The Strategist

Spain on the Road to Recovery, but Risks Remain

08/13/2015 - 15:00

It was easy to overlook the economic recovery in other regions of Southern Europe against the backdrop of months of drama surrounding the possible Grexit (the same could happen with Greece if there was no politics, some experts assume).

Andrew Parnell via flickr
Andrew Parnell via flickr
The rise in Spain is particularly important, since it is the fourth largest economy of the Eurozone, and one of those, which problems could have caused the collapse of the single European currency club only three years ago.

Some thinks, that the recovery in Spain is the evidence of that structural reforms bring results. However, the recession was so deep that Spain is still far from pre-crisis levels. In addition, it is unclear how the country's recovery is obliged to the glorified policy.

The Spanish economy is showing growth in the past two years after a double-dip recession from 2008 to 2013. Initially, the recovery was barely noticeable, but in the spring of 2014 it accelerated, reaching 0.9% in I quarter of this year (the annual rate of 3.8%) and 1% in the II quarter. Unemployment is still alarming (in June - 22.5%), but is already below the peak level of 26.3% in 2013, says the British magazine The Economist.

Spain's economy has certainly benefited from the general cyclical upswing in the Eurozone. The sharp depreciation of the energy, which occurred due to the collapse in oil prices, was as positive as the tax reduction. Besides, the ECB launched a program of quantitative easing, what has strengthened the positive effect.

At the same time, Spain shows better results than the Eurozone as a whole, which grew in the I quarter of 2015 only 0.4%. Thus, the growth rates of Spain today are among the highest in the Eurozone.

For Marian Rajoy’s government, the recovery was some reward for their reforms ongoing since the end of 2011 - extremely painful and unpopular. Authorities first shook the labor market by simplifying the process for companies of dismissal unnecessary employees, the minimum severance pay. In addition, it reduced the influence of the trade unions at the signing of labor contracts and resolving labor disputes.

The reform also included facilitation of the registration and opening a new business process, reducing the number of bureaucratic obstacles. Moreover, inspections, approvals, and regulatory laws in all the Spanish regions are becoming more homogeneous.

As regards the corporate tax, this year it was reduced from 30% to 28%, and will drop to 26% in 2016. Not surprisingly, Spain rose from 52th (2013) to 33th place the World Bank's rating last year.

However, despite all the obvious achievements of Spain, its economy is still 4% lower than seven years ago. Recall that the country's GDP during the crisis has fallen by 8% from a peak of spring 2008, and the unemployment rate is still one of the highest in Europe, second only to Greece.

There is also a disturbing and difficult situation in public finances. Spain's budget deficit rose in 2014 to 5.8% of GDP and, as forecasted by the European Commission, will still remain at a high level (4.5%) this year. Observers have expressed concern about the size of private and public debt relative to GDP.

In addition, there is stir around the fact that the economic recovery has not yet managed to deal with social problems, which appeared during the crisis. There are showing up among the various categories of the population (especially among youth), and its positive effects felt only a small part of the Spaniards. Recall that the first signs of recovery in 2014 in Greece did not prevent the party SYRIZA (which, according to its leader, represents the interests of crisis-hit Greeks) from winning the election.

Certainly, the restoration of the Spanish economy has been continued for longer, and its recession was not as catastrophic as in Greece (where the collapse reaches 27%), but given the upcoming general elections this year, we can say that the country remains extremely vulnerable to political shocks.