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Home Opinion Rebooting Spain
Spain • Corruption • Reform

Rebooting Spain

Jonás Fernández Álvarez - 13 February 2013

Corruption, unemployment and economic malaise have seen the two mainstream parties hit historic lows in the polls. The solution requires enhanced economic union with Europe but also modernisation at home

The economic crisis has dragged on now for five long years and there is still no light at the end of the tunnel. The social consequences are devastating with very high unemployment and poverty rates. To make things worse, the headlines are full of cases of corruption which, over the last few weeks, have pointed directly to the President of the Government. As a result, political, economic and social uncertainty have reached maximum levels although there is some good news coming from the process of integration in the eurozone, even though the new European budget reminds us of the difficulties of this project.

The Spanish economy shrank by 1.4% last year. There are nearly six million people out of work, three million of whom are no longer entitled to any benefits, while youth unemployment stands at over 50%. Moreover, nearly two million households face a situation where all of their members are unemployed. And while this data is already very worrisome, the short term outlook is just as bleak. The Government warns of a further 0.5% fall in revenues this year, which the European Commission sets at 1.4%. Hence, the present situation and the lack of hope on the horizon are undermining citizen’s confidence.

The underlying situation is such that the high private sector debt and its effect on the financial sector are standing in the way of recovery in domestic demand. The former must earmark all income for debt reduction while the latter are busy cleaning up their own balance sheets, with financial support from the Eurogroup. The public sector has to deal with rapidly growing debt and, in addition to its European commitments, must keep the size of the deficit in check. To a large extent, this fiscal imbalance is due to a severe decline in revenue, reducing its percentage over GDP by six points since the beginning of the crisis. This figure reveals a highly volatile tax base which complicates fiscal policy management. However, the Government has focused its strategy on adjusting expenditure (education and health) and raising indirect taxes and temporarily increasing direct taxes, thus avoiding a thorough reform of the tax system. The situation is such that the European Commission has forecast an increase in the 2014 structural deficit.

Irrespective of the adjustment path taken, the eurozone debtor countries are focusing their recovery strategy on the acceleration of domestic deflation with a view to boosting exports. It has now become evident that this approach is providing insufficient return in economies that lack flexibility and is also posing a threat to social cohesion and stability. Therefore, this path must go hand-in-hand with the deeper integration of the eurozone. A move in this direction would provide greater tax and monetary freedom, which is now very restricted in view of the less than optimal nature of the eurozone (fixed exchange rate agreement). And this is where we find some encouraging news. The most recent European Council agreements together with the ECB's OMT programme have contributed to overall confidence regarding the future of the euro. This incipient review of the institutional framework is the basis for softening the fiscal objectives for debtor countries which could be agreed over the coming weeks.

In the political arena, just over a year ago the Spanish Socialist Party (PSOE) lost the general elections: a victim of the crisis but also of its own inability to respond in time and communicate effectively. Voters gave the People's Party (PP) a comfortable absolute majority in the hope that it would be able to turn the situation around. One year hence, the credibility of the new government has vanished owing to the continuation of the crisis, failure to keep electoral promises and the cases of corruption which have emerged over the last few weeks.

Regarding this latter point, the media have reported extensively on alleged illegal funding of the PP. According to these news stories, construction firms apparently made donations to the PP in excess of the legal limit and this illicit income was distributed to party leaders as bonus pay which these leaders failed to report as income to Inland Revenue. The press has access to the parallel accounting books which show that the current President, Mariano Rajoy, allegedly received these illegal payments. To date, the President has claimed that this information is false but the leader of the opposition, Alfredo Pérez Rubalcaba, remains unconvinced and has called for his resignation.

In any case, this scandal is the latest in a series of court cases under way for possible corruption at local and regional level and other cases within the sphere of the Royal Family and the Supreme Court. This has accentuated the lack of credibility facing Spanish institutions. Moreover, this unfavourable institutional environment is key in understanding the renewed territorial tensions which add to this climate of instability.

Surveys show a significant drop of over 20 points in PP's popularity since the elections which now has the support of approximately 25% of the electorate. However, PSOE has failed to take advantage and remains slightly below PP. These two political groups have never jointly accounted for such a low level of electoral support. It would appear that the majority of these disenchanted voters intend to abstain bringing the abstention level up to nearly 20 points. Meanwhile, minority parties have experienced a noteworthy rise (the Union, Progress and Democracy Party - UPyD, and the United left - IU) but the anti-system and populist groups have not benefited.

Summing up, Spain is undergoing a severe economic crisis which is eroding social cohesion and having a negative effect on the legitimacy of the institutional order which has already had its share of problems. The definitive solution to the recession requires enhanced economic union within the eurozone but, at domestic level, Spain also needs to modernise the political, social and territorial pacts which were so successful during its recent democratic history.

Jonás Fernández Álvarez, head of Research Unit at Solchaga Recio & asociados

A contribution to State of the Left - Policy Network's monthly insight bulletin that reports from across the world of social democratic politics.

Tags: Jonás Fernández Álvarez , Opinion , State of the Left , SOTL , Economic , Financial , Sovereign Debt , Banking , Debt , Economic Crisis , Financial Crisis , Sovereign Debt Crisis , Debt Crisis , Banking Crisis , EU , European Union , Eurozone , EZ , Spain , Mariano Rajoy , The People's Party , Partido Popular , PP , Unemployment , Youth , European Commission , Eurogroup , Deficit , Structural Deficit , Tax , Income , Outright Monetary Transactions , OMT , European Central Bank , ECB , European Council , Alfredo Pérez Rubalcaba , The Spanish Socialist Workers' Party , PSOE , Corruption , Union , Progress and Democracy , Unión Progreso y Democracia , UPD , UPyD , United Left , Izquierda Unida , IU ,

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The Policy Network Observatory promotes critical debate and reflection on progressive politics. It is centre-left orientated but determinedly challenges social democracy. It is pro-European but restlessly questions EU institutions and practices.

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