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Home Opinion The recession is over but the crises still need to be resolved
State of the LeftSpain

The recession is over but the crises still need to be resolved

Jonás Fernández Álvarez - 22 January 2014

The Spanish economy has begun to stabilise due to the reorientation of European policies – but the pernicious legacy of the crisis remains in the form of a series of titanic political and social challenges

The Spanish economy has come out of recession. However, growth prospects remain very modest, unemployment will continue at very high rates and the pernicious social effects, resulting from the crisis but also from many of the political decisions made in recent years, will have a long-term impact on the cohesion of Spanish society. In this way, while it appears that the worst of this lengthy European crisis may be over, the political and social challenges remain titanic. This requires a new progressive agenda that combines the economic reforms required to stimulate growth with a radical approach to the problems of inequality and poverty plaguing us at this time. The country also urgently needs a sober yet deep and innovative institutional and democratic reform.

To find the reasons behind the economic upswing we need to analyse European policy. Although the agendas were focused on Keynesian policies between 2008 and 2010, that process ultimately failed due to sovereign debt sustainability problems. Those uncertainties emerged because, in a monetary union very similar to a simple agreement of fixed exchange rates, national spending policies cannot be made when faced with a debt crisis. However, at that time, it was believed that the strength and credibility of the Union were not at stake.

Nevertheless, such contradictions ultimately emerged in May 2010 with the sovereign debt crisis in Greece and the other “debtor” countries. Then, Europe could have opted for a strategy focused on reviewing the nature of that incomplete economic union and accelerating the integration, in such a way that there would have been alternative tools to fiscal adjustments and aggressive deregulation. Unfortunately, the political balance of the time led to the adoption of more conservative policies, focused on responding to the sovereign debt crisis within the institutional status quo of the Eurozone: austerity and deregulation. However, as at other times in history, that path not only did not guarantee a way out of the crisis but also had profound social costs.

In this way, it was only in mid 2012, after it was proven that this strategy was insufficient, when the Union began to shift its agenda towards accelerating integration in the Eurozone. In this sense, the European Council accorded in June a special commitment to accelerate the integration process in the Euro area. The first milestone, the banking union, stems from the improvement in the transmission of monetary policy. Moreover, that agreement let ECB take new measures to loose monetary policy. Both policies have contributed to reduce interest rates and then to further easing of fiscal adjustments. Furthermore, in the case of Spain, the request for a bailout financed by the ESM to clean up the financial sector, in the context of that acceleration of European integration, has also helped to stabilise the economy.

It is also fair to recognise that the government has taken measures that have also helped improve the economy. However, there were other more suitable economic policy options to improve the country’s credibility and the functioning of the markets and, of course, with zero social costs. However, the centre-right Partido Popular, who lead the government, chose to provide the reforms the country required with a deep ideological imprint and very negative effects on social cohesion, in the labour market, for example.

In any case, Spain starts 2014 with growth prospects of around 1 per cent, although the medium-term estimates point to very weak income gains, which will barely be able to reduce the rate of unemployment. So the recession is behind us but the Spanish economy needs to update its growth strategy, redesign the reforms of the Partido Popular, safeguard social cohesion and combat the effects of poverty as a matter of urgency.

Under this progressive strategy, in the short term, Spain must compose a fiscal reform to broaden the tax bases and attack niches of tax evasion and fraud, besides reviewing the taxation of wealth and environmental taxes. Far-reaching reforms are also required in markets for factors of production: labour and capital. Firstly, a new labour reform is urgently required that focuses on flexi-security to accelerate the creation of quality jobs, as opposed to the total deregulation endorsed by the government. Secondly, even after completion of the European bailout, the financial sector should remain the focus to improve its recapitalisation, as well as the flow of credit and competition. In this sense, the concentration of supervisory and sectoral regulation bodies with the Competition Commission, approved by the Partido Popular recently, was a step backwards in the fight against oligopolies and abuses of power, which threaten entrepreneurs and consumers as a whole. Similarly, the country must face an energy reform, which curbs electrical costs and maintains the commitment against climate change, which is also a key factor in strengthening the industrial export sector.

Furthermore, beyond the economic agenda, tax reform should ease the spending adjustments in the context of scheduled fiscal consolidation. In the short term, this should allow Welfare State policies to focus on combating poverty. In addition, in the medium term, Spain should review its educational policies, reversing the worst of the Partido Popular’s latest reform and focusing financial efforts on its citizens’ early years of life. Indeed, the next progressive government will have to repeal the proposal for abortion regulations by the government, if it finally decides to approve it in Congress.

On a different note, Spain faces a severe territorial problem caused by tensions in Catalonia, as well as by a federal model of the State, resulting from the regulatory development of the Constitution, but with serious coordination and cooperation problems. In this sense, sooner or later the country must review its Magna Carta to make the decentralised model more harmonious and allow a better adaptation of Catalonia. And all of this must be carried out in a very strained political climate due to the corruption cases affecting almost all the State’s institutions. In this way, Spain needs a regenerationist and progressive programme in order to move forward in the light of the current crisis, which is not just economic.

In any case, the economy has begun to stabilise, due to the reorientation of European policies, a strategy that still needs to be strengthened and confirmed before the next European elections. Spain and the whole Eurozone will only overcome this economic crisis if the integration process is accelerated, which also implies severe challenges of economic governance and democratic legitimacy. The banking union should be a first step that foresees the fiscal and social union of Europe under a deeply democratic project. This path is clear to European social democracy, and it must be endorsed by all European citizens as a whole next May.

Jonás Fernández Álvarez, Head of Research Unit at Solchaga Recio & asociados. He has recently published the book “Una alternativa progresista. Una respuesta a la crisis económica e institucional de España”. Ediciones Deusto. (A progressive alternative. An answer to the economic and institutional Spanish crisis).

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

This column is commissioned in partnership with Agenda Publica.

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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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