Back from the Brink Spain Emerges as Model for Europe

After years of being one of Europe's shakiest economies, Spain has managed to institute strict reforms and bring back economic growth. But job numbers and research funding lag behind -- and the country's greatest challenge may be a political one.



It almost looks like the highly productive and stereotypically spotless Swabia region of Germany. So orderly. So accurate. One glassed-in company headquarters after the next. Only the park benches on the sidewalks betray the fact that Alcobendas is near Madrid, and not an industrial area near Stuttgart -- the sun shines more often here.

Mercedes Benz, which is based in Stuttgart, also has a base here. The Spanish branch of the company has its headquarters in Alcobendas. To get to the office of José Luis López-Schümmer, the president of Mercedes-Benz España, you need to walk behind a bulky SUV and head to the elevator. López, a bearded man of about 50, smiles contentedly. "Business is going well again," he says.

He has reason to be in a good mood. Mercedes van sales have already gone up by half over the past year: The cars are popular among Spanish small-business owners. In the first couple of months of this year, the number of car registrations went up by another 27 percent.

López is especially proud of the fact that over the past year his country has produced 2.4 million cars, and is leaving the traditional car-producing countries of Italy and France further and further behind. Only Germany produces more cars in Europe than Spain, albeit by a wide margin.

It was exports, and not domestic demand, that lifted Spain out of the worst economic crisis since the civil war in the 1930s. "Ninety percent of our Mercedes vans and trucks, which we produce in two plants in the Basque region, head outside of the country," López says.

The model being emulated by the country during its upturn is unmistakable. During the crisis, Spain copied the German economic model, successfully putting its emphasis on exports. In 2014, almost one third of Spanish goods and services were shipped outside of the country. 25,000 new jobs were created in the Spanish car factories of Opel, Seat, Renault, Ford and Nissan alone. Once the unions consented to making production more flexible, Mercedes invested €190 million ($208 million) in the factories. "We've been on the move," says López, who also once worked in Stuttgart.

Spain's Big Return

The European Central Bank is predicting that Spain will be one of the economic drivers of Europe in 2015. Powered by a cheap euro and low interest, economic growth is predicted to rise by 2.3 percent this year. The Spanish government is expecting one million additional jobs for 2014 and 2015.

Along with Portugal and Ireland, Spain represents an example of how an economic crisis can be turned into an opportunity. These countries' experiences show that a nation can recover its economic competitiveness through painful reform, even in a monetary union.

As a result, Spain -- especially in the eyes of liberal economists -- represents the counterpoint to Greece, which has gotten entangled in its national battle against economic relegation and is losing ever more time with its recriminations against the rest of the euro group. That's one view.

Others see the dark side of Spain's success. Mass unemployment, which is still at 23.7 percent, is simply not going down fast enough. And this past weekend showed that the reformers can't count on the gratitude of their voters.

On Sunday, Andalusia, the most populous area of Spain, headed to the polls. Contrary to many expectations, the incumbent Spanish Socialist Workers Party managed to retain all of its seats, but the conservative Partido Popular, which governs Spain, saw its voter share decrease from 41 percent to 27 percent. Two new protest parties, Podemos and Ciudadanos -- which follow the mold of Greece's Syriza -- received 15 percent and 9 percent of the vote, respectively. In Andalusia, where the Socialists have been in power for decades, more than one-third of people are unemployed.

Hemmed in by the Euro

Álvaro Nadal, 43, one of Spain's reformers, receives visitors in a neoclassical palais located directly behind Moncloa, Madrid's presidential palace. The economist thinks fast and speaks even faster. At the most important international conferences, Nadal sits next to Mariano Rajoy, the Spanish prime minister, and is considered one of his most important economic advisors. His office is characterized by dark, severe furniture -- the big conference table is entirely upholstered with olive-green fabric except for its edges.

"After the introduction of the euro, our inflation was always two or three percent higher than Germany's. So after 2000, our competitiveness on the international markets sank," says Nadal, a Harvard University graduate. At first, the cheap money from the ECB and a big real estate boom plastered over the country's problems. Then in 2008 came the big real estate market crash, and Spain was trapped.

Back when the Spanish peseta was still in use, the country's currency could still simply be devalued. Thanks to that tried and tested method, the country had again and again been able to retain its competitiveness in previous decades. But when the crisis broke out, this exit strategy was off-limits: Spain would have had to leave the euro to use it. The option was seriously discussed in Spain at the time, but is now dismissed even by Podemos Head Pablo Iglesias.

Spain decided to take the more difficult road. "We are the first population-rich country that embarked on a large-scale depreciation within a currency union," Nadal says.

Taxes were raised in 2011 and many people were laid off, including those in the public administration. This led to mass unemployment, a plunge in real estate prices of over 35 percent, wage stagnation. At some point, prices also started to sink.

