Spain's Economic Arsonists Political Bankruptcy in Madrid Adds to Woes

Spain is an attraction, and not just as a destination for vacationers and the world's best footballers. It enjoyed a booming economy for a long time, but now the entire country seems to be in free fall. Will it have to resort to the bailout fund because of mistakes by its ruling conservatives?
Von Erich Follath und Helene Zuber
Firefighters in Asturias, northern Spain, prepare to pose naked with a sign that reads, "With so many funding cuts, we are left naked."

Firefighters in Asturias, northern Spain, prepare to pose naked with a sign that reads, "With so many funding cuts, we are left naked."


What a week for Spain. The Madrid Stock Exchange crashed, there was bad news of growing mountains of debt from across the country and the risk premiums Spain has to pay to borrow money are rising rapidly, reaching 7.4 percent last Tuesday -- a level that already forced three other euro countries to resort to the bailout fund. Last Thursday, European Central Bank (ECB) President Mario Draghi felt compelled to restore calm by promising to do "whatever it takes"  to preserve the euro, which apparently means printing as much money as possible. The euro recovered and Spain's borrowing costs fell slightly, but perhaps it's only a respite.

And what has Prime Minister Mariano Rajoy done? He hasn't given a television address or uttered so much as an explanatory or reassuring word to Europe or his people. Instead Rajoy, 57, has disappeared into his office at the Moncloa Palace on the outskirts of the capital Madrid. Some say that he spends his time there staring helplessly and powerlessly at charts. He meets with business leaders like Siemens CEO Peter Löscher in rooms decorated with modern art, and he has even met with Spanish trade union leaders for the first time, though it was after they had already spoken off the record with German Chancellor Angela Merkel. Others say that Rajoy is irritating his European partners with hectic phone calls.

This behavior doesn't inspire confidence. It seems more like a declaration of political bankruptcy.

It also isn't very helpful that Economy Minister Luis de Guindos has been downplaying Spain's problems in Berlin, steadfastly claiming that Madrid will not need more from European coffers than the €100 billion ($123 billion) already promised to rescue Spanish banks. Almost in the same breath, he also admitted that his country will have to fundamentally modify its growth model to get back on its feet. Then his fellow party member Esteban González Pons, the top official of the ruling conservatives, blamed "the Northern Europeans" as a whole for leaving "the South" in the lurch out of pure egotism.

Protests Continue

Meanwhile, the Spanish people are venting their fury at the parliament building in downtown Madrid, just a few kilometers from Moncloa Palace. For months, the Spaniards, in an admirable show of patience, endured more and more bad news in hopes that they would be rewarded after all the sacrifices they had made, from wage cuts to cancelled vacations. But now they have apparently lost their optimism. The miners from Asturias in northern Spain,  who took to the streets of the capital with their miners' helmets, have now been joined by firefighters, police officers and nurses. Young people have also shed their lethargy and are now protesting in front of the banks' glass palaces.

One in four employable Spaniards is out of work (an unemployment rate almost five times as high as Germany's), while 53 percent of young people are unemployed (almost seven times the German rate). Spain is a deeply wounded and torn country. The wealthy and influential members of high society, the ones who make their daily noontime pilgrimages to the expensive restaurants where it's still difficult to get a table -- they still exist. At the same time, however, hundreds of small bars throughout the country have had to shut their doors, because most ordinary Spaniards can no longer afford ordinary prices. Many are too proud to stand in line at church soup kitchens.

Is this stable democracy, this reliable European Union partner often praised as the alliance's "southern anchor," the fourth-largest economy in the euro zone, after Germany, France and Italy, at a crossroads? And could it even see a return to authoritarian, nationalist times, 37 years after the death of former dictator Francisco Franco? Will there be a royal road for Spain, or is prayer along its famous pilgrimage route, the Way of St. James, the country's only hope?

Anti-European History

The relationship between Spain and Europe has always been difficult and controversial on both sides. Charles V, the Holy Roman Emperor and a member of the Hapsburg family, became Charles I, King of Spain, in 1516. Ironically, he was proclaimed king in Brussels and only arrived in Spain in 1517 and assumed the throne in Madrid in 1518.

The Spanish anti-reformists opposed the religious reforms of the 16th century, sought to distance themselves from new scientific discoveries, and frowned upon work ethics and the resulting improvements in the quality of life. This attitude reached its unhappy climax in the brutal expeditions to secure the colonial realm and in the Inquisition, during which unimaginable atrocities were committed in the name of the church. They were also a deliberate rejection of Europe.

