Free Market Fundamentalist Opinion

Spanish Socialism is Holding Europe Back

The Spanish government refuses to make much-needed reforms.

Most European economies slowly moving out of recession. France and Germany are boasting modest growth rates and they are pulling other countries, like Italy, on the road to recovery.

There is one country that seems incapable of keeping pace, and that is Spain.

Misleading

Government stimulus has been of some help, but the Spanish national bank warns that early signs of recovery are misleading. Because imports have fallen even more dramatically than exports, GDP figures may appear optimistic but Spain lacks a solid foundation for growth.

Between 1997 and 2007, the Spanish economy was almost exclusively driven by a rapidly expanding real-estate market, producing a stable growth rate of 4 percent annually.

In the same period, the country attracted almost four million immigrants. Now that construction has come to a standstill, many are moving away. Millions of Spaniards are left unemployed with so many as two million living off unemployment benefits.

Same promises

Prime Minister Rodríguez Zapatero came to power in 2004 promising to diversify the country’s economy. He intended to invest in renewable energy, bioengineering, high-speed infrastructure, construction and logistics to encourage innovation and a solid services economy.

Five years later, the socialist still makes the same promises.

“My government’s ambition is to make this an innovative, creative, entrepreneurial country while upholding the social welfare state,” he said last July.

Zapatero saw no trouble combining the two:

Some people will say that a social welfare state and a competitive economy are incompatible, that innovation is incompatible with workers’ rights. They want to deregulate workers rights, deregulate social rights. That is exactly the same tune as people who say we have to deregulate the financial markets and I do not dance to that tune.

As a result, Spain faces both an enormous trade deficit and a deficit on the state’s budget of almost 10 percent. Zapatero nevertheless counts on foreign investment to carry his country out of recession, but who would investing in Spain nowadays?

It’s not just money from abroad that is lacking. Spanish banks are reluctant to lend money, which is hurting small businesses and the real-estate market, because Spaniards can’t a mortgage.

Reforms

Today, finally, the Spanish government announced long-awaited labor reforms after unemployment reached 19.3 percent in October.

Zapatero proposes to provide for greater flexibility, reduce high dismissal costs but also reduce working hours to preserve employment: a controversial step that seems unwise considering how little it did to ail Britain’s economy in the 1970s.

Difficult choice

Spain’s lack of recovery left the European Central Bank with a difficult choice. As the French economy grows, the banks expects inflation to go up. France has proposed to temper it by raising the interest rate (a step Australia and Norway have already taken), but this would hurt the Spanish economy by further depriving it of credit.

The bank has to choose between serving France, whose recovery is helping other European economies, and supporting Spain, because its government lacks the political will to make needed reforms. For now, it is choosing the latter, maintaining the interest rate at 1 percent.

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