Fiesta Del Few

MADRID — They say the party is back on in Spain. Money "is pouring in from everywhere," according to Banco Santander Chairman Emilio Botín, and the country’s benchmark stock index, the Ibex 35, is up around 20 percent since January. Last week, the Bank of Spain confirmed that the economy is finally growing again after a nine-quarter recession. Even Bill Gates has gotten in on the action, taking a 6 percent stake in Fomento de Construcciones y Contratas, one of Spain’s biggest construction companies. But if the party is back, it’s a decidedly elite gathering.

Only big business and those who enjoy access to international finance appear to be on the guest list. As for the vast majority of Spaniards? Well, their best hope is to find work popping champagne corks for those who made the cut. 

The collapse of Spain’s banking system — and the sheer quantity of previously unwanted real estate and low-priced office space — means the bargain hunters are moving in; according to El País newspaper, international investors have bought stock and property worth nearly 14 billion euros so far this year after a desperate 2012 that saw virtually no sales.

And now, after the longest recession in living memory, the economy is growing again — just barely — with the Bank of Spain reporting 0.1 percent quarterly rise in gross domestic product (GDP) for the July-September period. This year will still see Spanish output shrink by over 1 percent, while the government’s forecast for next year stands at an anemic 0.7 percent growth. That’s hardly likely to make a dent in the country’s crippling unemployment figures of 26 percent, or just under six million.

After a half-decade of crisis in the form of a double-dip recession, Spain’s recovery period is set to be painfully gradual. What’s worse for those who are out of work — and for the growing proportion of Spaniards whose labor conditions are precarious — is that the ongoing human crisis may actually form the basis of the Popular Party (PP) government’s recovery plan: a low-wage, low-tax, and ultra-flexible discount sale where investors can place their bets.

Not that it appears to be making a dramatic impact. Apart from the headline figure of the first quarter-on-quarter rate of growth for two-and-a-half years, the Bank of Spain’s report on the economy in the third quarter made for somber reading. In addition to the fact that the economy had shrunk by 1.2 percent over the previous year, the figures showed that Spain’s domestic market is still contracting, making a negative contribution to a meager output of 0.3 percentage points on a quarterly basis. The head-above-water overall growth rate is thanks to net trade — exports minus imports — which boosted GDP by 0.4 points. But even this is bad news. Imports are down because so many Spanish households are in scrimp-and-save mode, while exporters are becoming more competitive thanks to lower wages, which are falling in real terms.

"No one is laying out on anything, unless they really have to," said one unemployed mother in Madrid in late October. Third-quarter unemployment figures showed a slight drop, but the number of indefinite contracts fell nationwide by 146,300, offset by a slightly more dramatic rise in temporary jobs.

"There has been a major adjustment, a big internal devaluation with negative consequences for the people," says Miguel Jiménez, the financial editor at El País. Of course, this has been a selling point for the right-of center administration. According to Finance Minister Cristóbal Montoro, it has managed an internal devaluation of the magnitude of 30 percent: "What’s more, it is a devaluation without inflation. It is extraordinary. This allows Spain to recover credibility," the minister crowed in a recent El País interview.

News this week, however, brings the specter of deflation into view, with a National Statistics Institute flash estimate of -0.1 percent on price variations for the year up to October.

So how were the seeds of this internal devaluation sown? When Prime Minister Mariano Rajoy’s government introduced its 2012 labor reform, the biggest howls were directed at its plan to make it easier for companies to terminate employees. Now, it is indeed easier and cheaper to downsize, but what is turning out to be even more significant is that employers can now unilaterally cut salaries citing "objective causes." Falling sales, it turns out, are reason enough.

"In part, this was the plan: to bring costs down," says Jiménez, pointing out that the effects of such a sly economic strategy are naturally limited. "With the unemployment levels we have, internal demand is in the doldrums. There is not going to be real growth for a good while."

And yet, optimism prevails — at least in the world of high finance. "We are optimistic on the euro periphery as a whole and Spain in particular," Berenberg Bank economist Robert Wood recently told Bloomberg Businessweek. "The country has made big structural changes," he added. "It’s been engaged in a lot of deficit reduction, business sentiment is improving and unemployment is probably close to a peak." Berenberg Bank forecasts that Spanish growth could be as high as 1.4 percent in 2014.

The Popular Party government in Madrid is somewhat less sanguine, predicting 0.7 percent growth next year, while the International Monetary Fund is still insisting on a nearly flat 0.2 percent.

So whose portrait of the Spanish recovery bears a closer resemblance to reality? In a way, both capture elements of the truth: Investment is pouring into the country, but it’s not making a lot of difference for the vast majority of Spanish citizens.

