month, shows how far Spain still has to go. Although Spain moved up one notch in the overall ranking to 35^th place out of 148 countries, its already low position in three of the 12 categories –macroeconomic environment, financial market development and labour market efficiency– worsened.

The country’s main strength is its world-class transport infrastructure (6^th place) and a large and skilled labour force, thanks to one of the highest tertiary-education enrolment rates (8^th). Spain also scores well in the availability of scientists and engineers (18^th). The problem is there are nowhere enough jobs for them as Spain’s economy is a long way from being knowledge-based, as it has been excessively based on bricks and mortar. Significantly, the country’s capacity to retain talent is ranked 102^nd, a big drop from 82^nd last year. This underscores Spain’s brain drain: bright young scientists are increasingly working or seeking work abroad.

Lest anyone believe there is a massive exodus from Spain, this is far from the case, although to judge from the Spanish press one would think otherwise. Between January 2009 and January 2013 the number of Spaniards born in Spain and residing abroad only increased by 40,000 (less than 0.1% of the population in Spain) to 1.9 million (three times less than the 6.4 million foreign-born citizens in Spain). Spanish society has in fact been exceptionally immobile over the last 30 years, after massive emigration in the 1960s and early 70s (see the revealing analysis -in Spanish- by Carmen González Enríquez at the Elcano’s website).

The PP faces a general election in just over two years. The Socialists, for the first time since the PP took power at the end of 2011, would very narrowly win an election if it was held this month, according to a Metroscopia poll. Voters are beginning to move towards the discredited Socialists –at the very moment when the PP has some good news– because they do not believe the macroeconomic turnaround tangibly benefits them and because of the toll that the slush-fund scandal of Luis Bárcenas, the former PP treasurer, is taking on the ruling party.

The government cannot afford to rest on its laurels. It has a long overdue pension reform to approve, in the face of trade union resistance, and has not yet started to tackle the equally urgent issue of tax reform. Spain’s tax system is very inefficient, and unless improved the country will never bridge the structural gap over the course of an economic cycle of around 5% of GDP between government spending and tax receipts. Pension and tax reform are vital for lowering the budget deficit on a sustained basis, unless the government is prepared to take an even bigger axe to spending, which is unlikely as it moves close to elections.

* The author’s new book, Spain: What Everyone Needs to Know (Oxford University Press) was published recently.