Spain’s Syriza Moment

First Greece, now Spain. Four months after the election of a radical-left government in Athens, leftist alliances have won control of Barcelona’s city council and potentially Madrid’s, too. In local elections on May 24, Spanish voters deserted the ruling right-wing Popular Party (PP), turning not to the center-left Socialists, who also lost ground, but to slates supported by Podemos, a new radical-left party, as well as to Ciudadanos, a centrist anti-establishment party that originated in Catalonia and has only recently gone national.

With a general election due later this year, there is horror and disbelief in the Spanish establishment — and among eurozone authorities — that Spanish voters could seemingly be as misguided as the Greeks, especially since the Spanish economy is now growing again. But if establishment parties are both corrupt and incompetent, is it any wonder that voters are desperate for alternatives?

In a normal liberal democracy, Spain’s government would have fallen long ago. Prime Minister Mariano Rajoy is implicated in a huge party funding scandal, with the jailed former PP treasurer providing documentary evidence that Rajoy and other senior figures received cash payments from a secret slush fund. Rodrigo Rato, a former PP finance minister (and Dominique Strauss Kahn’s predecessor at the helm of the International Monetary Fund), has been arrested and charged with money laundering and tax evasion. Top PP officials have been arrested on charges of taking kickbacks from government contracts — as have leading Socialists. The list of political corruption scandals continues to lengthen.

The accused politicians all protest their innocence, but voters can scarcely be blamed for being up in arms. According to Transparency International’s Global Corruption Barometer, 83 percent of Spaniards surveyed in 2013 (even before the worst abuses emerged) thought political parties were corrupt or extremely corrupt.

Spain’s scandals are on a par with those exposed in Italy in the early 1990s. Those resulted in jail terms for guilty politicians and killed off the cabal of parties that had run Italy since the end of World War II. So far, the old guard in Spain — the Popular and Socialist parties that have alternated in government since the country emerged from dictatorship after Gen. Francisco Franco’s death 40 years ago — are clinging on. But if they can’t or won’t clean themselves up, a broom is needed.

But it’s not just corruption that is driving voters to look away from the old guard. The mainstream parties have driven the country’s economy into the ditch. The Socialists oversaw a huge property bubble that burst in 2008, leading to a deep recession. As house prices plunged, they failed to deal with the huge overhang of mortgage debt and the associated banking collapse. With Spain succumbing to the financial panic that engulfed the eurozone in 2010-12, voters turned to the PP for change in the November 2011 general election.

But Rajoy’s government has failed to fix the economy’s problems, too — even if that’s not what you’ll hear from the PP’s propaganda machine. The government relentlessly boasts that Spain will have the fastest growing major economy in the eurozone this year — proof, it claims, that the tough, Germanic decisions it has taken to consolidate public finances and impose structural reforms have worked. But though it is true that the economy grew by 2.7 percent in the year to the first quarter and unemployment is falling a little, Spain’s recovery is not as impressive as it might seem — and it hardly vindicates the PP’s economic management.

The eurozone as a whole is a disaster. Whereas the United States’ economy is nearly 10 percent larger than it was seven years ago, the eurozone’s is 1.5 percent smaller. And Spain is faring even worse: Its economy is still 5 percent smaller. Nearly one in four Spaniards, and one in two young people, are unemployed. In the European Union, only Greece’s unemployment rate is higher. Many people have dropped out of the labor force altogether (or immigrated to countries where there are jobs to be found). A lost generation is in the making.

Worse, the PP’s policies have shifted most of the costs of the crisis onto hard-pressed debtors, the poor, and ordinary taxpayers. Public money has been used to bail out bankrupt banks, their rich, politically-connected owners, and overpaid, incompetent managers — along with their powerful creditors — both domestic and foreign. State aid to the banking sector topped 371 billion euros between 2008 and 2012, more than 36 percent of Spanish GDP in 2013, including 40 billion euros borrowed from other eurozone governments in 2012. While many families struggle with unpayable debts and some have even lost their homes, the reckless lenders — often German and French banks — that financed the bubble and plunged Spain into this mess have been bailed out. In effect, the Spanish people are being bled dry to rescue corrupt Spanish elites along with German and French banks and investors.

