Communication for 17^th Workshop on Alternative Economic Policy in Europe, Vienna, September 2011

Autores:
Miren Etxezarreta (Universitat Autònoma de Barcelona)
Francisco Navarro (Universitat Autònoma de Barcelona)
Ramón Ribera (Universitat Oberta de Catalunya)
Victòria Soldevila (Universitat Rovira i Virgili)
All members of the Seminario de Economía Crítica TAIFA

Lugar:Vienna

The records of the Spanish economy in 2010-2011

 

Unemployement:	More than 4,800,000 unemployed, 21% of working population, June 2011; 46% among young workers; June 2011. 1,370,000 families with all their members unemployed
Evictions	300,000 in 2010 because of lack of mortgage or rent  payment:
Black economy	17% of GDP= a fiscal fraud of 30,000 million € a year = 20 times the Government savings with the pension freeze= 4 million workers(other estimates increase the black economy to the 20-22% of GDP)
Business profits	the 35 biggest enterprises of the IBEX (Stock exchange) had profits of 49.881 million € in 2010Increase of 24.5% over 2009. Business profits increased 4.1% and wages 0.5%. Big banks had profits of 15,300 million €
Remunerations  of high directors	Those of the IBEX35 increased 20% on average
For instance:	Telefónica has increased profits a 30,8% in 2010 to 10,167 million6,000 workers were dismissed to keep competitiveness
Source: Adapted from I. Escobar: ‘La economía bate records’. Público 3/3/11

 

 

 

Abstract

 

In the last twenty years Spain has experienced a period of rapid growth followed by a very deep crisis. Until 2007, it was named ‘the Spanish economic miracle’ and now it is the country with the highest unemployment rate in the EU amongst many other very serious troubles. The present economic crisis has brought severe problems to the economy and society of the country which are proving to be rather intractable. Spain has become a very relevant part of the European periphery and the problem of its indebtness, especially external debt, is being adduced as a key element for today’s policies. All this process has been developed around, and cannot be dettached from, Spain’s integration to the European Union and the Eurozone.

 

The purpose of this paper is to explore the reasons for that evolution, especially dealing with the events of the last ten years, the policies that have been implemented to deal with the crisis, the influence of the EU upon them and, in particular, the consequences of those policies for the population. A very tentative view about what are the economic and social prospects of the country for the near future will also be intended.

 

 

1. A brief snapshot of the Spanish economy

 

Spain has historically been a poor country in relation with the rich countries of Europe. But after the development initiated in the sixties and having gone through all the process of full incorporation of the country into developed capitalism even if cut across by many specific elements[1] and with its integration in the European Economic Community, gradually Spain started to feel a full member of the rich part of the world. At the beginning of the 21^st Century we find a country with a level of income and an economic structure similar to the second rank countries of the EU. Indeed, Spain became the fifth industrial power in Europe.  No longer Spanish leaders considered themselves part of a poor country but members of an important industrialised country, even if in the opinion of European and World leaders it has never attained at best more than a second rank classification. It seems Spain had ‘developed’ at least in economic growth and industrial structure. (see Figure 1.1 and Figure 1.2).

 

Figure  1.1- GDP Growth rate, Spain, 1971-2010

 

Source: Own elaboration based on OECD, 2011

 

Figure 1.2.- Relative evolution of the GDP per capita, Spain, (EU=100)

 

Source: Own elaboration based on OECD, 2011

 

The evolution of the Spanish economy since the sixties of the past Century may be briefly described as follows: There is a first industrialisation and urbanisation drive in the sixties. Internal demand was growing due to industrialisation, urbanisation and the corresponding increased incomes and the country could export thanks to low wages and a submitted labour force. During the eighties, Spain is integrated into the EU with a productive model based in low labour costs and low level technology (automobile, food industries) and compelled to compete with European industries under the pressure of the Single Act. Increasingly the country became an interesting market for the central countries of the Union.

