Spain’s reforms are a lesson for the eurozone

Financial Times - 25.08.2015

Mariano Rajoy, Spain’s prime minister, ought to be feeling upbeat about the chance of regaining power at the country’s general election later this year.

When his centre-right Popular party won office in 2011, Spain was widely seen as the eurozone member whose troubles were most likely to shatter the single currency. Today, it is one of the fastest growing economies in the bloc, with growth projected to be more than 3 per cent this year. As the Greek drama has twisted and turned this year, the Rajoy government has looked on with a degree of serenity that would once have seemed unimaginable.

Still, Mr Rajoy’s election hopes are not quite as clear-cut as he might like. In opinion polls, his party is only narrowly ahead of the opposition socialists while the prime minister’s personal ratings are dismal. If he is having to fight to regain power it is partly because Spanish politics has become so fragmented, with two new parties, Podemos and Ciudadanos, vying for support on the extreme left and centre. But his difficulties also reflect the fact that many Spaniards remain uncertain about how lasting the economic improvement really is.

Mr Rajoy deserves credit for reforms that have helped to kick-start the recovery. In 2012, he shook up Spain’s labour market, making it less expensive for companies to fire permanent workers. His government recapitalised and reformed the country’s banking system when it was on the brink of collapse. He implemented tax reforms to boost Spain’s competitiveness, lowering corporate tax from 30 per cent this year to 25 per cent in 2016.

The government cannot take all the credit for the upturn, however. For a start, Spain’s recovery has been helped hugely by external factors outside Mr Rajoy’s control. A weaker euro has helped to boost the growth in Spanish exports. The decline in oil prices has been particularly beneficial for a country which imports all its energy needs from abroad. The European Central Bank’s adoption of quantitative easing has been a further boost. If Spain’s growth spurt is to be maintained, it has to hope that eurozone demand does not peter out.

Mr Rajoy’s backers also need to acknowledge that while the headline growth figures are up, economic recovery is not making a big enough difference to many Spaniards. Jobless numbers are falling but the unemployment rate — at 22 per cent — remains the highest in the EU after Greece. Many without work have been out of the labour market for more than two years. The unemployment data, especially for youth, are too high for a developed European economy and remain a blot on the government’s record.

News, commentary and analysis of the eurozone’s debt crisis and its faltering recovery as it struggles with austerity and attempts to regain competitiveness

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In the next few months, Spain will face new challenges that endanger political stability and once again put the economic recovery at risk. The general election may produce no clear result because of the rise of smaller parties such as Podemos and Ciudadanos. Next month’s parliamentary election in Catalonia is coming to be seen as a de facto plebiscite on independence that may bring constitutional turmoil if separatist parties gain a majority.

But these risks on the horizon, while serious, should not detract from a positive assessment of what Spain has achieved in the past four years. The Rajoy government’s courageous economic reforms, helped by ECB action, have allowed Spain to defy the once widespread prediction that it would remain Europe’s economic laggard. Its turnround is a lesson — and not just for Greece — that remaining in the eurozone does not condemn a nation to economic failure.

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