According to financial analyst Juan Ignacio Crespo, the continued inflow of foreign capital into a more competitive Spanish labor market represents the way forward. Crespo acknowledges that there’s been a dramatic transformation since Spain was forced to accept an EU-sponsored bailout for its troubled banking sector in June 2012 (for starters, the risk premium — the added profit investors demand for holding Spanish sovereign debt over the rate on the German bund — is now stable at around 230 basis points compared to the unsustainable levels of 600-plus in the summer of 2012.) But he argues that more investment is needed to prevent Spain from becoming choked by its ballooning public debt, which will probably reach 100 percent of GDP next year. Here another factor enters into play: whether or not the EU will cut Spain some slack in the coming years on its timetable for bringing its budget deficit back under the European limit of 3 percent of GDP.

"The fact that Brussels softened up on the 2013 target [6.5 percent of GDP] gave the Spanish economy some breathing room this year. The same will happen in 2014, with a target of 5.8 percent which is not all that strict. From then on, the Spanish government and the European Commission will face another difficult dilemma: If deficit targets are relaxed for two additional years, the debt-to-GDP ratio will soar to 112 percent. If they are not relaxed, the economy will relapse into a recession," said Crespo, the author of Las Dos Próximas Recesiones (The Next Two Recessions).

The only way out of this dilemma, according to Crespo, is an "influx of foreign investment, especially if it comes in the shape of businesses settling down here or expanding their Spanish operations." Pointing out that Spain has a qualified workforce which is cheaper than that of its rivals — he cites average labor costs per hour of 21 euros in Spain, compared to 30 euros in Germany — Crespo concludes that "the key to growth does not just rest on the public sector adjusting its spending, or on exports doing as well as they have so far."

On strong exports and buoyant tourism, Spain’s balance of payments registered its first surplus in the first half of the year since 1997. At the same time, services — including those of engineers, architects or consultants — are increasingly driving the export boom, reaching one third of the total in 2012. Even with falling labor costs, Spain cannot hope to compete with China or other emerging nations on the factory floor. But a well-trained Spanish engineer with low salary expectations is increasingly being seen as an unbeatable deal. The fact that more young people are now in the education system — many returning to the classroom after being tempted away by easy-to-find work in the boom years — will enlarge Spain’s skills pool further: in 2011, 62.4 percent of those between the ages of 15 and 24 were studying, above the European average.

But many young people are still abandoning Spain for greener pastures. Clearly, the length of the unemployment lines provides ample motivation to move away, with some 400,000 more Spanish adults living abroad now than in 2008, a rise of 33 percent. But the ultra-phlegmatic attitude of the prime minister has surely added a touch of nightmarish urgency for many. Elected in late 2011 with a rare absolute majority, Rajoy has watched as unemployment passed the 5 million barrier — and then the 6 million barrier at the start of 2013 — before improving slightly in the past six months. Cue a frenetic tour of employment offices or the unveiling of a national plan to get the youth into work? Not Rajoy.

Joblessness records, a judicial investigation into widespread corruption within his Popular Party, and now revelations of U.S. espionage against Spain are among the many burning issues met with stony silence or guarded observations by the conservative leader. Even on the day Spain was bailed out by the European Union, Rajoy chose not to pronounce in public, instead attending a soccer match.

Rajoy has seemingly made the calculation that his majority-guaranteed four-year tenure will be long and arduous, and any attempt to burn brightly amid so much gloom will be futile. In recent days, he has pushed out junior officials and ministers one by one to make delicate inquiries into the NSA’s massive espionage activities in the hopes of remaining relatively anonymous amid the harmony of European outrage; the plan is still to stage-manage Rajoy’s first visit to the White House after two years in office. And the prime minister will need a boost ahead of his third year in office, when the PP’s performance in European elections will determine whether or not he is still the party’s horse in 2015.

The hope that 2015 will mark the culmination of a genuine recovery is being cherished through what are still very lean times, with Economy Minister Luis de Guindos predicting growth of over 1 percent for that year. Nonetheless, Rajoy signaled this week that the economy had been shored up, and the government’s task now was to extend the benefits of this work to the majority of Spaniards. The danger is that amid the noise of so much back-slapping in the ministries and those champagne corks over at the stock exchange, the sound of a new storm brewing may be missed.

Since taking over in 2011, the PP has mocked Rajoy’s predecessor, Socialist José Luis Rodríguez Zapatero, for being unprepared for the 2008 global financial crisis — and now claims to have come up with a better economic model. Foreign investors, it seems, must now be the judge of that.