 

This productive model deteriorated with increasing world and European competitiveness (East European and Asian countries) and in 1994 unemployment was at 24,1% of the working population. Pressure upon wages increased and especially working precariousness was used (submerged economy, temporality, short term labour contracts that accounted for more than 33% of labour contracts according to official statistics and to more than 50 % according to other estimates[2]) that decreased internal demand. The economy recovered a little due to four devaluations between 1992-94, increasing labour precariousness and the beginning of the building bubble. In 2000 unemployment was 20,4% and in 2004 12,2%. But to participate in the eurozone because of the Treaty of Maastricht another adjustment program was established and, without devaluation, competitiveness (internal and external) became more difficult. Nevertheless the euro permitted to keep a greater external trade deficit. In front of the problems of this model, capitals looked for non tradable sectors where competition was not relevant (building industry, commercial big areas) or oligopolic sectors being privatized (energy, communications) or financial speculation. On the side of demand, the willingness to reach the ‘European level of consumption’ was maintained and even increased through cheap credit, especially to buy apartments and the building industry boom was established.

 

During the period from 2000-2007, the Spanish economy was booming. Alongside the “Irish Tiger”, the Spanish economy grew fast; it was admired for its liberalization processes, its new openness to international markets, with new emerging global players such as Telefonica, Ferrovial or Banco Santander. Obama’s Transport Secretary visited Spain to check on the impressive new high speed train lines. Unemployment in 2007 was at the lowest since democracy even after absorbing more than 4 million economic immigrants in a decade. The housing market was highly dynamic and prices surged. After advancing Italy in GDP per capita terms in 2007, the president of the government, J.L Rodriguez Zapatero was feeling so confident that announced that in few years time, Spain will overpass France. Spain was pushing hard since Aznar administration to be recognised as an economic power and lobbying to enter in G8. Again Spain had an ‘Armada Invencible’ (or Spanish Armada)[3]. This time, composed by business men, financiers and investors.

 

However, despite a ‘decent’ average figures for income per capita (see Figure 1.3), an important income increase for most of the population and a very significant improvement in their qualitative ways of living – moving from a mainly rural and poor country to a industrialising and urbanised country -,   the social picture is not so favourable, as can be seen in Figure 1.4. and Tables 1 to 4.

 

 

 

Figure 1.3.- GDP per head, Spain and EU-15 (1971-2010)

 

Source: Own elaboration based on OECD, 2011

 

Real wages have increased very little since integration in the EEC (except at the beginning of the nineties), and both wages and share of wages have always increased at smaller percentages than in the EU-15; moreover, the share of wages in GDP has decreased during the whole period at Spain (See Figure 1.4.) as it has happened in the EU.

 

Figure 1.4.- Wages, gross operating surplus and taxes as GDP percent, Spain.

 

Source: Own elaboration based on OECD, 2011

 

Indeed, it can be observed how social services are less satisfactory. Education, health, and other social elements are poorly provided for and expenditure on them is well below that of many other European countries (Table 1.1). These low levels have their base in the inheritance of the dictatorship and the relative gap in the social rights due to it. This shortfall (though declining) continued when Spain joined the EU, as well because fiscal pressure has been considerably lower than in the Union (Table 1.2).

 

Table 1.1.- Social benefits other than social transfers in kind (%GDP)                          

	1990	1995	2000	2005	2009
European Union (27 countries)	:	:	:	19.8	21.8
European Union (15 countries)	:	20.9	19.4	20	22.2
Germany	:	25	25.8	26.6	26.7
Spain	:	15.7	14.3	14.2	17.5
France	:	22.8	22.1	23.4	25.4
Italy	17.6	18.2	18.7	19.8	22.1
Finland	15.7	23.3	17.8	18.7	20.9
Sweden	:	22.2	19.5	19.7	20
Source: Eurostat, 2011 (no data found for Spain  before 1990).

