By Don Quijones, Spain & Mexico, editor at Wolf Street. Originally published as Wolf Street.
On Friday, Spain’s benchmark stock index, the Ibex 35, plumbed depths it had not seen since the worst days of 2013, the year that the country’s economy began its “miraculous” recovery. Of the 35 companies listed on the index, 15 (or 40%) are – to quote El Economista – “against the ropes,” having lost over a third of their stock value in the last 9 months. Only one of the 35 companies — the technology firm Indra — is still green for 2016.
This doesn’t make Spain much different from other countries right now, what with financial markets sinking in synchronized fashion all over the world. What does make Spain different is that it has no elected government to try to navigate the country though these testing times, or at least take the blame for the pain.
Inevitable comparisons have been drawn with Belgium, which between 2011 and 2012 endured 541 days of government-free living. However, Spain is not Belgium: its democratic system of governance is younger, less firmly rooted, and more fragile, and its civil service is more politically compromised.
To make matters worse, Spain’s richest region, Catalonia, which accounts for 20% of the country’s economy, bucked expectations last week by cobbling together a last-minute coalition government that seems intent on declaring independence within the next 15 months.
Meanwhile, business confidence, the cornerstone of any economic recovery, is beginning to crumble. Spain’s leading index of business confidence, ICEA, just registered a drop of 1.3%, breaking a straight eleven-quarter run of positive results. For the first time in almost three years more business leaders are pessimistic than optimistic about the economy’s outlook.
This should come as little surprise in a country where unemployment is still firmly on the wrong side of the 20% mark, over a quarter of the new jobs created last year had a contract lasting less than one week, and public debt is higher than it’s ever been [read: Six Nagging Facts About Spain’s “Recovery”].
And now that there’s no elected government in office, businesses that depend on public sector contracts, including the country’s heavily indebted construction and infrastructure giants, face weeks or perhaps even months of inertia.
“Everything has come to a standstill,” a contact in a Madrid-based research consultancy told me. “No decisions are being made, no funds are being released. It’s a vacuum.”
For the moment, the political backdrop has had limited impact on the price of Spanish government debt. The 10-year yield is at 1.75%, below the 10-year US Treasury yield, though it’s up a smidgen since the general elections on December 20. In its latest update, S&P left Spain’s rating unchanged, predicting 2.7% growth for 2016, despite the prevailing mood of political and economic uncertainty. In a similar vein, Deutsche Bank has forecast growth of 2.5%, regardless of what happens within or beyond Spanish borders.
In other words, every effort will be made to safeguard the economic order in Spain, including putting a ridiculously positive spin on a desperate situation. To paraphrase Europe’s chief financial alchemist, Mario Draghi: do not underestimate the amount of political capital that has been invested in the European project, in particular in the Eurozone’s fourth largest economy.
However, the leader of Spain’s Socialist Party (PSOE), Pedro Sanchez, doesn’t seem to have got the memo. A week ago he was in Lisbon to meet Antonio Costa, Portugal’s new prime minister, to seek advice on how to cobble together a broad coalition of left-leaning parties.
On Friday Costa, now in his second month of governance, announced a raft of economic reforms including a 5% rise in the minimum salary, reintroduction of the 35-hour working week for public sector workers and the cancellation of bank charges, one of the main profit sources in Portugal’s struggling financial sector – hardly the sort of measures that will endear Costa’s government to European institutions, especially given that Portugal boasts the second highest debt to GDP ratio in the world.
However, it’s one thing for an economy the size of Portugal to fall into the hands of political forces determined to reverse many of the economic reforms imposed by the Troika; it’s quite another when elected representatives of the eurozone’s fourth largest economy think of doing the same, especially during a year that Spain is expected to execute its biggest public spending cutbacks since 2010, when the Zapatero government froze public pensions, paralyzed public investment and cut public sector salaries by 5%.
Enter stage right the president of the European Commission, Jean Claude Juncker, who on Friday warned that he expects the formation of a “stable” government in Spain “as quickly as possible,” while emphasizing that he has no intention of interfering in the “exact composition” of that government.
Hardly comforting words given the Commission’s infamous role in the replacement, in 2011, of the elected governments of both Greece and Italy with technocratic regimes. Could history be about to repeat itself, or at least rhyme? The Commission already has enough problems on its hands – refugee crisis, stagnating economies, Brexit, Dutch referendum, an increasingly recalcitrant Italy and uncooperative governments in Poland and Hungary….
Given how much is at stake in Spain, things are likely to get a whole lot uglier before they get any prettier. Rajoy’s acting government has already accused Sánchez of seeking to break up the country by forging an alliance with Catalonia’s two main separatist parties.
A few days ago the Fiscal and Economic Crime Unit of Spain’s Policia Nacional announced it had launched an investigation into the finances of Podemos amidst allegations that it had received millions of euros of funding from the Chavez government in Venezuela and Iranian media. Serious allegations indeed, especially given Podemos’ leader Pablo Iglesias’ cozy ties with both.
As political tensions escalate, the chances of establishing even a weak interim government grow slimmer by the day. All indications point to new elections some time in the spring, meaning that the country will remain ungovernable for at least three or four months to come. In normal conditions this might not be much of a problem, but with the global economy edging closer and closer toward yet another fateful date with reality, Spain could well be on the cusp of a perfect storm.
