España Va Bien

With reforms taking hold and world trade recovering, Spain is stronger than at any time since the 2008 financial crisis.

Jansen, Fedea: Despite the fact that unemployment remains high, the recovery is very job-intensive.

In the 1990s, then–prime minister José María Aznar was mocked for his claim that Spain was “doing fine.” But this claim no longer elicits laughs: In 2017, Spain is growing strong.

“Spain now has a current account surplus of near 2% of GDP, which is extraordinary, since this is an economy that imports almost all its energy sources,” notes Angel Ubide, managing director at Goldman Sachs in Washington, DC. “Spain’s economy is doing very well.”

The Spanish economy is in its fourth year of continuous expansion, and this year its GDP is expected to grow more than 3% for the third year in a row. The release of second-quarter GDP figures in July provided the right occasion to celebrate: The value of the total amount of goods and services produced in the country is back where it was right before the beginning of the crisis in 2008—a milestone that countries such as the US, Germany and France reached several years ago but other Mediterranean neighbors like Italy and Greece have yet to accomplish.

“The strength of the current recovery is mostly due to a combination of factors, some exogenous: tax cuts, declining interest rates, the decline in oil prices, the depreciation of the euro and the improvement in the global environment,”Ubide tells Global Finance. “There is also a new element, which is that the Spanish economy has improved its ability to export.”

To be sure, a high level of public debt—around 100% of GDP—remains from the crisis and still represents a big obstacle against intervening in favor of workers who have been displaced. But many economists say that Spain’s economy is nevertheless better and more resilient now than before the financial crisis.

“This is the case not only because of a switch between public and private debt, with more of the first and less of the latter, but also because of other fundamental changes like the implemented reforms and the recapitalization of the financial sector,” says Miguel Cardoso, chief economist for Spain at BBVA Research in Madrid.

The expansion that accompanied Spain’s entry into Europe’s monetary union was mostly due to high domestic demand that was linked to a real estate boom and an inflated credit bubble, which sowed the seeds for the crisis that followed. The more recent expansion is fueled by exports. In mid-2013, exports lifted Spain out of recession and have remained strong since.

“This is an important point, because a few years ago, there were doubts about the ability of the Spanish economy to keep exporting while being part of the euro area. People were saying that Spain lacked competitiveness, and that if it had to stick to the discipline of the single currency, it would unable to offer competitive goods on the international markets,” says Ubide. “What we have seen instead is that the Spanish economy has rebalanced in a reasonably successful way. There was a structural change inside the economy.”

Tourism has also provided a boost, with a string of record seasons in the last three years. Waves of visitors have been choosing Spain and its well-developed hotel network over countries in Northern Africa or elsewhere in Europe due to security concerns. BBVA pegs around 30% of Spain’s growth in foreign tourists since 2010 to such fears. “People were afraid of visiting some North African countries after the Arab Spring; also the coup d’état that was attempted in Turkey last year, along with terrorist attacks in France and the UK, pushed a lot of tourists to choose Spain,” Cardoso says. The late August terrorist attack in Barcelona may change perceptions of Spain’s relative safety. Still, it remains one of the most well-organized tourist destinations in the world. Both this year and last, Spain topped the World Economic Forum’s Travel and Tourism index, which considers a range of factors from safety and health to business environment.

The key to Spain’s economic success has been a process of reforms, mainly of a traditionally rigid labor market and the banking industry, economists say. “The thing to mention here is the impact of the reforms that are behind all this. We have reforms in the public sector regarding the public deficit; a decline in the public deficit due to lower interest rates has made credit available to households. The labor reform made wages more flexible at the company level, and employment has been higher than in previous cycles of GDP growth,” says Cardoso. “All these factors are behind the growth that we are seeing in Spain.”

Cardoso, BBVA: A decline in the public deficit has made credit [more] available to households.

One of the biggest changes in labor laws allows companies to set salaries—once set by unions at industry level—pushing down the cost of labor and making Spanish goods cheaper. For example, Spain has become Europe’s second auto producer after Germany, with plants such Ford’s in Almussafes near Valencia or Opel’s in Figueruelas near Zaragoza increasing output and workers.

“What happened in Spain is that through the crisis there was a big reduction of labor costs. The process lasted for a few years, until now, and Spain became more competitive, making the country able to export a lot more,” Angel Talavera, senior economist at Oxford Economics, says. The extra flexibility of wages determined at company level allowed for better adjustment, he says, cautioning that it takes time for such reforms to take hold. “We cannot say with certainty that this is already a change that is permanent and structural. It is a bit of an open question,” says Talavera. He adds that he is surprised by the current strength of the economy, although he expects that growth will be higher than initially expected this year, and probably next year as well, in part because the rest of Europe is finally picking up.

At the height of the economic crisis, more than one Spaniard out of four was without a job; but even now Spain’s unemployment remains elevated by any other standard. In the second quarter of 2017 it fell to 17.2%. Marcel Jansen, labor economist at Fedea, a think tank that was among the promotors of the current labor market reform, believes that Spain should do more to improve its labor market, with measures aimed at correcting long-term unemployment. “There are serious reasons for concern. The main reason is that 60% of the unemployed are long-term unemployed,” says Jansen. “Here this is going to be an enormous challenge. Elderly workers are among the main victims, as well as low-educated workers.”

Still, “We should not ignore the fact that at the peak, the unemployment rate reached 26.7%. It has come down by about 9 percentage points since the recovery started,” Jansen acknowledges. “Despite the fact that unemployment remains high, the recovery is very job-intensive. This is as good as things can be, with growth rates in the range of 3%.”