 

Table 1.2.- Fiscal pressure (% GDP)

	1985	1990	1995	2000	2005	2009
European Union (27 countries)	:	:	40.8	41.7	40.4	39.8
European Union (15 countries)	:	:	41	42.2	40.8	40.3
Germany	:	:	41.3	43.3	40.2	41.1
Spain	:	:	33.6	34.8	36.4	31.3
France	44.5	43.4	44.5	45.9	45.4	43.5
Italy	47.1	49.7	38	42.1	40.7	43.4
Finland	42.2	45.2	46.3	47.4	44.1	43.3
Sweden	:	:	48.5	52.1	49.3	47.4
Source: Eurostat, 2011

 

Looking at the overall distribution of income, we can observe that is more unequal and the risk of poverty higher than the rest of EU15 (Table 1.3 and Table 1.4). In other words, we find a rather ‘correct’ economic development with a social development that lags far behind, no doubt as the inheritance of many years of dictatorship and the maintenance of the conservative powers and policies since them.

 

Table 1.3.- Income distribution. Gini index[4]

	1995	2000	2005	2009
EU-15	31	29	29.9	30.3
Germany	29	25	26.1	29.1
Spain	34	32	31.8	32.3
France	29	28	27.7	29.8
Finland		24	26	25.9
Sweden			23.4	24.8
Source: Eurostat, 2011.

 

Table 1.4.- Risk of poverty or social exclusion.  (% of the population)

	2004	2005	2006	2007	2008	2009
EU-15	:	21.5	21.8	21.7	21.5	21.1
Germany	:	18.4	20.2	20.6	20.1	20
Spain	24.4	23.4	23.3	23.1	22.9	23.4
France	19.8	18.9	18.8	19	18.6	18.4
Italy	26.4	25	25.9	26.1	25.3	24.7
Finland	17.2	17.2	17.2	17.4	17.4	16.9
Sweden	16.9	14.4	16.3	13.9	14.9	15.9
Source: Eurostat, 2011 (no data found before 2003).

 

Yet, as capitalism is crisis ridden, sooner or later, the contradictions of capital will emerge and explode, bringing a period of strong restructuring.  When the world crisis arrived at Spain all that new economic power melted in the air, growth vanished and Spain became one of the European countries more affected by the global downturn. Again, the Armada Invencible was beaten. 

 

A very brief account of that evolution is what we intend to present in this paper, arguing that the rise and fall of the so-called “Spanish economic miracle”, was based on very thin and unstable foundations. These foundations can be explained through how the Spanish economy was inserted in the circuits of global capital in the last half a Century, and in particular, its evolution in the last 15 years. Thus, when the contradictions of capital at global scale emerged, the house of cards of the Spanish economy fell down.

 

The paper is organised as follows. First, prior to analyse the current crisis in Spain, we will briefly explain how Spain has been connected to the global and European circulation of capital, and how its particular form of productive integration has brought the seeds for the unleashing of a major crisis in the context of the global financial turmoil. Secondly, we will analyse in more depth some of the determinants of that crisis to then discuss its combination with the debt crisis. Finally, we will present some reflections in the frame of the EU on the short and medium term scenario for Spain.

 

2. Economic integration and the European periphery

 

2.1. Spain in the European Economy

 

European economic integration embodies countries with very different productive models and varied competitive levels. Industrial specialization of the economies of the European periphery has been mainly based on keeping competitiveness by having low costs, mainly labour costs, thus, implying productive process of lower added value, second rate technology and high weight of little qualified labour. This has been the industrialization model of Spain.

 

European integration during the last decades has taken place in a context of globalization of capital with important changes in international and global redistribution of production and labour competitiveness. In this process, European investment and industry have been relocated to countries like China, India, and particularly to Eastern Europe. The previous advantages of the European periphery of low labour costs and legal permissiveness were losing competitive strength in front of the new members from Europe, more specifically, the relocation of European investment flows in the process of eastward enlargement of the European Union. Its  relocation had clear losers for the other peripheral countries, including Spain. In this sense, the Spanish economy, along with other economies on the periphery of Europe as Greece and Portugal, have lost weight in the relative advantages for trade and in the attraction of international foreign direct investment (FDI) with respect particularly to Asia and Eastern Europe. This is a key factor in the process of deindustralization and degradation of the accounts of the external sector of the Spanish economy that has been progressively losing weight in international trade, and especially in the European one.

