Business

Tuesday 17 January 2017

Spanish inquisition looms

He has presided over an economic crisis but the premier's achievements will be remembered by his fellow countrymen

Published 09/04/2011 | 05:00

Portugal's decision to finally seek a bailout eclipsed the other important development on the Iberian Peninsula this week -- Spanish prime minister Jose Luis Rodriguez Zapatero's decision not to seek a third term in next year's general election.

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As the pressure mounted on Portugal in the four-and-a-half months following Ireland's bailout last November, it was widely predicted that, after the Portuguese domino had fallen the pressure would start to mount on Spain.

This was the eurozone's nightmare scenario. With an economy more than twice as large as those of Greece, Ireland and Portugal combined, Spain was both too big to fail and too big to bail out.

A full-blown Spanish crisis would have rapidly exhausted the €750bn EU/IMF bailout fund established after last year's Greek financial crisis.

That hasn't happened, at least not yet. Instead Spanish bond yields have fallen to just over 5pc, still too high, but only a little over half the 10pc Ireland is paying and the 9pc investors are demanding to purchase Portuguese bonds.

Spain's campaign to differentiate itself from the other PIGS (Portugal, Ireland, Greece and Spain) seems to be working.

Of course, it helps that the Spanish public finances were never allowed to descend to Irish or Greek levels of delinquency.

Retirement

Spain's public debt currently stands at about 60pc of GDP and this year's budget deficit will be 6pc after the Zapatero government took a series of tough measures, including raising the retirement age from 65 to 67, increasing taxes and cutting spending.

This is reflected in Spain's very strong credit rating, making it the only one of the PIGS whose bonds haven't been downgraded to either junk or near-junk status.

Unfortunately, the Spanish property boom was, in proportionate terms, second only to that experienced by Ireland. Since the bubble popped in 2006, Spanish property prices have fallen by an average of more than 20pc, while huge stocks of unsold properties overhang the market.

This means that, despite its relatively disciplined public finances, bond investors have been keeping a close eye on Spain, worried that the property bust would, as happened in Ireland, force the government to bail out the banks.

Spain seems to have managed to minimise the impact of the property bust on its banking system.

The Spanish central bank, the Banco de Espana, scarred by the memory an earlier banking crisis in the early 1990s, imposed strict reserve and provisioning rules on its banks.

This means that while several of the cajas (local savings bank) have got into trouble, with the Banco de Espana arranging shotgun marriages between several of them, the country's major banks, Santander and BBVA, seem to have emerged unscathed from the downturn.

While the Spanish government and regulatory authorities seem to have done a much better job than their Irish counterparts, Spain is by no means out of the woods yet. Like Ireland, a founder member of the euro in 1999, Spain binged on the abundant cheap credit which the single currency made possible.

Hangover

After the party, the hangover. The Spanish unemployment rate now stands at over 20pc, with more than 40pc of under-25s jobless. This is at least partially the result of Spanish unit labour costs rising by 30pc relative to those in Germany over the past decade, meaning that there has been a massive loss of competitiveness against the eurozone core.

In addition, the Spanish labour market is extremely inflexible, making employers very reluctant to take on permanent staff even in conducive economic conditions.

The poor economic outlook and the tough 2011 budget have inevitably eroded popular support for Zapatero's Socialist Party.

The most recent opinion polls indicate that the Socialists are trailing the right-wing Popular Party by 10 percentage points. If that result were repeated in next year's general election Zapatero would be replaced as prime minister by the Popular Party leader Mariano Rajoy.

Although Zapatero stressed this week that he had always intended to step down as prime minister after serving two full four-year terms, it is difficult to imagine that the prospect of virtually inevitable defeat next year didn't strengthen his resolve to quit.

Spanish politics are still shaped by the bloody civil war fought between the Left and Right from 1936 to 1939 during which an estimated 500,000 people were either killed in combat or executed.

Among the dead was Zapatero's paternal grandfather Juan Rodriguez, an army captain who was executed by firing squad in August 1936 for refusing to join in the right-wing military rebellion against Spain's democratically-elected, left-wing government -- Spaniards are far more relaxed than Northern European's about which family name they use and Zapatero generally uses his mother's more distinctive surname.

After the death of Spain's fascist dictator Francisco Franco in 1975 the two sides agreed the pacto de olvido, "the pact of forgetfulness", under which the Left agreed to let bygones be bygones in return for the Right quickly dismantling the Franco dictatorship. For the next 30 years a collective amnesia about civil war events descended on Spain.

While the pacto de olvido paved the way for the swift return of democracy to Spain, it meant that the country never fully came to terms with the toxic legacy of the civil war. Of those who died, "only" about 200,000 were killed in combat with a further 130,000 being executed by both sides between 1936 and 1939.

The bloodshed continued after the right-wing victory in 1939 with the Franco regime estimated to have executed up to 100,000 prisoners out of hand with a further 35,000 dying in captivity. Virtually everyone in Spain lost a close relative or friend to either the civil war or the post-war repression.

This enormous loss of life inevitably left a huge scar on Spanish society, one that has never properly healed. While the most visible symptom of the civil war's noxious legacy was the terrorist campaign conducted by the Basque separatist group ETA (Franco's repression had been most severe in the Basque country) until 2010, it permeated every level of Spanish society.

It was not until Zapatero was first elected prime minister in 2004 that Spain belatedly began to come to terms with its unhappy past. The mass graves where Franco had secretly buried his victims were excavated and tens of thousands of bodies exhumed.

Victims

In 2007, the Spanish parliament, the Cortes, passed the Law of Historical Memory, which acknowledged the victims on both sides of the civil war, recognised the victims of the Franco regime and condemned its human rights abuses.

Fiercely opposed at the time by the Popular Party, which claimed that it would dredge up old differences, the Law of Historical Memory is now widely credited with finally helping to heal the wounds of the Spanish civil war.

This year marks the 75 anniversary of the outbreak of the Spanish Civil War. For the first time in three-quarters of a century Spaniards can openly discuss the events of those terrible years. The necessary, but ultimately counter-productive pacto de olvido, has been cast aside.

When the arcane details of his government's economic policies have long since been forgotten, Zapatero's success in helping his countrymen come to terms with their bloody past will almost certainly prove to be his outstanding achievement.

Irish Independent

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