How Spain is fixing its economy

Madrid by night.

Madrid by night.

The recovery in the Spanish economy continues at a strong pace in the 3rd quarter 2015. For the time being the growth rate in the Spanish economy is the strongest in the Euro zone with an expected GDP growth for 2015 at 3,3. And 2016 looks no worse. Activity is igniting in all sectors.

The unemployment rate is falling at historic pace, and the 3rd quarters shows the strongest employment pace since the recordbreaking year 2006. Allthough the overall unemployment rate is high, it is down from 23,7 % 12 months ago, to 21,2 % october 2015. The unemployment rate is expected to fall below 20% early next year. Employment is increasing in all sectors, all over the country.

Schibsteds website (Spanish increased from 400 000 vacant positions in 2013 to 700 000 vacant positions in 2014. And this far in 2015 Schibsted see an increase of 35 – 40 % from last year. Schibsted has seen the growth coming for a long while, and are now investing more in Spain. wrote an interesting article some weeks ago about lessons that could be learned from Spain to other southern European countries still striving for recovery. “it’s a bit more complicated than “austerity works”, writes Bloomberg. Spain has made some brave, unpopular choices that seem to be working out. Bloomberg furthermore writes:

“The economy suffered a crippling downturn in the financial crisis, then hobbled along until 2012 without anybody doing much about it. At that point, the government applied for a 100-billion-euro rescue package from the European Union. The situation was grim. Spain’s real-estate bubble had burst, unemployment (a blight on Spain for years) had climbed above 25 percent, and cascading bankruptcies further undermined confidence. The yield on 10-year Spanish bonds in July 2012 ran more than five percentage points over Germany’s, prompting the European Central Bank to step in to save Spain from speculative runs on its sovereign debt.

The government of Prime Minister Mariano Rajoy cut public-sector wages and benefits, and increased VAT to 21 percent (with exemptions) from 18 percent. Had he stopped there, Spain might have bumped along the bottom for a good while longer, rather than seeing the recovery it’s now enjoying.

Low inflation, a cheap euro, the fall in energy prices and renewed financial stability in Europe have supported consumer spending and lifted Spain’s retailers. Holidaymakers have favored Spain this season, too — in part because visiting Greece without bundles of cash has presented difficulties. Put much of all that down to luck.

But Spain’s recovery today also owes a lot to hard reform aimed at particular failings in the economy. The Rajoy government bravdly persisted in a deliberate rewiring of the Spanish economy, with an emphasis on far-reaching labor-market and tax reforms. Despite protests from the left-wing.

In 2014, the government said it would gradually lower the corporate tax rate to 25 percent from 30 percent. The top marginal rate on personal income will fall to 45 percent from 52 percent. The government is limiting deductions, broadening the tax base and making a serious effort to curb evasion.

Companies have been given more flexibility to set wages and working conditions. Wage growth that had run ahead of productivity has moderated. The barriers that created Spain’s notorious two-tier labor market, with its underclass of workers on temporary contracts, have begun to fall.

Be under no illusion: The job is far from finished. Structural unemployment — what’s left when growing demand has done all it can — might still be as high as 18 percent. Tax and labor-market reforms need to go further. The government could do more to help to match job seekers, many of them high-school dropouts, to work or training. Above all, to avoid repeating the errors of the past, it will need to be careful about maintaining fiscal discipline as the recovery boosts revenues and financial pressure subsides.

Madrid by night

Madrid by night

Nonetheless, Spain proves an important point: Contrary to reports, geography and euro membership condemn no country to economic failure.”

The series of necessary but unpopular choices done by the Rajoy government (conservative right) may cost them their position though. With national elections coming up 18.dec this year, the social democrats seem to be in favour. The big question is how will a change in government affect the economic recovery. To be continued.

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