Nov 23, 2011 | 11:51 GMT

7 mins read

Spain's Economic Outlook After Elections

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Outgoing Spanish Prime Minister Jose Luis Rodriguez Zapatero’s decision to call for early general elections, held Nov. 20, allowed Spain to have a smooth political transition. While the arrival of a new government in Spain will be quieter than in other members of the eurozone, such as Italy and Greece, the new government of Mariano Rajoy has immediate challenges — among them high private debt, a fragile banking system and growing unemployment — that threaten the new administration.
On Nov. 20, the Popular Party won a landslide victory in Spain’s general elections. Outgoing Spanish Prime Minister Jose Luis Rodriguez Zapatero called for the elections in April, seeking to put an early end to a government that had failed to find answers to the economic crisis. Zapatero wanted a new administration — preferably run by his Socialist Workers’ Party (PSOE) — to assume control. Instead, the Popular Party, led by Mariano Rajoy, obtained 186 seats in the 350-seat Spanish parliament, giving the new administration's party an absolute majority. The "indignants” protest movement's influence seemed limited, although it possibly hurt the PSOE, led by Alfredo Perez Rubalcaba. While the PSOE secured only 110 seats in its worst performance in more than 30 years, other minor, anti-austerity left-wing parties performed better than was expected (the United Left, for example, won 11 seats). Although the PSOE failed to stay in power, Spain managed a smooth electoral transition — clearly distinguishing itself from Italy and Greece, the two major European countries at the center of the Continent's economic crisis. In Italy, the transition was a traumatic process during which former Prime Minister Silvio Berlusconi brought weeks of uncertainty to his country (and to the international markets). The outcome of this crisis was a techocratic government that now must gain the support of a fragmented and contentious opposition. The situation was perhaps more tense in Greece, where former Prime Minister George Papandreou threatened to call for a referendum on EU austerity measures before he resigned and handed power to a caretaker government. Rajoy will not have to face elections in the near term, thanks to the laws of the Spanish political system. The next general elections, as well as most of the autonomous parliaments’ elections, do not need to be held for four years. But despite this seamless political transition, Spain has serious economic troubles that will threaten the sustainability of the new administration.

Spain's Short-Term Economic Problems

One of the main problems that Spain faces is its budget deficit, which In 2010 stood at 9.3 percent of gross domestic product (GDP), the third-highest figure among eurozone countries (Greece and Portugal are at 10.6 percent and 9.8 percent, respectively). According to Eurostat, Spain’s total general government debt reached nearly 642 billion euros ($867 million) in 2010. But borrowing is increasingly expensive; in November, the yield for the Spanish 10-year bond hit 6.98 percent, the highest level since Spain joined the eurozone. With such a large budget deficit, Spain must regularly convince markets that it is in control of the situation — otherwise Madrid faces immediate and severe financing problems. In an attempt to win back market confidence, the PSOE and the Popular Party agreed in August to reform the country's constitution to include the concept of "budgetary stability,” which will entail a deficit cap. However, the text does not specify the size of the cap, which must be set by either the European Union or, in its absence, the Spanish parliament. The deficit limit could also be broken during a recession or a national crisis. When it comes into force in 2020, the new law will affect all levels of Spanish administration, including the regional governments that run health care and education. The debt-to-GDP ratio is also a cause for concern in Spain. According to Eurostat, Spain's debt represented 36.2 percent of its GDP in 2007, moved to 63.45 percent of GDP in 2010 and reached an estimated 70.25 percent ratio in 2011. Yet the main problem in Spain is private, not public, debt. Currently, private debt stands at 212 percent of GDP. At the same time, both the real estate crisis and exposure to Spanish debt are harming the Spanish banking sector. In June, Spain's average domestic non-performing loan (NPL) ratio rose to 6.7 percent from 5.5 percent last year, while the NPL ratio for real estate increased to 17.8 percent from 11.2 percent in 2010. The effects of this are not limited to major players, since medium- and small-sized savings banks, known as cajas, are similarly exposed to high-risk loans. While Spain’s two international banks, Santander and BBVA, benefit from their geographic diversification — which gives them the capacity to counterbalance muted domestic results — both have a significant presence in Spain. More than half of BBVA's assets are in Spain, while Santander has around 30 percent of its assets there. Sovereign exposure of the major Spanish banks, while less than that seen in other eurozone countries, is concentrated in Spanish debt. Their total exposure to government securities was 119.8 billion euros at the end of 2010, representing around 7 percent of the banks' total assets. Sovereign exposure to other peripheral countries is limited.

Unemployment and Demography

While Zapatero pushed through austerity measures intended to cut the deficit to 6 percent of GDP in 2011, the Spanish government later admitted that those goals would not be met. During the campaign, Rajoy vowed to make cuts "everywhere" except for pensions in order to meet Spain's target of cutting the public deficit to 4.4 percent of GDP in 2012. The problem is that austerity measures affect a population already suffering from very high unemployment. Currently, Spain's unemployment rate is 20.7 percent, the highest rate in the eurozone. The situation is particularly serious among those aged 15 to 24; youth unemployment in Spain moved from 24.6 percent in 2008 to 45 percent in the second quarter of 2011. As those rates show, Spanish youths are having a harder time finding jobs than are their eurozone counterparts. Demography is also an increasing source of worry in Spain. According to official statistics, Spain's population of about 46.7 million will decline by up to half a million within a decade. Spain is an aging country. Most of its population is older than 35 and the declining growth rate is expected to stand at 0.9 percent by 2015 and 0.5 percent by 2025. Emigration is also a factor in this decline in growth — the economic crisis is expected to push nearly 600,000 people to leave Spain this year. As the young tend to be consumers and the old tend to be savers, Spain has only a few years to generate consumption-led economic growth. Despite the bleak outlook, Spain is better prepared than most European countries to reverse this situation. To some extent, Spain has been more efficient in incorporating foreigners, especially from Latin America, into its economy. Between 2000 and 2005, immigration grew 304 percent in Spain, and by 2007 around 1.8 million Latin Americans were living in Spain. Because of cultural and linguistic similarities, most of those new inhabitants have been effortlessly incorporated into the economy. Due to the size of its economy and of its debt, the consequences of an eventual Spanish collapse might not be as serious for the eurozone as would the fallout from an eventual collapse of Italy. However, the smooth transition in Spain and the apparent lack of serious political conflicts in the near future does not mean that the Iberian country is free from immediate economic challenges.

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