There’s a conventional wisdom on the right that the basic problem of the European economies now in trouble lies with excessive public spending. Sometimes this gets a bit more nuanced–but only a bit–and there comes the talk about competitiveness, labour market flexibility, friction costs to businesses, etc. There’s a conventional wisdom on the left, particularly in social democracy, that the problem with European economies in crisis lies with unaccountable private power, and in particular insufficiently regulated financial capitalism. I will argue the Spanish case in particular needs to be looked at from both ends.
I’m afraid in order to present some of this context, I’m going to have to delve into Spanish history, at least from the 50s onward, so please bear with me.
Spain used to be a primarily rural country. We arrived late at all the modern developments: the industrial revolution, urbanisation, suburbanisation…
Around the 60s, the dictatorship decided it was imperative to modernise, and many people moved to the cities. Internal migration was a big demographic factor, as well as emigration to Switzerland, Germany, France, etc. This time is known as the time of the technocrats, as the autarchic military government was substituted by Opus Dei ministers implementing the Washington consensus.
The technocrats liberalised the economy, opened up to foreign investment, devalued the currency, and, generally, this succeeded in yielding higher levels of economic growth. We must remember Spain didn’t go out of food rationing until 1952, and it took 2 more years to exceed the per capita income in 1935.
Although the dictatorship was fascist, it also had a high level of intervention in the economy, some of which had a paternalistic tinge. For example, there were lotteries for social housing, which allowed many poor urban people to access ownership of flats, as well as very stringent rent controls for housing units. Many of these provisions, as well as a strong central administration, were reduced with the arrival of the 1978 Constitution.
The Constitution of 1978 is really quite a cipher. It has it all: private property and the general welfare; freedom of enterprise and state planning. It permits many different policies, and I would argue even many different state forms under its ægis. The way it was applied, there was a strong decentralising drive, removing powers from the central state, and devolving them to the autonomous regions. Although it was foreseen that only the historical regions would have normative powers (legislation) the so-called “coffee for everyone” solution made it expedient to grant such powers to all of them, true miniature states with their parliaments, civil services, etc.
Surprisingly, such decentralisation didn’t deal with an old political and administrative problem: the weakness of municipalities. The autonomous regions, main beneficiaries of the great loss of attributions of the central administration, were no less jealous in their prerrogative than Madrid had itself been in the past, and local councils remained underfunded.
Spain’s economy during the 80s improved significantly, but it was still subject to devaluations and high interest rates. 15% was not unusual. During the 90s, the situation kept improving, and thanks to EU cohesion funds and the single market Spain became more and more integrated in the European economy. This process wasn’t free from contradictions–the great Basque industrial restructuring for example–but it seems to have produced an unprecedented stability in the public finances.
In 1996 the social democrats lost a general election under a huge assault by right-wing media and the recently unified right, in the midst of corruption scandals, the unveiling of state terrorism (GAL) and the misuse of black funds. The PP, single right wing party with parliamentary representation of national ambit, took power, and decided to increase the liberalisation of rents, land, and so on. Law 6/1998, of the 13th of April, on land and evaluations, was a key to this process. The sharp reduction in interest rates resulting from the EMU is the other piece that must be born in mind.
This led to a perfect combination of factors. Perfect from the viewpoint of land developers and council members, that is: the administrative decentralisation and the land liberalisation removed what limits the state had placed regarding land use; the underfunded local authorities were thirsty for taxes, which given their limited powers could only be obtained in large amounts from land development; the demographic changes required an increase in the housing stock; and, finally, the intergration in the EMU and the single market made Spain an attractive target for surplus foreign investment by other European banks and countries, resulting in very attractive interest rates for buyers.
Spain has been characterised by a far larger home ownership rate than the vast majority of EU countries, with 78% in 2001. Whether this is cause or effect, the market in rented accomodation does not function well, with relatively high prices and uneven provision in many urban areas. Suggesting that those who can’t buy should rent can be like suggesting those who can’t eat bread should get cake. Even with the recent liberalisations in rent controls, it is difficult to find affordable rented housing.
We must put this all together with the fact that the extreme decentralisation of housing policy has permited the widespread pehnomenon of “commissions”. When a local council must approve a land development project, it helps a lot if the developers give a bit of money under the table to the mayor and his cabinet. This situation is so common and outrageous that some councils had to be outright intervened by the state under court order.
Spain lacks a powerful industrial fabric. Tourism is still the main source of GDP, and the state’s position since the mid 90s seems to be that the best industrial policy is that which doesn’t exist. Contrast the situation with that in the Basque country, where a vigorous regional industrial policy has contributed to the fact the unemployment rate there is about half the rate in the country as a whole. As a result, the main engines of the Spanish economy are service companies, without much of a drive to do r&d, and, of course, construction. It is no surprise that many young Spaniards went from the highschool to the building site, without giving a thought to further education.
This leaves Spain in a very precarious and weak position. The PSOE government (2004–2011) attempted, though only towards the end and without enough resources, to change the economic model. A very large bet on renewables hasn’t paid off, at least so far, and Spain has one of the most expensive power generation infrastructures in the Union. The Euro ties us to a policy set in Frankfurt and for Berlin’s sake, and devaluation is not an option. Unemployment contracts aggregate demand, in a vicious cycle which nothing seems able to stop. Whether the growth package recently agreed by the Eurozone will stop this process remains to be seen. I, for one, don’t think it’s anywhere the necessary size.