Spanish 'economic miracle' loses its splendour

After joining the European Union, Spain was quick to join the ranks of richer nations. Now the economic crisis has halted its advancement.

The first half of 2010 should have been a time of glory for Spain. For these six months, a crucial time in European history, Spain holds the rotating presidency of the Council of the European Union. In the midst of economic crisis, the EU has to devise its own answer to the economic emergency. The Treaty of Lisbon, which reforms the European government, needs to be implemented. A successful stint as EU chair would be a boost to Spanish morale, or so the government of prime minister José Zapatero hoped.

Things did not go as planned. Greece was cast into crisis as its budget deficit soared. Spain, the European country that - together with Ireland - had suffered most from the credit crisis, became a target of international financial markets.

The country is continually compared with Greece now that its comfortable budget surplus has turned into an 11.4 percent deficit in only two years.

Not in the same league

The crisis has left Spain on the defensive. According to Cristina Manzano, editor in chief of the Spanish edition of Foreign Policy, in recent years, the country had the illusion it had finally caught up with the rest of Europe.

"We thought we were playing in the same league," Manzano said. "Even though we might not have yet reached European averages for certain economic variables, we compensated for those in other departments. But now the inferiority complex that weighed so heavily on us for so long seems to have returned."

The Spanish feeling of inferiority has a long history. After its global colonial empire collapsed in the early 19th century, Spain became an isolated and backward nation and remained so for centuries. After the Franco dictatorship, which ended with the general’s death in 1975, the country was quick to leave this dark era behind it – partially thanks to help from Europe. Since it joined the EEC (the EU’s predecessor) in 1986, Spain has received 200 billion euros in support from Brussels. The funding has served as a belated Marshall Plan. Spain was quick to embrace EU membership as an extra safeguard of its young democracy.

Spain became a model member state. It met all the requirements for joining the euro without fudging its books. During the last economic crisis, in 2002 and 2003, Madrid stuck with the rules laid down in the Stability and Growth Pact, keeping its budget deficit below three percent of its GDP, while even Berlin and Paris did not.

The economy has prospered in recent years, growing faster than the European average. Year by year, Spain’s per capita income came closer and closer to the European standard. In 2006 the country surpassed Italy in this respect. It seemed only a matter of time before it would catch up with France.

A bubble bursts

But now the crisis has cast the country back. The real estate bubble that served for a decade as the economy’s main driving force, together with tourism, has burst. Suddenly the rapid growth of the past seems to have been unsustainable. Unemployment rates, now near 20 percent, are the highest of the entire eurozone by a wide margin. "The country is awakening to a bitter hangover after years of partying," said economist Ángel la Borda.

Many Spaniards complain their country does not have an answer to the crisis. But if foreigners dare voice the same type of criticism, Spaniards are quick to react. Especially when derogatory terms like ‘PIGS’ (an acronym for Portugal, Italy, Greece and Spain) or ‘Club Med’ are used. Or when the old ‘mañana, mañana’ cliché is invoked to explain the current crisis.

Deprecatory references are particularly prevalent in the Anglo-Saxon business press. "Foreign magazines tend to paint a rather stereotypical picture of us," said José Ignacio Torreblanca, managing director of the Madrilenian branch of the European Council on Foreign Relations (ECFR).

"Until 18 months ago they called us Europe’s economic miracle. They sung praises of our dynamic and open economy. Spanish companies were the ‘Trojans of the South’. We had spent European funds so wisely. Why has this all changed now?" Torreblanca asked.

Peripheral economies do worse

Torreblanca said the outside world has to understand that the crisis is hitting Spain in particular because Europe’s peripheral economies tend to develop in a more rampant fashion. "When the EU is doing well, we do better. When the EU is doing badly, we do worse. This has nothing to do with our national character. You see the same in Estonia, and no one will contend we have a lot in common with them."

Whether the criticism is deserved or not, the Spanish government has to pay heed to it. Financial market anxiety over Spain’s economy and the government budget has definitely not subsided in recent months. This has caused the interest paid on Spanish treasury bonds to rise in comparison to the interest paid on the bonds deemed most reliable: the German ones.

"The game the government now has to play," Torreblanca said, "consists of introducing reforms to keep financial markets happy on the one hand. On the other hand it should not reduce the deficit to such an extent that they end up paying an enormous political price."

So far, the government has not been very successful in pulling off this balancing act. Earlier this year, it announced hasty measures to get the budget deficit under three percent by 2013, as Brussels demanded. But since then it has only half-heartedly attempted to find support for the unpopular measures, including 50 billion euros in cutbacks, raising the eligibility age for state pensions and reforming the labour market. The outside word has therefore remained wary.

The government’s leeway is limited. In the 1980s and 1990s, there was widespread political support for far-reaching measures in Spain. At the time, those were necessary for joining the EU and later the euro. In addition, the measures were rewarded with large sums of European monetary assistance. Since the EU expanded eastward in 2004 and 2007, a lot of European support has also been diverted in that direction.

A polarised political landscape

The Spanish political climate has also become extremely polarised since the beginning of this century. The centre-right opposition is not exactly keen to help the centre-left government tackle the current crisis, while unions are resisting reforms from the left. "The government is not truly willing to pay the political price for this crisis back home," Cristina Manzano of Foreign Policy said.

According to Torreblanca of the ECFR, the crisis could mark the beginning of a new relationship with Europe. Pro-European sentiment in Spain "has always been intuitive and ill informed," he explained. In 2005 for instance, a large majority voted in favour of the proposed (but never realised) European constitution even though few people knew it well. Torreblanca believes the Spanish lack of interest was calculated. "People do not collect information on a subject that does not concern them. If your country gets six billion euros from Brussels every year, that is all you need to know."

Now that the European flow of money is drying up and Brussels is pushing for far-reaching reforms, the Spanish attitude towards the EU looks to become less pliant. "But Spain is still far away from protests like the ones we saw in the streets of Athens, where European flags were burnt," Torreblanca said.