 

Competition of the Central economies in the context of the European Union and, especially, from the creation of EMU, has made more difficult, along with other factors (educational levels, etc.) the transformation of the productive structure towards higher technological content and greater value-added sectors. The weight of the sectors of advanced technology inside the Spanish production structure rose from 6.4 per cent of the industrial GVA in 1986 to 7.4 per cent in 1995, to decrease back to 6.5% in 2007 (and thus, much less than the weight of these sectors in the EU-25 = 11.8%). The external competitiveness of those sectors has also been eroded: cover rate of the most advanced industrial sectors has declined from 51.8% in 1995 to 40% in 2008 (Myro and Gandoy, 2009). Furthermore, there are the most advanced industrial sectors, which, in relative terms are being more affected by relocations (Myro and Fernández-Otheo, 2004).  

 

A reverse process happened in central countries such as Germany and The Netherlands, where their specialization in industrial sectors and services of high-tech and its privileged competitive situation in the European and global space has allowed them to maintain a constant current surplus thanks, in large part, to demand from the European periphery. Meanwhile the periphery has to survive with low value added industries and increasing debts, in particular external debt.

 

The model of trade relations in the euro area presents a composition of peripheral demands dominated by products manufactured abroad, the larger part in the central European zone. The peripheral countries have provided with a demand that has benefited the core economies on the continent. The indirect effects of final demand from countries such as Spain on the export of Germany should be considered in this process. Even important effects of drag (backward linkage) final demand manifested through sales of intermediate products and machinery of high technology to developing countries like China which is used to produce the final goods consumed ultimately by Spain. The economic space of the EU has been changing from a situation where the periphery has moved from being the precarious industry of Europe to become places aimed at ensuring an abundant demand fed with debt for the production of the central countries, the later being at the same time the main suppliers of credit to the peripheral countries that buy the products.

 

The result of these very different dynamics in the European Union has been a trade imbalance and a growing divergence in competitivity between the centre and the periphery. It is true that the levels of per capita income have starred a slight convergence during part of the first decade of the 21st century, however differences in competitiveness and production models have increased, resulting in a growing instability as a reflection of the profound imbalances in the euro zone.

 

Therefore, a feature of the economies of the Eurozone is the confluence of countries with continuous current-account deficits on the one hand, geographically located in the periphery, and on the other hand, countries located primarily in the central area, with surpluses on their current balance, especially Germany. Both dynamics are negatively correlated, in the sense that the deficits of the first are the surpluses of the latter, a situation that has resulted in a structural divergence between both groups of countries.

 

Figure 2.1.- Surplus/deficits in current account as percentage of GDP

 

Source: Own elaboration with Eurostat data.

 

As it can be seen in Figure 2.1 that these deficits consolidated and increased highly with the Monetary Union and the facilities that it generated in the peripheral demands.

 

But demand has to be financed and it has been in a high part financed by external debt, by resources of various kinds. Especially because the Spanish economy has gone in the last decade from being a net recipient of FDI to a net emitter. This is due both to a stagnation of direct investment inflows and an outstanding increase in investments of Spanish companies abroad.

 

The external debt of the peripheral countries of Europe has been financed mostly by financial institutions of the central countries, funds which originate in the trade surpluses we have commented upon. Thus a round circle was established: the banks of the central countries provided with the credits to the periphery countries for these to buy the goods produced in the central countries.

 

In Spain, as in the rest of the periphery, most of these resources have been exclusively financial in nature, where the portfolio investments and bank loans have become the main source of funding for the last decade. According to the Bank of Spain, portfolio investments doubled its weight in GDP in the 4 years prior to the crisis, from 50% in 2003 to 104% in 2007, displacing the importance of foreign direct investment (FDI). This fact is explained on the one hand by the change in the form of funding such financing in a context of high financial innovation, and on the other hand by the important decrease in received FDI.

Before the crisis, Spain had one of highest external debt as percentage of its GDP among the most important countries in the world – in 2006 and 2007 current account deficit was 9% and 10% of GDP, while it was the second in absolute value, only behind the United States. It has decreased because of the crisis to 6% in 2009 and 4.7% in 2010.

