Prof. José Antonio Sanahuja on the Spanish Economy and the European Debt Crisis

José Antonio Sanahuja is Professor of International Relations at Complutense University of Madrid, and Research Fellow at the Complutense Institute of International Studies (ICEI)

Q:How is the Spanish economy now?Is it going to get worse or turning for the better?

A: Spanish economy is now entering its fifth year of crisis, with a 1,5% fall in GDP in 2012. It’s suffering three interrelated crises: first, it’s a banking crisis, with under-capitalized banks facing liquidity and sometimes solvency problems. It was caused by the combination of inadequate regulation and over-indebtedness, encouraged by external and internal factors: an international and intra-EU cycle of high cheap money in international finance, and the real estate bubble in Spain. Second, it’s a sovereign debt crisis. Central and regional governments are facing increasing fiscal deficits caused by the fall in tax revenues and growing social spending –specially unemployment subsidies, caused by the economic recession, and it has led to a unsustainable risk premium in Spanish bonds. Third, it’s also a growth crisis, with low levels of economic growth and underlying problems of productivity and competitiveness.

It’s important to emphasize that the economic policies imposed by the EU and applied by the Spanish Governments since 2010 –both socialists and conservatives, are more part of the problem, than the supposed solution to the crisis. The reluctance of the EU institutions and “core” countries, particularly Germany, and the inadequacies of the ECB mandate and the Eurozone institutional framework for dealing with “asymmetric shocks” pushed Spain to an infernal loop: spending cuts aimed to re-balance the budget push the economy into recession, driving to more unemployment and falling tax revenues, making deficit goals unachievable. It pushes up bond yields and interests payments of government are now higher than the total payroll of central government employees.

At a certain extent, Spanish economic maladies are self-inflicted by its own policies and its neoliberal bias. As any basic economics handbook could confirm, within a monetary union there is no choice to escape this lethal cycle without cuts in real income or the external economic assistance that a fiscal union could provide. And the Eurozone crisis demonstrated until now that the EU is very far away of such fiscal union.      

Economic forecasts for Spain in 2013 are gloomy. Economic recovery seems impossible with a 26% of open unemployment and more budget-cuts in social services, no credit and falling consumption and investment. Exports, until now the only growing sector, could stop if economic growth slows down in both in the EU and the global economy, as it’s forecasted for 2013. Many of the Spanish banks now depends entirely of ECB financing and the Spanish Governments need to raise around 230 € billion in 2013 to refinance itself. A bail out seems unavoidable, despite –or because the temporary relief provided by Mr. Draghi announcement in August and September 2012 about a massive ECB intervention supporting bonds of countries in trouble. In sum, recovery seems elusive for Spain even in 2014.

Q:It is reported that many Chinese and Latin Americans are saying good-bye to Spain.They leave Spain with lots of money in their pockets. Why does the Spanish government not to encourage them to make investment in Spain? 

A:  Until the third quarter of 2012 there was figures showing strong capital outflows from Spain, fearing a breakdown of the Eurozone. Many banks and business adopted contingency plans, but most individuals keep its deposits in Spanish banks, even in the nationalized ones. Even considering the amount of these outflows and the uncertainty about the Euro, there was not a bank run and basic levels of confidence remained among investors, business and the general population. Again, plans announced by the ECB at the end of August marked a turning point and outflows slowed. At the end of the year, the IBEX Stock Exchange index seems resilient. But it seems clear that the current economic situation doesn’t encourage foreign investors to take positions, even considering that many assets seem to be undervalued and there’re many investment opportunities, particularly for emerging countries’ multinationals.

Q:Then how about the European debt crisis as a whole?Are we seeing any light at the end of the tunnel?

A: It seems clear that the crisis is very far away to be solved. A number of years will be needed to clear debts and the balance sheets of individuals, companies and governments. The problem exceeds the rescued or soon-to-be rescued countries. Deficit and debt levels in France or the UK also are a cause of uncertainty. In the whole of the OECD deleveraging will mean less investment and consumption, and therefore it’s possible to forecast low levels of growth for advanced economies.  Now it seems clear that the engines of growth are shifting to emerging economies, but it’s difficult to assess at what extent they will be affected by low economic growth in advanced countries.

