The idea that Spain could become a target of the world’s markets, an economic basket case weighing down the euro, is a preposterous notion, but not an unthinkable one. It’s preposterous in the sense that this is a great, energetic, creative and competent nation that in about 25 years shed a dismissive label as a cheap place for two weeks in the sun to become Europe’s fifth economy, Latin America’s biggest foreign investor, and an all-points, high/low cultural turbine producing terrific films, clothes people want to wear, exceptional food, and great soccer and basketball. In 2010, that’s a reasonable, widespread perception. Still, according to Fernando Fernandez, a former chief economist at Banco Santander and former official at the International Monetary Fund in Washington, “an attack by markets on Spain would be based on some rationality.” Now a professor at IE University here, he said, “An 11.4 percent deficit like ours is huge.” Last week, José Manuel Barroso, president of the European Commission, and Angel Gurría, secretary general of Organization of Economic Cooperation and Development, were in town on separate missions to insist, as decorously and elliptically as possible, that Greece (whose 12.7 percent deficit and substandard accounting methods have shaken the euro), and Spain (having the confidence of its lenders and much lower debt) were chalk and cheese. Still, Spain’s facts are scary: 18.8 percent unemployment; about half the age group under 25 out of work; €600 billion, or $820 billion, in mortgages outstanding after the end of a construction boom two years ago; and a real effective exchange rate that the E.U. Commission says is overvalued by 10 percent. Spanish structural realities run a along a similar track: Productivity and competitiveness are low. The job market’s rigidities mean that two-thirds of the labor force are permanent hires, blocking a potential fall in real wages after a rise in labor costs of 4 percent a year over the last nine. To boot, the central government controls only about 25 percent to 30 percent of discretionary spending, with the rest of state revenue devolving to regional and local governments with their own notions of savings and expenditures. What to do? The governor of the Bank of Spain, Miguel Ángel Fernández Ordóñez, says that failing “urgent” and “ambitious” reforms in the labor market, the Spanish economy will enter a “tough and complicated period.” Which is a gently phrased complement to the insistent market noises saying Spain stays an attractive speculative target even if the European Union rescues Greece. Mr. Ordóñez, who also sits on the governing committee of the European Central Bank, stressed the need for an immediate, convincing response. The startling thing in Madrid is its seeming absence. There’s a kind of lethargy instead. No crash program with specific goals to change the Spanish economy over the next weeks and months is coming from right-wing opposition. And the Socialist government of Prime Minister José Luis Rodríguez Zapatero appears to bumble ahead confusedly, casting proposed cutbacks into the air, then reeling them back. Mr. Zapatero himself informed an international audience of his plan to push back Spain’s retirement age to 67 from 65, which, days later, was put it into the conditional tense. The possibility of a public sector wage freeze, discussed in the press by an official last Wednesday, got buried on Thursday by Finance Minister Elena Salgado. The government’s effort seemed as feeble as an initiative announced by the Fundación Confianza, a group backed by big Spanish firms like Telefónica, Santander and BBVA, seeking to buck up national confidence with a Web site called estoloarreglamosentretodos.org. Roughly translated, that’s togetherwecanstraightenthingsout. I tried to get onto the site on Monday morning and was shunted to one having to do with sustainable transport. Spanish politics, frankly, does not currently seem up to the intensity of action that the country’s economic and financial circumstances would suggest — and appears barely conscious of the implications for the world’s view of Europe if Spain were to fall to its knees. The opposition Popular Party, which the polls indicate would run up to seven points ahead of the Socialists if national elections scheduled for 2012 were held now, gives the impression of not wanting to do anything — proposing a cutback in social security levels, for instance — that might spook a single prospective voter. Mr. Zapatero, in turn, it is said, just might relish some kind of eventual E.U. involvement, guidance or assistance in enacting the tough austerity measures his constituency, notably the trade unions, would otherwise resist. In the Spanish context, where the electorate holds the E.U. in ongoing reverence, accepting what could be euphemized as a European austerity checklist could be a politically manageable way out for the prime minister. But the game may be moving quickly outside of Spain’s grip. On Friday, the ratings agency Standard & Poor’s, far from endorsing the credibility of the government’s pledge to the E.U. to reduce its deficit to 3 percent of gross domestic product by 2013, said it thought it was likely to remain above 5 percent. It said it expected “much weaker economic performance” than the government expects, with unemployment remaining above 15 percent over the period. The agency also renewed its negative outlook on Spain’s sovereign ratings “in the absence of more aggressive and tangible actions by the authorities.” As if in response, Ms. Salgado, the finance minister, asserted that the country, which remains in recession, would grow in every quarter this year. And — Let the good times roll! — sounding like someone who thought they had assurances that Spain was Too Big to Fail, she insisted that members of the euro zone “will not stand idle if one of the member countries is in trouble.” That was late Friday. On Monday, Mr. Zapatero doubled up on Ms. Salgado’s statement of confidence, telling the Frankfurter Allgemeine Zeitung in an interview, “You can have absolute confidence in us. Our plan to reduce the deficit will be fulfilled.” Then, almost in the next sentence, he added a new turn to the government’s pattern of confusion, and cut the legs off the finance minister’s timetable for Spain’s emergence from recession by as much as half. “I am convinced,” Mr. Zapatero said, “that our economy will be growing again by the fourth quarter, at the latest.” Story from NY Times
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Spanish Economy on the Edge