 

Without downplaying the competitive decline of the Spanish economy, the adoption of the euro has been key in this process since it allowed for many years a high external deficit with nobody in the decision making realm caring for an infeasible level of external debt. Besides facilitating trade the less competitive countries lost their main strategy for external imbalances (devaluation) and were submitted to an institution as the ECB mainly caring for the central counties interests. Sharing the same currency led to the abandonment of the ‘risk premium’ (prima de riesgo) for the Spanish debt for our main creditors.  This in a context of fall of real and constant interest rates with constant innovation and financial deregulation increased private indebtedness disguising the feet of clay of the Spanish economic growth and the imbalances of the eurozone. 

 

2.2. The role of the European Union in the integration of the Spanish Economy

 

We all know the role of the EU in all this process. In the first period after accession (1986, the year of the Single Market) the fact that Spain belonged to the EEC gave security to European investors more interested in buying existing industries than expanding or improving the productive capacity, while many Spanish entrepreneurs took the opportunity to sell their industries. The Single Market also facilitated as we say above that Spain became a good market for the products of the central countries of the Union (including technology and technological knowledge). An important number of small industries disappeared and the productive tissue of the country already weakened by the crisis of the seventies approached a dual structure: few modern corporations and many small traditional ones struggling to absorb advanced technology in order to produce competitively for the internal market and export. A high external deficit developed that could only be solved with four devaluations in two years (92-94) but of course, after the euro no such instrument could be relied upon.

 

The Maastricht Treaty (1992) and its conditions together with the strong will of the Spanish Government to be among the first group of countries in  EMU led to a though adjustment program during the first part of the nineties. The macroeconomic conditions for taking part of the eurozone were fulfilled and the country became a full member of it but the economy did not recover before 1995.  In the realm of production the car industry and tourism expanded, but competitiveness lagged behind and the big increase in imports and the smaller if positive development of exports led to the corresponding high deficit in current account. However, since belonging to the Union has permitted a high external deficit no preoccupation due to it appeared even among the main economists of the country.

 

We are proud Europeans with the new currency now, but except for the peasants no many improvements for the population came from ‘Europe’ despite that the country has been a net recipient of European funds for around 1-1.5% of its GDP since accession to 2013 when Spain will start to satisfy a net contribution to the Union.

 

But no policies exist at the Union to improve the productive structure of the member countries. Well until the second half of the nineties the structural funds (FSE, FEDER and the development part of the CAP) were but a very small proportion of the total budget of the Community. The proportion increased in the late nineties- together with the Cohesion Fund they account for more than a third of the total budget of the EU- but the total budget has not increased but decreased and we all know the poor funds that it allows for. Besides, those funds were mainly directed to agriculture and regional development in some sort of ‘poor region and agriculture assistance’. Moreover, a proportion of these funds coming from the Union have been mainly utilized to build infrastructures (some of them absurd, as the many kilometres of High Speed Trains (AVE) built, we are the country in the world with more kilometres of AVE except China, or of motorways or many municipal sports camps), whereas the European Social Fund (ESF) was dedicated to cater for the many courses (same of them fake) that were given to unemployed workers by the Unions and Employer Associations[5].

 

Imbued as it is that the markets are the best instrument for economic development the Community has never had any programs to balance or improve the nucleus of productive capacity of the member countries[6]. The other way round, in fact public subsidies to enterprises are forbidden. The policies of the Union have led to the development of the central parts of it, remember the ‘golden banana’. Nevertheless most of the population and especially all those in any position of leadership or power considered that being members of the EU was full of advantages.

 

3.-The ‘domestic’ pattern of growth: housing bubble and ‘national champions’.

 

Summing up, during the 1990s the Spanish economy was heavily dependent on foreign capital that had already started to move out towards Eastern Europe, Asia and North Africa. Locally owned capital, in general terms, remained uncompetitive internationally.  The economy was driven by internal demand, tourism and thanks to the EU Structural and Cohesion Funds, investment in infrastructures was possible beyond the capacity of the Spanish state. Yet, in the late 1990s and early 2000s, this receipt for failure was transformed into the “Spanish Economic Miracle”. This so-called miracle was sustained by two major set of events. On the one hand, and the most prominent, the housing bubble; on the other hand, and though more discursively than effectively, the internationalisation of a few Spanish-based holdings created from the privatisation of state companies and monopolies.