"For the past 18 months, inflation has been lower than in Germany. That had never been the case before," Nadal says. He shows a graphic demonstrating labor costs. Thanks to its restraint on wages, Spain managed to completely regain the competitiveness it had lost relative to countries like France and Italy since 2000. Even the gap between Spain and Germany rapidly shrank.

Lagging Job Market

Mercedes Spain head López-Schümmer confirms that wages barely rose during the crisis years. "The unions have accepted that the old system of raises based on inflation plus a certain percentage on top no longer works," says the executive, who also heads the Spanish Association of Car and Truck Manufacturers (Anfac). Work hours have become more flexible. If a company is losing money, wage increases may be cancelled. And companies began hiring new people because it has become easier to lay them off again if investment plans don't pan out.

Spain is embarking on a dream liberalization program. But the progress on the job market is puny. It is still almost impossible for young Spaniards to get a permanent job in their homeland. In some places, temporary contracts are as valuable as a winning lottery ticket. University graduates are more likely to find an adequately paying job in Antwerp, London or Frankfurt. Even Prime Minister Rajoy -- who, as a politician, is professionally required to be optimistic -- is proceeding on the assumption that five more years of economic growth will be necessary for 20 million Spaniards to have a job, as was the case before in the crisis.

During the crisis, the construction industry lost about 1.8 million jobs. Given the many empty apartment buildings, these jobs won't be returning, even if a turnaround is in sight in this sector as well. Still, in 2014, after falling by about 35 percent, apartment prices once again rose nationwide.

The Spanish state also still has to carry the burden of some infrastructure projects that verge on the megalomaniacal. Eight private highway companies went bust after building new roads that the market didn't actually need. Now they are waiting to be saved by the government -- according to the construction sector, €8 million would suffice to do the job.

Even the European Union, for whom Spain was one of its biggest subsidy recipients, has become more careful. It had plans to co-finance the unnecessary expansion of a container terminal in Cádiz, Andalusia, which has been little used for years. In the wake of a SPIEGEL report about the plans in October, the EU cancelled its co-financing in early March. Now Spain needs to submit a new project proposal for the project, which the public port company had already almost finished building using loans.

Research Investment is Crucial

Today, these forms of inherited waste are still causing problems in the country. Research funding was cut because the state ran out of money -- also as a result of its support for meaningless prestige projects. The country, however, has enormous catching up to do -- particularly in the promising high-tech sectors. Research and development are a big weakness in many companies, who invest too little in their future.

Businesses like ITP, which builds turbines and invests 8 percent of its income in research, are the exception. The company managed to use its expertise to build the turbines for Eurofighter military jet as well as civilian planes. Crucial parts of the engine -- which powers planes like Airbus' wide-body A380 or the Boeing 787 -- are designed and produced in Spain.

Rolls Royce -- alongside the Spanish family holding company Sener, which is a major stockholder in ITP -- has just signed a contact which would task the Spanish with the development of high-speed turbines that would power planes in 2025. The European Investment Bank jumped in to maintain research financing during the crisis years, when Spanish banks were no longer willing to take risks.

Spain is lucky to have entrepreneurs like 44-year-old Mónica Martínez Walter. The physicist was working as a researcher in a Max Planck Institute in Mainz, Germany when her father unexpectedly died in 2001. She needed to take over as the president of the Madrid aerospace company GMV. Now she sits in a modest office covered in numerous old maps, soberly describing the years when the banks suddenly demanded two-figure interest rates, because the financial crisis had arrived in Spain.

"During the crisis we needed to replace state clients with private ones and to further internationalize," Martínez says. She wants to turn her family business, with its 1,500 employees and its subsidiaries in 10 countries into a large corporation.

The inner courtyard of the company's headquarters contains red mounds of sand with circular craters. "We're training a robot here how to find its way on Mars," Martínez says. The company is participating in the new Mars expedition being planned by the European Space Agency. The hope is that if the Europeans land there at some point in the future, the robots, assisted by GMV technology, will be able to steer themselves on their own using digital maps and sensors to prevent them from falling into the first hole they stumble upon.

If the Europeans are going to land there at some point in the future, robots will autonomously create their own digital maps with the help of GMV, and be able to move around using visual sensors without falling into the nearest hole.

In Madrid, hundreds of scientists and technicians are working, with considerable talent for improvisation, on solutions for the future. Sometimes those involve a garbage disposal for space which could catch the space junk that flies around the Earth at various speeds. Others involve the optimization of the satellite software of the Galileo navigation system, with which the Europeans hope at some point to be able to compete with the American GPS.

But during the crisis Martínez has learned that even state-financed contracts can easily fall apart. As a result, she's happy that her clients are increasingly made up of private companies like Renault-Nissan or Daimler. In the future, the same company that helped to track and steer the European space probe Rosetta, which spent many years chasing a comet, may also be doing the same thing in cars.

