Hidden by the Greek headlines, Spain shows how it's done .... it could all still go wrong, though

Tuesday 9th June 2015

 Hidden by the Greek headlines, Spain shows how it's done .... it could all still go wrong, though

 "Spain rebound gathers pace despite high jobless level" , The Financial Times, p.10

One can sometimes forget that at one time many thought Spain rather than Greece presented the biggest threat to the Eurozone. The much larger Spanish economy was brought to its knees in 2008 by the bursting of a debt-fuelled, obscenely over-inflated property bubble that threatened the banking system itself. In 2012 and one year into office, PM Rajoy was forced to nationalize a number of banks and negotiate Spain's own bail-out package from the EU to shore up the system.

Spain officially emerged from recession in Q3 2013 and growth rates have been on an upward curve ever since. Yesterday, the IMF raised its growth forecast for Spain this year to 3.1%, making it something of a star performer both within the Eurozone and beyond. 

There is always a price to pay, however. The austerity measures insisted upon by the EU as terms of the bail-out have been painful to apply, in the case of the resulting high unemployment levels excruciatingly so. The unemployment rate stands at 24%, and is much higher amongst the young. The economic recovery has yet to make a significant dent in this figure. Above and beyond the enormous social implications of such a number, it is important for a couple of reasons.

Firstly, Spain (and others such as Portugal, Ireland and even Italy) are among the most hawkish in the EU when considering whether to give any concessions to Greece. Unsurprisingly, they take the view that if they've had to suffer such pain before emerging fitter and leaner the other side, why should Greece get a special deal ? Such strong views make it doubly difficult for creditors to offer Greece any more lifelines, even if they were tempted to do so.

And secondly, for obvious reasons high unemployment is political poison for the ruling administration. With Spain facing a general election in November, Mr Rajoy will welcome the upbeat growth forecasts but desperately needs the effects to be seen in lower unemployment levels. The IMF suggest that he has to be more proactive in this area. Guiding the economy back to impressive headline growth numbers may not be enough to win the backing of the electorate, large parts of which still face a desperate struggle.

The anti-austerity Podemos party has been the biggest beneficiary of the public's disaffection, but recent regional elections point to a fractured vote that would leave no party holding a mandate. What then for Spain ? After all she's been through, it would be a crying shame if she should fail now.