Spain prospers despite political stalemate

Posted on September 5, 2016

Mariano Rajoy, Spain's prime minister, speaks during an investiture debate at the Spanish parliament in Madrid, Spain, on Tuesday, Aug. 30, 2016. Rajoy is trying to piece together the first administration since Spain’s traditional two-party system broke down with the emergence of Ciudadanos and the anti-establishment party Podemos at last December’s election. Photographer: Antonio Heredia/Bloomberg©Bloomberg

How much government does a country need to create jobs and grow the economy?

In the case of Spain, the conclusion after eight months of political stalemate seems to be: not very much.

    The country has been in the hands of a largely impotent caretaker government since December. Mariano Rajoy, acting prime minister, cannot initiate new legislation, appoint ministers and senior officials, or even pass a budget. Spain’s parliament has not approved a single new law since October last year.

    What is more, there is no sign that the current political blockade is about to end: last week, parliament voted twice on a bid by Mr Rajoy to lead another government. He fell short on both occasions. Unless the fragmented legislature rallies behind a candidate in the next two months, Spain will have to hold a third general election in a year, possibly prolonging the period of drift deep into 2017.

    Spain’s economy, however, has proved remarkably resilient in the face of this political adversity: GDP growth has remained steady at 0.8 per cent for four consecutive quarters, putting the economy on course to grow more than 3 per cent this year — well above the European average.

    Unemployment has fallen sharply from its peak, and is expected to drop below 20 per cent for the first time since 2010. Despite the weakness in key trading markets, Spanish exports rose 2.3 per cent in the first half of 2016, reaching an all-time high. Consumer spending and business investment also continue to rise.

    Economists argue that Spain’s protracted political uncertainty has indeed had a negative impact on growth, but that any drag has been more than compensated by other factors. “Spain has everything working in its favour right now — from cheap oil and low interest rates to a great year for the tourism sector and last year’s tax cuts, which have helped domestic demand. With all that and the reforms that were done by the government in the past, the economy is flying on autopilot, says Federico Steinberg, economist at Real Instituto Elcano, a think-tank.

    FT View

    Spain’s political deadlock has gone on far too long

    Spain's acting Prime Minister Mariano Rajoy and Ciudadanos leader Albert Rivera (R) attend their meeting at the parliament in Madrid, Spain August 28, 2016. REUTERS/Andrea Comas

    The Socialist party leader should use his power to break the logjam

    “You don’t need to pass a law every week for the economy to function.”

    Jesús Fernández-Villaverde, economics professor at Pennsylvania university, makes a similar point, but also warns of the longer-term damage created by the current impasse. “A modern state is a well-oiled machine that can run itself for quite a long time without major problems,” he says.

    “The real question is not about the resilience of the Spanish economy this year but about the costs in the medium and long-term. The real cost is that we are not reforming the education system, we are not improving the labour market and we are not taking measures to raise productivity for the next 10-15 years.”

    According to separate estimates by Prof Fernández-Villaverde and by economists at BBVA, the Spanish bank, the political uncertainty has shaved a few decimal points off this year’s GDP growth. At the same time, BBVA last month raised its overall 2016 growth forecast from 2.7 per cent to 3.1 per cent, highlighting how, at least for now, Spain’s political troubles are more than compensated by other factors.

    “If the political uncertainty didn’t exist, we could be growing at 3.4 per cent,” says Rafael Domenech, the bank’s head of macroeconomic analysis.

    But, like others, he also worries about the long-term consequences of the stalemate, both in terms of reduced growth and the failure to pass much-needed reforms. “This is like watching your child grow. Day by day you don’t notice much change but 20 years down the line the impact is clear,” warns Mr Domenech.

    For the moment, Spain is still reaping the benefits of reforms pushed through by the Rajoy government in its first tenure (when it enjoyed a comfortable majority in parliament). Among other measures, it took steps to liberalise the labour market and to overhaul and recapitalise the banking system. “They restructured the banking sector and basically did what Italy should have done years ago but still has not done,” says Nicolas Véron, senior fellow at Bruegel, the Brussels-based think-tank.

    He argues that governments — even ones equipped with solid majorities — often have only brief windows to push through structural reforms. In that sense, the Spanish impasse is not so different from the situation in other European countries.

    “A government is useful when it has the capacity to act and to take difficult decisions,” says Mr Véron. “But the truth is that many European governments are not making those difficult decisions even when they are in power.”

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