Umm, I’d call demand the cornerstone of a recovery, and wages the driver of that demand, with business confidence a measure of the success in creating demand,
Calling business confidence any measure of economic activity appears as a supply side view of an economy. Business confidence is driven by customers spending money.
As William Lazonick points out “Markets are outcomes rather causes of economic development”
I would paraphrase “business confidence is a result of, not the cause of economic recovery”
I think your rendering makes more sense. I don’t get how a recovery can be built on “confidence.” There was plenty of confidence in 2006, but that didn’t stop the inevitable from happening. And we know that business types tend to be optimists who act irrationally, so I don’t know why we should take their feelings as being indicative of anything…although, when the inveterate optimist starts wearing a scowl, it may be a good indication that things are undeniably bad, even to those wearing rose-colored glasses.
“A few days ago the Fiscal and Economic Crime Unit of Spain’s Policia Nacional announced it had launched an investigation into the finances of Podemos amidst allegations that it had received millions of euros of funding from the Chavez government in Venezuela and Iranian media. Serious allegations indeed, especially given Podemos’ leader Pablo Iglesias’ cozy ties with both.”
You loose all credibility when you state the above!
It has been widely reported that this “investigation” is bogus and those ties you imply Pablo Iglesias has with both Chavez and Iran are just false….
Weren’t Pablo Iglesias and Juan Carlos Monedero paid political advisors to Hugo Chavez’ government?
Didn’t Iglesias also work for an Iranian public television broadcaster called Hispan TV?
Just a simple yes or no will do.
Receiving money from foreigners is a crime?
In the case of foreign governments, Robert, the answer is yes. Until last year it was an administrative crime in Spain for a political party to receive money from foreign governments; now I believe it is a penal offense, punishable with up to one year in prison.
Which is as it should be, if you believe in representative government. When voters in Spain vote for a certain party, if that party then enters government it is supposed to represent and defend the interests of those voters and the broader polity, not those of a foreign government. Unfortunately those same rules do not apply to foreign individuals and companies, who can — and do — donate as much as they want to politicial parties.
On the question of Podemos, it is certainly no surprise that Spain’s legal system seems determined to prosecute this case to the full letter of the law — which was certainly not the case with the Bárcenas case and other funding scandals. As was recently brought to my attention, in Italy a similar attempt is being made to discredit the M5S movement because of (still unproven) connections of a single party member with organized crime.
Meanwhile, anti-EU parties in France, Hungary, Austria and Germany are accused of receiving funding from the Kremlin. To quote The Telegraph, “Right across the EU we are seeing alarming evidence of Russian efforts to unpick the fabric of European unity on a whole range of vital strategic issues” — as if Brussels itself is not doing a good enough job!
Yeah…someone should do something about that here in America. Is there such a thing anymore as a foreign business? With all these multinational corporations setting up PO Box companies in tax havens all over the world to avoid taxes, their clever lawyers also can concoct schemes to hide their political donations that are no match for our very gutted IRS. Seems setting up shell companies is almost as easy as establishing a new e-mail address. Plus the SCOTUS has very thoughtfully provided them with air cover via their election campaign machinations that makes it easier to hide the dark money trail. America, the land of economic free-for-all where anyone can become a billionaire and buy their own island and pet congressman.
If globalization is inevitable, and many believe it is, then from my POV there’re glaring double standards and seemingly irreconcilable contradictions.
Immanuel Wallerstein has written and spoken about this, extensively. He describes competing visions, which he refers to “the spirit of Davos” v. “the spirit of porto alegre”, i.e., “capitalism without democracy” v. “participatory…civil society”:
Anyone who knows anything about Belgium will have a real chuckle at the notion of advanced political structures in a country which has two powerful linguistic divisions and a weak and highly corrupt central authority. The writer seems to have no idea that Belgium is a recent artificial construct on the historical scale, whereas Spain is an ancient empire. Okay they have had their troubles but a comparison with Belgium is absurd.
Spain is indeed an ancient empire and that’s exactly the point: it has very limited experience of representative government. Whatever you might say about Belgium, it survived 541 days without an elected government, which is more than any other developed nation on the planet — not bad for a country with “two powerful linguistic divisions and a weak and highly corrupt central authority!”
Spain would not come even close to that, for the simple reason that the civil service and justice system are too politicised — meaning they depend upon the party in government. And in the case of Spain right now it doesn’t have an elected government. Indeed, it doesn’t even a genuine separation of powers — hence the impunity with which Rajoy’s scandal-tarnished government was able to operate.
And on the topic of corruption, Spain is in a league almost of its own. In the region I live, Catalonia, Jordi Pujol, the honorable gentleman who served as president from 1980-2003, is accused of extorting over a hundred million euros — at the very least! — from taxpayers. Much of that money ended up being laundered by his son through tax havens like Panama, Jersey and the Cayman Islands and allegedly through projects in Latin America with partners involved in Mexico’s narco business.
Meanwhile, in Madrid senior members of the People’s Party, which has spent the last four years “governing” the country, are suspected of accepting cash in envelopes from dozens of construction companies. The suspects include the premier Mariano Rajoy. Not a single person has resigned.
So please don’t talk to me about corruption.