Worries over Upcoming Elections

Unlike Greece, Spain has internationally competitive companies. But as in Athens, the recovery is threatened by political uncertainties. Parliamentary elections will be taking place at the end of the year. Investors are afraid of populist, anti-capitalist parties like Podemos. "Did you recently see on TV the photo of Trotsky that the Podemos supporter had posted on his Apple computer?" one of the businessmen asks with a slightly horrified tone in his voice.

The Ciudadanos people's movement, which originated in Catalonia, seems more business friendly -- they want to support the middle class and create a national anti-corruption program. Both Ciudadanos and Podemos have double-digit support levels in voter polls, because, regardless of the economic crisis, the traditional elites from both the conservative and socialist party are wrapped up in serious corruption scandals.

Nadal, the conservative presidential advisor, points to the high political costs of the reforms: "When they devalued their currency before, the companies immediately became competitive again. When you devalue within the euro zone, it takes a long time and is painful for everyone." Homeowners need to lower the prices of their homes if they want to sell it. Employees earns less. And every company makes less profit.

Rajoy's conservative government has implemented a feel-good program in order to transmit the fruits of the upturn to voters. Taxes were lowered, old cars could be scrapped and new ones purchased with the help of government subsidies and the money is flowing more freely again.

Even in a politically stable country, over three years of internal devaluation are also barely tolerable. Because then there are elections.

Discuss this issue with other readers!
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edwards.mikej 03/25/2015
Only from German European Imperial Headquarters could one find an article saying a country which has 50+% youth unemployment is successful. The ability of the German Intelligentsia to totally ignore abundant evidence that its Neoliberal policies and ridged ideology which rejects any evidence of its overwhelming failure (as would a cult) is astonishing.
thisisgrey 03/25/2015
As an Spaniard now living in London out of necessity I can tell you that this growth means NOTHING. All my friends are either unemployed or making laughable salaries that allow for nothing but subsistence. As for corruption, things are as bad as always and Spain is still a hot bed for cronyism. This unexpected half recovery halted the momentum for change. People are depressed, broken and hopeless. The idea is going anywhere, building anything, voting whoever, anything but this and these people. For workers this recovery feels like the fall stopped. It doesn't feel like things are improving, it only feels like this is the new normal and there is no hope. Like the brief moment of happiness was a lie and there is no possibility to save, invest or dream. Only corruption, unemployment and desperation. Oh yes, and sun, lots of it, even too much.
kirk.preston.16 03/26/2015
3. The Spanish Economy
Before we open the champagne, I want to inject a bit of reality to the situation. Yes, the government has liberalized labor laws, which have fallen hardest upon the working class, but at least have helped companies become more competitive. Wage stagnation and less worker protections have helped Spanish economic competitiveness grow from bad to decent. Also certain sectors, usually in Madrid or Barcelona are competing well due to lower Spanish salaries, and the ability to be choosy in selecting employees. Now for the bad news. The reforms are not enough. Hardly any have fallen on the bloated, inefficient, corrupt and pampered public sector, where jobs for life, unaccountability, make work jobs, 35 hour work weeks, and comfy salaries are the norm. Rising from the more reasonable base salaries of the lower civil servants, the privileges and excessive compensation grow exponentially to excessive levels for administrators and other politically connected government types. Rajoy, the prime minister, has done little to nothing to cut out the waste at the top, corruption, duplication, and bloat. All he has cut are hospitals and schools, with the pain falling on patients, nurses and doctors, while the administration class live in Brahmin like luxury. Rajor recently made a public apology for all the corruption, while at the same time doing nothing to actually reduce it. In other words the "austerity" has not fallen on those who most need a cut and a reality check: the pampered political class and the banks. No it has fallen on the most vulnerable: the population and the beaten down private sector workers. Not only that, but outside a few star businesses in Madrid, the rest of the country is dragging along the bottom economically, being mired in scandalously high unemployment and a stagnant economy 7 years running. Supposedly a "recovery" is underway. Well, I don´t see it. The only criteria by which Spain is the "star pupil" in Europe is that their minimal reforms are at least better than the rest of Europe, which appears to not have implemented ANY reforms at all. I guess in a class of all F students, the +D student is the "model pupil". Europe is so desperate to hold up any shred of positive news, that the minimally positive news on Spain is held up a a "great victory".
nereusjen 03/26/2015
It is a painful process from the economical spree before 2008 global financial crisis. Spain did what they need to do in solidify their economic structure in order to improve their competitiveness. It tends to be a long process in trickling down on Spain economy. However the light is on the horizon although it needs patience. Hope their political system is prepared to support it!
Tadeo Norias 03/26/2015
5. A wrong idea about economy
You are wrong. Spain has become the most unequal country in Europe, has a serious problem with political corruption and a deeply bad governance since there is no political and financial accountability. Nobody feels pollitically accountable of anything, nobody resigns for anything. To reddress the big figures is relatively easy, it can be done by good economists, liberal or not, but economy is more than that, it is a social matter. There are no real reforms in public accounting, education. If you say that is a good perspective, I would rather say the contrary.
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