Spain Suffering from Zapatero’s Mistakes

Even as Prime Minister Zapatero announces budget cuts and reform, Spain’s hopes for a quick recovery aren’t looking up.

Times are tough for Spain’s socialist prime minister José Luis Zapatero. While up north, eurozone members as Germany, the Netherlands and even France are boasting modest growth rates, his country remains mired in recession. One out of five Spaniards is out of work; government finances are a mess and unions have organized mass protests against nearly every single one of Zapatero’s attempts at emerging from the quagmire.

Spain was hit hard by the crisis in 2007 after maintaining seemingly stable growth rates for over a decade. When Zapatero came to power in 2004 he was aware of the need of diversifying Spain’s economy. The preceding years of boom had been driven by a real estate bubble that was bound to burst eventually. The socialist government pledged to invest in renewable energies, bioengineering and infrastructure but six years later, it is still uttering those very promises. Meanwhile, as a result of the recession, Spain’s public finances are in a dismal state.

Following the example of many governments worldwide, Zapatero and his socialists attempted Keynesian stimulus which, after the meltdown in Greece this April, only added to mounting concern about the sustainability of deficit spending. Since 2008, Madrid hasn’t been able to solve an almost 10 percent gap on its budget. The public debt has since ballooned and Spain’s credit rating is under pressure.

Government spending already amounted to nearly 40 percent of GDP in the years preceding the downturn; the stimulus, which equaled a little over 1 percent of Spain’s total economic output, provided for public works investments, support of the auto industry and increased social benefits. Only recently has Zapatero pushed for budget cuts, including a pay cut for public-sector workers and a 30 percent cut in infrastructure investment. His government has been trying to reform labor laws and raise the retirement age from 65 to 67 but so far, those proposals have met with vehement opposition from both members of Zapatero’s own socialist party and their allies in the trade unions.

Lowering government salaries and loosening up the labor market alone won’t steer Spain back onto a stable growth path however.

For the last fifteen years, while things were looking up, the country neglected to educate its workforce for the sort of high tech industries Zapatero dreams about. Homeownership in Spain has been heavily subsidized, leaving people today with gargantuan debts which they’re unlikely to pay off for many years to come. Banks are understandably reluctant to extend more loans and mortgages which is hurting small businessowners and young people looking to buy a house. Labor regulations remain inflexible. Employing a worker is costly; dismissing one can be nigh impossible.

The prime minister’s popularity has plummeted as a consequence. The socialists are now fifteen points behind the conservative opposition in the polls which has largely targeted Zapatero personally for failing to enact pro-growth policies. Although he is likely to try to remain in power until March 2012, when parliamentary elections are scheduled, Zapatero, who was reelected with only a 5 percent margin in 2008, may consider not running again, granting his party a chance to recover electorally.