Minimal Spanish rescue could fail within weeks
Since the return to democracy in the 1970s, Spain has undergone the most radical decentralisation of any European country. The de facto federalisation of the country has, among other things, given the 17 regional governments huge spending powers. And Teutonic fiscal discipline has not always prevailed in regional capitals. Suspicions abound that piles of debt have been swept under carpets up and down the peninsula.
But even if regional governments do not generate the sort of negative surprises that the banks have served up, Spain – like Ireland – will escape the mire it is in only if its economy starts growing. That does not look like happening any time soon.
While most of the post-crash shake-out of the Irish economy appears to have taken place, Spain faces further wrenching downsizing. Despite property and construction bubbles that were not dissimilar in size to those of Ireland, the economic shock suffered by the Iberian economy has been considerably milder thus far.
By the two best measures of activity – GDP and domestic demand (the second measure excludes the export side of an economy) – the Irish economy has contracted by twice as much as Spain’s. Irish property prices have also fallen by twice as much.
Even the employment fiasco has been worse in Ireland. Although the rate of unemployment in Spain is much higher than Ireland’s (unemployment was never banished even at the height of the boom and few Spaniards have emigrated since the crash), fewer jobs have been lost there than here.
All of this, along with recent indicators and the predictions of most forecasters, suggest Spain is facing a deep recession. Should that happen, tax revenues will continue falling and public indebtedness will soar regardless of what happens to the banks. Spain’s prospects are finely balanced.
If the latest victim of the crisis is all but certain to suffer another bad recession, it appears it will be spared the indignity of having foreign technocrats come to Madrid regularly to poke their noses into its affairs and pass judgment on government actions.
The apparent avoidance of that humiliation is in part because the International Monetary Fund is not putting up a cent of the money. That body has strict procedures to follow when it lends to countries, including regular visits to capitals to check whether the conditions of its loans are being met.
The absence of IMF money and the much more limited scope of the Spanish mini-bailout explain the less intrusive surveillance than that endured by Ireland, Greece and Portugal. But it is hard not to suspect that the country’s size has meant preferential treatment. Grown-ups know that big countries will always have more clout in any club. But Spain’s bailout looks too much like an entirely different set of rules. If the EU were to go in that direction, questions would arise as to whether small countries’ interests would still be served by being in the EU club.
Dan O’Brien is Economics Editor