Download Hypothesis/Significance: Jose Luis Rodriguez Zapatero`s decision to

Hypothesis/Significance: Jose Luis Rodriguez Zapatero’s decision to call for early
elections 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, as high
private debt, fragile banking system and growing unemployment threaten the future of
the country.
Scope: OpCenter asked for a piece to release before the Spanish elections, updating the
situation of the country and describing the main political and economic challenges for the
new government.
Analysis
On November 20, the Popular Party (PP) won a landslide victory in general elections in
Spain. PP, led by Mariano Rajoy, obtained 186 seats in the 350-seat Spanish Parliament,
which means that the new administration will have an absolute majority. The ruling
Socialist Workers’ Party (PSOE), led by Alfredo Pérez Rubalcaba, only got 110 seats, the
worst performance in over 30 years.
Although the “indignants” movement often made the news since its birth in May 2011, its
influence seems to have been limited. It seems to have particularly hurt the Socialists:
while PSOE got the lowest amount of votes since the return of the democracy, other
minor, anti-austerity left parties did better than expected (the United Left gained 11
seats).
The November elections were the result of the decision taken by Jose Luis Rodriguez
Zapatero in April to call for a general election five months early. At the time, Zapatero's
decision sought to put an end to a government that had proven unable find answers to the
economic crisis, and allow a new administration (preferably Socialist) to take the reins of
the country. Although the PSOE failed to stay in power, Spain managed a smooth
transition.
This represents a clear difference with Italy and Greece, the major European countries
that are at the center of the economic storm. In Italy, the transition was a traumatic
process (even by Italian standards), where Berlusconi brought weeks of uncertainty to his
country (and the international markets). The outcome of this crisis was a technical
government that must gain the support of a fragmented and confronted opposition. The
situation was arguably more dramatic in Greece, where Prime Minister George
Papandreou threatened with the call for a referendum on the EU austerity measures
before resigning and handing power to a caretaker government.
Thanks to the Spanish political system, Rajoy will not have to face an electoral climate in
the medium term, since the next general elections and most of the autonomous
parliaments elections be held in four years.
However, Spain may have even little time to implement economic reforms. One of the
main problems that the country faces is its budget deficit. In 2010, the Spain had a budget
deficit of 9,3% of GDP, the third highest of the Eurozone (Greece is at 10,6% and
Portugal at 9,8%).
According to Eurostat, Spain’s total general government debt reached 641,802 million of
euros in 2010. But borrowing is becoming more and more expensive: in November, the
yield for the Spanish 10-year bond hit 6.98%, the highest level since Spain joined the
Eurozone. At 9% of GDP Spain must regularly convince markets that it is on top of
things, otherwise it faces immediate and severe financing problems.
In an attempt to win back market confidence, PSOE and PP agreed in August on a reform
of the country's constitution to include the concept of concept of "fiscal stability”.
However, the text does not specify the size of the deficit cap, which must be set by either
the European Union or, in its absence, the Spanish parliament. The limit could also be
broken at times of recession or national crisis. When it come into force in 2020, the new
law will affect all the levels of Spain's administration, including the regional governments
that run health and education.
The debt/GDP ratio is also a cause of concern in Spain. According to the Eurostat,
Spain’s debt represented 36,2% of its GDP in 2007, then it moved to 63.45% of GDP in
2010, and it has reached an estimated 70.25% ratio in 2011. It’s important to notice,
though, that the main problem in Spain is not public debt, but private debt. Currently,
private debt is 212% of GDP.
At the same time, both the real estate crisis and the exposure to Spanish debt are harming
the Spanish banking sector. In June, the average domestic non-performing loan (NPL)
ratio of rose to 6.7% from 5.5% of last year, while the NPL ratio for real estate was
moved from 11.2% to 17.8%. This affects not only the major players, since medium and
small size saving banks –known as “Cajas”- are similarly exposed to high risk loans.
Although Spain’s two international banks (Santander and BBVA) benefit from their
geographic diversification -which gives them the capacity to make up for the weak results
in Spain- both have a significant presence in Spain. BBVA has over half of its assets in
Spain and Santander around 30%.
Sovereign exposure of the major Spanish banks is concentrated in Spanish debt. The total
exposure in government securities of the Spanish banks was 119.8 billion euro at the end
of 2010, which represents around 7% of the bank’s total assets. Spanish banks’ sovereign
exposure to other peripheral countries is limited.
Unemployment and demography
While Zapatero has pushed through austerity measures intended to cut the deficit to 6%
of GDP in 2011, the government later admitted that those goals wouldn’t be met. During
the campaign Rajoy vowed to make cuts "everywhere", except for pensions, so as to meet
Spain's target of cutting the public deficit to 4.4% of GDP in 2012
But the austerity measures hit a population already suffering from very high
unemployment. Currently, the unemployment rate of Spain is 20.7, the highest from the
Eurozone. The situation is particularly serious between the young: youth unemployment
in Spain moved to 24,6% in 2008 to 45% in the second quarter of 2011. Those rates
reflect that Spanish youths from 15 to 24 are facing more difficulties in finding jobs than
their Eurozone counterparts.
Demography is also an increasing source of worries 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, with most of its population being over 35
years old and a declining growth rate (0,9% by 2015 and 0,5% by 2025). This decline
will not only be due to a falling birth rate, but also to emigration: the crisis is expected to
push nearly 600,000 people to leave Spain this year. As young people tend to be
consumers and old people tend to be savers, this means that the Iberian country only has
a few years to generate some consumption-led growth.
However, 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, to the economy. Between 2000 and 2005, immigration grew 304%
in Spain. By 2007, around 1.800.000 Latin Americans were living in Spain. Because of
cultural and linguistic similitudes, most of those new inhabitants were smoothly
incorporated into the economy.
Due to the size of its economy, and the size of its debt, the consequences of an eventual
collapse of Spain might not be as serious for the eurozone as an eventual collapse of
Italy. However, the smooth transition in Spain and the apparent lack of serious political
conflicts in the near future doesn’t mean that the Iberian country is free from immediate
economic challenges.