 

3.1. The rise of the housing bubble

 

After the year 2000 and following the world trend, liquidity was abundant and the rates of interest low. A number of elements existed and developed that led to an enormous expansion of the construction industry all over the world.[7] In Spain, that expansion was spectacular. The reasons behind these developments are several. The most important among them were:

 

First, there was a lack of profitability in the manufacturing and service economy. As mentioned before, the Spanish economy was weak, with low productivity. Its competitiveness depended on reductions of real wages and not on innovation. Spanish manufacturing was facing strong competition; also, the first 90s witnessed a new austerity program and diminishing of growth while for the late nineties there was the enlargement of the EU and the rise of China. Therefore a strong reduction of profit margins in the real part of the economy and the moving of funds to other undertakings.

 

Second, there existed already an important building industry. In Spain, since the Franco era have existed a small number of important construction industries (particularly civil engineering ones) that had grown at the shadow of big public works economic, through favours from the State and even and political corruption. At present, 5 Spanish enterprises are among the 50 greatest enterprises in the world and most of them originated during Franco period.

 

Third, during the second part of the nineties important deregulation measures and a very permissive legislation for building and urbanisation took place. Land use was liberalised, and critically, a new category of land was created: “suelo urbanizable” (developable land). That is rustic land that can be categorised as potentially site for construction. Moreover, one of the most important sources of income for municipalities (the tax on economic activities, IAE in its Spanish acronym) comes from the permits for building. Thus the activity of municipalities requires and  construction permits an increased source of funds for local authorities and more relaxed financing procedures.

 

Fourth, a situation of abundant and cheap credit both the world over and also in Spain, that provided credit with good terms, on the one hand to the building and real estate industry and for apparently cheap mortgages for families, on the other. In contrast to USA for instance, it is worth mentioning that almost the half of mortgages given in Spain during that period were given to developers. It was not uncommon that developers started a promotion based only with 20% of own sources, and the rest leveraged through mortgages.

 

Fifth, an historically degraded dwelling stock, cheap credit and new developments meant a longing for better homes of the Spanish population that devoted their newly found incomes mainly to the provision of better housing.

 

Finally, also a fair number of European visitors decided to buy an apartment or a house in Spain, especially in the sunny areas of the East and the South, were many English and German pensioners found a good climate and cheap cost of living in relation with their pensions. Also, in the last period of the boom immigrants who had a job, mainly in the building industry, started to buy apartments.

 

In this scenario an entrepreneurial class developed rapidly seeking high short term profits-many times, housing development changed ownership several times even before the beginning of works-, and prepared to pressure public authorities to obtain very favourable terms for urbanisation of rural lands and building.

 

Many enterprises expanded their previous trade or started building apartments[8] which were sold very easily with the help of ‘favourable’ terms of credits to buying them as well as fiscal benefits for buying them. The prices of apartments started rising very rapidly and strongly but credits were awarded for longer periods – mortgages changed from 12-15 years to 30-40 years – and the rate of interest was low, therefore many working people could afford a new house[9]. The idea that the value of houses could only go up was well established and the very wide offers of credit by the banks and the Savings bank led people to engage themselves in apartments at thirty of forty years mortgage. People kept buying thinking that they could always sell the house if they changed their mind or found themselves in difficulties. Building followed a hectic rhythm.  The big building enterprises led the way but they were followed by every small entrepreneur and workers of the building trades that could buy a piece of land started building houses. So much so that from 2004 more than 500,000 apartments or houses were built per year, and in 2005 more than the ones built by France, Germany and the United Kingdom taken together (Observatorio de Energía y Sostenibilidad en España, 2008) creating a housing stock of 23 million in a country of 45 million inhabitants) (Chislett, 2008). Note that this means using a very great share of the funds for investment in the country. Foreign investment in real estate increased sensibly up to 7,000 million euro. Building and selling house became the big business of the country accounting for 15.7% of Gross Value added and 23.4% of employment.