This is not only unjust; it also depresses growth. Many Spanish households remain lumbered with huge, inescapable mortgage debts. Because of Spain’s antiquated, pro-bank mortgage law, even families who lose their homes are not freed from mortgage debt. This debt bondage — and the fear of falling into it — depresses household spending, and hence business investment and growth.

Under pressure from Berlin, Brussels, and Frankfurt, the PP enacted counterproductive, brutal austerity measures. In 2011 and 2012, Spain faced a financial panic, not a solvency crisis. It needed European Central Bank (ECB) intervention, not immediate fiscal tightening. And at a time when households, companies, and banks were all trying to reduce their borrowing, and demand was also depressed elsewhere in the eurozone, austerity predictably caused an unnecessarily deep second recession. For what it’s worth, a study by a European Commission official using the commission’s own economic model estimates that austerity in Spain in 2012 and 2013 reduced output by a total of 8.75 percent of GDP. That’s around 100 billion euros or some 2,100 euros per person.

Spain’s subsequent recovery isn’t due to the success of the government’s policies. Rather it is due to the ECB finally quelling the panic and the subsequent easing of austerity — and, more recently, thanks to lower oil prices and a weaker euro.

Spain still has the largest fiscal deficit, as a share of the economy, in the entire EU: 5.8 percent of GDP last year. Public debt as a share of GDP rose by more last year than anywhere else in the eurozone and is set to top 100 percent this year. So Spain is hardly a model of successful fiscal consolidation.

Nor is it true that Spain has enacted bold reforms to improve economic performance. The incestuous ties between politicians, companies, and banks remain intact. Product markets are often cartelized. Public administration is overly bureaucratic and often corrupt. It is far too difficult to start and grow a business. Spain still has a two-tier labor market that excludes outsiders, not least of which is young people.

The focus of “reforms” has been on depressing wages in a misguided Germanic pursuit of “competitiveness,” instead of prioritizing measures to boost productivity and investment. But countries are not companies. While it may make sense for an individual business owner to try to minimize wage costs, for society as a whole, wages are not a cost to be minimized, but rather a benefit to be maximized — provided they are justified by productivity.

Overall, Spanish wages were not too high: They were a lower share of GDP in 2011 than at the euro’s launch in 1999, while exports continued to grow over that period. Where individual Spanish companies have been undercut by Chinese (or other foreign) competition, the solution is not to try to produce the same old products while pushing wages down to Chinese levels, but rather to invest in moving up the value chain, and make new and more sophisticated products and services for higher wages.

Slashing wages has also depressed demand and made Spain’s huge debts even harder to bear. In the absence of measures to boost competition in product markets, these policies have fattened companies’ margins instead of lowering prices. And since all eurozone countries have cut wages at once, it has made them dependent on exports to the rest of the world in order to grow. But the eurozone is too big, and global demand too weak, for that to generate a strong, sustained recovery.

Spain’s recent spurt of growth looks far from sustainable. Export growth has already slowed — and is now outpaced by import growth. A post-election fiscal squeeze seems likely next year. Recent growth is based primarily on households saving less and spending more, even though their wages are stagnant or falling. On current policies, the recovery seems likely either to peter out or to lead to a return to unsustainable debt-fueled consumption, ending in another crisis.

It is hardly surprising that Spanish voters want a change. And they are lucky: They have both left-wing and pro-market alternatives to establishment parties, but no far-right one. That the newcomers are inexperienced should scarcely disqualify them. The old guard has plenty of experience at running the economy into the ground while lining their pockets.

Spain needs a government that is committed to rooting out political corruption and enacting constructive economic reforms. The economic priority should be mortgage-law reform and a comprehensive restructuring of legacy debts, with fiscal consolidation delayed until household debts have fallen to a sustainable level. Losses for banks should fall on their shareholders and creditors, not taxpayers. To boost wages and jobs, the next government should lower taxes on people’s hard work and open up the labor market to young people and other outsiders. It should also promote investment and reforms to boost productivity, and hence living standards. That includes, crucially, breaking the unhealthy grip that big banks, monopolistic companies, and corrupt, incompetent officials have over the economy and politics. Spain needs open capitalism, not crony capitalism.

Photo credit: Javier Soriano/AFP/Getty Images