Saving Spain's Economy

After the Portuguese government requested a bailout from the European Union, many argued that Spain would be next in line. Although recent reforms led by Prime Minister Jose Luis Rodriguez Zapatero provide reason to be optimistic about Spain’s economy, they have come at a high political cost. In fact, Zapatero has announced that he will not run for a third term as Prime Minister to keep his party, the Partido Socialista Obrero Español (PSOE), in power; however, current polls indicate that the PSOE will lose the next election anyway. Despite this weak standing, Zapatero is determined to continue pushing forward controversial economic reforms. 

The fear that Spain could fall into a deep economic crisis is not unfounded. Spain’s budget deficit is the third highest in Europe. This is partly due to the global financial crisis, as well as the increase in government spending during Zapatero’s first term in office. Before 2008, Spain had been growing at a rate of 3.2 percent every year. At the end of 2004, Spain had a budget surplus of 2.2 percent. Unemployment and inflation were also low, which created optimism for the country’s future. However, unemployment started increasing after the economic crisis and has now reached a historical high of 20 percent. In addition, the Spanish economy seems to be recovering slowly. For 2011, the government predicts economic growth of 1.3 percent. This situation has not only contributed to the decline of Zapatero’s popularity in the country, but has also led many to question whether Spain will be next to request a bailout from the European Union. 

However, it is too soon to declare the economic collapse of Spain. Immediately after the economic crisis that hit Greece and Ireland, the Spanish government started to push forward a set of reforms to counteract a potential economic breakdown. These reforms aim to reduce government spending by cutting public workers’ wages and slashing welfare payments, among other measures. One of the most controversial reforms establishes an increase in the retirement age from 65 to 67 years. The reform was so unpopular that a nationwide general strike was organized in September 2010 in protest. Zapatero’s reluctance to eliminate the policy added to his declining popularity. According to a survey by the Center for Sociological Research (CIS), 80 percent of the population disagreed with the packet of reforms proposed by the Prime Minister. In spite of the great  political cost of these reforms, Zapatero seems determined to carry them forward. 

Although the full impact of the reforms will be determined in the long run, short-run measures adopted by the government are beginning to improve Spain’s economic outlook. Certainly, they have contributed to decreasing the budget deficit, which has gone from 11.1 percent in 2009 to 9.3 percent in 2010. Zapatero’s government aims to further decrease the deficit to 6 percent this year. Members of the European Union and private investors see this improvement as a sign that Spain is taking the necessary steps to avoid a deeper crisis. Although the reforms are indispensable to improving consumer confidence in the economy, Zapatero knows that budget cuts are not the only reform needed. Measures to increase productivity and job creation must also be adopted. The time is particularly auspicious for Zapatero to implement such bold reforms since he has decided not to run for a third term and risks no political backlash. Although likely to become one of the most unpopular prime ministers in Spain’s history, Zapatero recognizes that the fate of his country, and even that of the European Union, may rest in his hands.

Even then, Zapatero will still have to overcome various political obstacles to successfully implement his reforms. One of these obstacles is the high degree of fiscal independence enjoyed by the autonomous communities, especially the Basque Country and Catalonia. The 17 autonomous communities in Spain control 37 percent of overall government spending. Zapatero has tried to convince local politicians to cut their spending, but to no avail. Although these politicians recognize the need for reforms, they are not willing to let the central government extend control over their economy. For example, Arturo Mas, the new president of Catalonia, has promised to decrease his budget by 10 percent in 2011. However, he boldly asserted that the Zapatero administration must first fulfill its financial responsibilities before asking others to do so. Given the central government’s lack of control over many of Spain’s local economies, Zapatero will need a great deal of political finesse and bargaining to achieve a consensus with his opposition and other regional governments.

The reforms implemented by Zapatero have undoubtedly begun to improve Spain’s economy. However, as a result of his policies, Zapatero’s popularity has markedly declined and he has decided to not to run for a third term in office. Most polls suggest that the leader of the opposition party, Mariano Rajoy, will become Spain’s next president. Whether he, or a new Socialist president, will be able to save Spain from a bailout is not yet clear. What is certain is that the long run success of Zapatero’s reforms would be in everyone’s interest. A bailout to Spain would be too expensive for the European Union, especially at a time when German and Finnish citizens have started to question why their tax money is sent to other countries.  Zapatero’s critics fail to understand that austerity measures, though unpleasant, are vital to Spain’s economic recovery. A collapse of the Spanish economy would indeed cause an economic disaster of major proportions that ripples around the world.