Developments in the Eurozone continued following the usual exasperating slowness in EU decision-making. However, since the summer of 2012 a number of positive developments could be mentioned. As it was pointed out earlier, the September 2012 ECB bond-buying plan for countries accepting a bailout marked a watershed in the Eurozone and until now Mario Draghi statements seemed to have the same influence taming bond spreads that the own ECB intervention that he announced. It gave EU leaders the hardly needed time to put into operation the new European Stability Mechanism (ESM), formally established on 27 September 2012 as a permanent firewall for the Eurozone with a maximum lending capacity of €500 billion. It also gave breathing space to negotiate an agreement for recapitalizing banks in the event of a ECB bailout, achieved in October 2012, and the agreement for a EU-wide banking union, achieved in December 2012.

A “Grexit” –the potentially catastrophic exit of Greece from the Eurozone, was also avoided in the last weeks of 2012 with a broad program of bond repurchasing equivalent to a debt restructuring.

All these events demonstrate that the EU is determined to avoid the breakdown of the Euro, even in the case of Greece, and it also indicates that the EU is firmly establishing the new foundations of the Eurozone. Perhaps, in an optimistic mood, it could be said that the summer of 2011 and the summer of 2012 marked the worst phase of the Eurozone crisis.

However, there are many factors of uncertainty in 2013 considering the huge financial needs of a number of EU member countries. Additionally, defining the small print of the aforementioned agreements will take time and there are not sign of the hardly needed growth policies to mitigate the harsh effects of economic adjustment in Eurozone periphery. Of course, there is light at the end of the tunnel, but the tunnel seems to be very long and the light is yet very small.                   

Q:The European debt crisis will be over in the end of the day.The question is: how can we say that the crisis is over.Ireland has witnessed positive economic growth.Can we say that Ireland has resolved the debt crisis?

A:  “Crisis” is a complex word and it could have a number of meanings. In many cases “crisis” mean “transformation”. The EU that will emerge from this crisis will be a very different one. Therefore the end of the crisis will not be the return to any previous situation.

Establishing the landmarks for the end of the crisis also means judgements guided by value-preferences. The end of the crisis could be marked by economic recovery and/or the return of confidence to the markets and the recovery of bank lending across EU countries. But the social backlash and the budget-cuts in social spending must be also considered. The IMF has warned about the risks of a “lost generation” in the countries affected by high youth unemployment that in the case of Spain peaked at the stratospheric level of 50%.

A recent study by Intermón Oxfam (the Spanish affiliate of Oxfam International) based in the experience of previous debt crisis in Latin America and Asia forecasts a two-decade long period of recovery for employment and social spending indicators. We can ask also for the impact of the crisis in social, economic and territorial cohesion, taking in account that cohesion and real income convergence is one of the stated goals of the EU. The regression in equality and convergence indicators already point to a decade backlash. If we look at the social impact of the crisis, the end of the crisis seems to be more elusive. Taking into account all these things, it’s difficult to affirm that the crisis in Ireland is over, even considering some positive indicators in its economic performance.

Q: It seems that the EU would like to strengthen its relations with Latin America and other developing areas. Why so?Is it because the EU is in a difficult time so that it needs external help to tide over the debt crisis?

A: The Lisbon Treaty reinforced the EU’s external action vision, goals and means. However, the EU seems to be unable to articulate a common foreign policy in many relevant issues of international relations. Despite Lisbon, the EU seems to be a fragmented power afflicted by self-inflicted international irrelevance. Additionally, economic crisis imperatives focused the EU institutions and EU leaders in its internal short-term economic problems and the need of long-term Eurozone reengineering. The emphasis in pro-cyclical adjustment policies put the EU in the

Within this framework, EU external relations haven’t progressed in the last years and the growing efforts for advancing economic interests abroad are framed and deployed mainly in the national level. A number of EU member countries are deeply involved in “neo-Colbertist” policies to promote exports, foreign investment and/or the purchasing of treasury bonds to foreign investors and sovereign wealth funds from emerging countries. The mood is improving each country national “brand”, not the European one.

Latin America remains as a non-priority area for the EU, and it seems resigned to lose ground to the new Asian partners of Latin American countries. However, since 2010 the EU has signed new free-trade agreements with Central American countries, Colombia and Peru, and despite many difficulties ahead, EU-Mercosur negotiations remains open and there’re positive signs by both sides.

Obviously, Spain remains committed to Latin America as a foreign policy priority, and the crisis is rebalancing the relationship and changing the Spanish view of the Latin American countries. At the 22nd Ibero-American summit in Cádiz in November 2012, the Spanish Government asked for foreign investment from the Latin American countries and emerging “multilatinas”, and offered its well educated-but unemployed human resources as a development catalyst for its Latin American partners.