Until well into the Franco dictatorship of the 20th century, many viewed reformists and proponents of enlightened thought as "un-Spanish" and the right-wing forces in Spain as Europe's "true moral reserve." Meanwhile, some in the rest of the continent believed the saying that Africa began beyond the Pyrenees.

After Franco's death, Spain quickly managed to liberate itself from its authoritarian traditions and overcome what the author Ortega y Gasset had dubbed an era of "sleep, mental enfeeblement and egoism." The young democracy was brought into NATO and the European Community in the 1980s and proved to be eager to learn, a model European student. Soon money from Brussels' "structure and cohesion funds" began flooding into the country. A blessing at first, the money soon proved to be a curse. Instead of using it to develop industries of the future, the Spaniards promoted infrastructure projects, including roads, railways, housing and hotels.

Conservatives and EU to Blame

The conservatives became the country's biggest arsonists, heating up the real estate mania with their neoliberal land and building policies, fires they are now expected to put out too. But the EU also shares some of the blame, because it neglected to require Spain to employ targeted planning procedures and was also sloppy when it came to monitoring the funds. As a result, Spain was never able to completely shed the protectionism inherited from the Franco era and become competitive. Instead, it developed a superficial dynamism based on borrowed money. The perceived rise in the value of real estate from year to year enabled Spaniards to continue borrowing money and leading increasingly luxurious lives. Almost unavoidably, education and innovation were neglected, while the sweet, slow poison of debt led to a dependency that has now become all but inescapable.

Spain is one of the top travel destinations for Germans, a paradise with sandy beaches and rugged mountains, and the home of dozens of UNESCO World Heritage cultural sites, from the Moorish Alhambra to the Catholic Cathedral of Santiago de Compostela. It is the home of great painters like Pablo Picasso and Miquel Barceló, great architects like Antoni Gaudí and Rafael Moneo, and great writers like Miguel de Cervantes and Javier Marías. It's also the home of the world's top national football team, and even of excellently managed international companies, including Santander (which the magazine Euromoney just named the World's Best Bank in 2012), the communications group Telefónica and the textile giant Inditex.

Spain is not Greece. It has competitive products to offer, albeit relatively few in the high-technology segment, as opposed to the agricultural sector, in which it excels. Some of its agricultural products, like wine, olive oil and ham, often surpass those of EU competitors in terms of quality and value for the money. The Spanish trade balance doesn't look bad. The government debt level, currently at 75 percent of GDP, is comparable to Germany's and thus below the EU average (not to mention the United States and Japan). The high interest premiums for Spanish government bonds on international markets are not based on economic fundamentals, as German Finance Minister Wolfgang Schäuble noted last Tuesday during a meeting in Berlin with his Spanish counterpart. Spain's main problem is liquidity, specifically with its banks.

Unpopular Prime Minister

The fact that the markets lack confidence in Madrid is partly a result of the inability to coordinate economic policy and to explain the reasoning behind measures taken by the government. But that government is headed by Señor Rajoy. Never since Franco's death in 1975 has a prime minister lost his luster as quickly as Rajoy. The taciturn notary, who wears a beard and rimless glasses, and was voted into office eight months ago with an absolute majority, now enjoys the confidence of only a fifth of Spaniards in polls.

If Spain does indeed require the full program of a European bailout, at an estimated cost of least €300 billion, and if the feared "men in black" from the troika, consisting of the European Commission, the ECB and the International Monetary Fund, assume control, it will put an end to Rajoy's political career. A prominent former party member is already calling for early elections. For too long, the prime minister believed that his mere presence at the head of the government was enough to ensure that Spain would stop "being a problem and become part of the solution."

On three occasions, he had to correct deficit targets Spain had agreed to with Brussels. Rajoy has also made the rigid labor market more flexible. He has increased taxes and streamlined government ministries. He has set a debt ceiling of 1.5 percent of GDP for the autonomous regions, and he has also forced them to cut an additional €10 billion in education and healthcare spending

But German Chancellor Angela Merkel, Brussels and the investors did not acknowledge his efforts, the premier says privately. Rajoy himself predicts another bad year before the structural reforms can take effect, and that growth should not be expected until 2014.

And now the government also wants to weaken the social safety net -- a culture shock in a society that has always emphasized solidarity with the family. As a result, even fathers and grandmothers have joined the protests. The Spaniards are unwilling to accept without complaint the notion that the weakest members of society are to be deprived of the social safety net, but they are expressing their displeasure without being aggressive. In Spain, unlike Greece, the demonstrations have remained nonviolent.

Shameless Lies

Perhaps what infuriates hundreds of thousands of people and drives them into the streets is not that they are being asked to make sacrifices, but rather the lies of the political class. Rajoy, who consistently emphasized during his campaign what an honest man he is, has exhausted the Spaniards' patience with sugarcoating and shameless lies, especially on the subject of banks.

Conservatives and Socialists alike consistently praised Spain's banking system as the best in the world. Rodrigo Rato, economics minister with the People's Party under José María Aznar, the prime minister who presided over the boom years, was considered the father of the Spanish economic miracle. He was also the one who liberalized building laws and boasted of giving all Spaniards access to the stock market.

After returning from the International Monetary Fund, Rato became president of the new industry giant Bankia in 2010. The banking group was created through a merger of seven ailing savings banks from regions with conservative governments.

In May, by Rato's own account, his fellow party members in the government forced him to resign. He is currently being investigated for accounting irregularities. Luis de Guindos, who served as state secretary under Rato and is the current economics minister, nationalized Bankia and installed a banker as Rato's successor. In turn, Guindos immediately demanded €23 billion from the government. As a result, Rajoy's only option was to request the loan from the European bailout fund, which he then celebrated as a personal victory.

He carefully avoided using the Spanish word for rescue, "rescate," insisting instead that this wouldn't cost taxpayers anything and that Brussels would not impose any conditions on Spain.

But he was wrong. The Spanish commissioner for competition in Brussels, Joaquín Almunia, a Socialist, made it clear to his fellow Spaniards that the government had to guarantee the aid for the banks. And now that they have realized how much the "favorable credit line," as Rajoy euphemistically calls it, is going to cost them, the Spaniards are outraged.

Forging a New Alliance

The executives of savings banks, which also talked low-income borrowers into taking out mortgages, will remain unscathed if these borrowers default on their mortgages. The same holds true for bankers who speculated with pensioners' savings.

Retirees who have been harmed as a result are protesting in their underwear in front of branches of Novagalicia Banco, a savings bank in the northwestern province of Galicia. They've written the words "You've stripped me completely" on their underwear. Naked firemen are protesting in the neighboring province of Asturias. In Seville, outraged citizens staged a bank robbery, but instead of pulling out weapons they stamped their feet and danced the flamenco.

Even more dangerous for Rajoy are the autonomous regions that are rising up against the government's stricter austerity programs. Many will have to raise fresh capital in the second half of the year. To meet this need, Madrid intends to make a so-called autonomous liquidity fund totaling €18 million available to the regions starting in September.

The eastern province of Valencia, a conservative stronghold, has announced that it intends to apply for at least €3.5 billion, while neighboring Murcia, also ruled by the conservatives, wants up to €500 million. Even the Catalans, who are normally so determined to gain independence, are now forced to ask Madrid for aid payments.

But Finance Minister Cristóbal Montoro says: "The government coffers are empty." Based on the projection that the Spanish economy would shrink by 1.5 percent this year, he had the parliament enact legislation that strictly caps the government budget for 2013. But the opposition fears that the austerity measures are not enough, and that the economy will continue to decline. Although the Euro Group of European finance ministers has given Spain until 2014 to reduce its deficit to 3 percent, Montoro does not want to allow the autonomous regions to relax their austerity goals.

Amid all this hardship, Prime Minister Rajoy is planning an act of liberation with the help of a newly forged euro axis stretching from Rome to Madrid to Paris. He has invited Italian Prime Minister Mario Monti to a meeting at Moncloa Palace on Thursday.

Together with his ally, Rajoy intends to work out a new strategy to apply pressure to Chancellor Merkel. It pits the southern and northern Europe against each other. On the same day, Draghi will have to explain to his colleagues on the ECB Council how his offer to print money is supposed to work.

Spain has made some very important decisions in the last few months, and it will continue to do so, says Rajoy. "Now it's up to Europe to apply the same amount of energy and make decisions just as quickly," he said.

Translated from the German by Christopher Sultan