The End of the Spanish Model

Cornel Ban

Until recently Spain has been a quiet country known for a successful economic and political transition. In 1977, the entire political spectrum, from the hard right to the communists, signed a compact that sealed the terms of the country’s political and economic liberalization. This was followed by a massive transformation of Franco’s economic legacy during the 1980s and 1990s. During this period, the developmentalist industrialization drive that marked Spain’s postwar period made room for an economic model that aimed to increase competitiveness. It did so by targeting the consolidation and internationalization of the country’s financial, energy and construction sectors. As a result, in the eyes of many, Spain emerged as a European “tiger” economy.

A major weakness haunted Spain’s success, though: permanent double-digit unemployment levels. After a short respite given by German banks inflating Spain’s enormous construction bubble, the specter of unemployment would soon come to question the very bases of the post-Franco settlement.

Even as the post-Lehman crisis raged on, sending unemployment to the highest level in the OECD and putting half of the country’s youth out of work, citizens did not lash out harshly against the status quo. The management of the memory of the Civil War created a political society and a labor movement that feared confrontation politics. Unlike the Greeks, most Spaniards seemed to be joining Ireland in taking a stoic view of the crisis.

By mid 2012, even the famously reflexive and creative indignados movement whose tactics stressed a radical rupture with Spain’s existing political institutions, withdrew from the national scene into myriad neighborhood assemblies that were active yet not immediately threatening to the status quo. Spain’s economic model was failing a record number of its citizens, but the consensual bases of 1977 seemed to endure the test of the worst economic crisis since the transition to democracy.

Yet this Spanish political tradition began to melt into the air in the summer of 2012. The 65 billion-euro austerity hole in the Spanish government’s fiscal coffers adopted in early July led to a string of protests whose repertoire signaled that more contentious forms of politics may be entering the stage.

The country’s relatively tamed labor union movement put hundreds of thousands in the street. The active protest space is no longer the main turf of the ultimately easy-to-ignore indignados. In July coal miners battled the federal police in the Asturias mountains by using makeshift weapons and staging ambushes. Enraged by the government’s reneging on its commitment to subsidize their industry, hundreds of miners walked from various parts of Spain towards Madrid, knowing that the current policy meant permanent unemployment for them. Thousands of Spaniards cheered and fed them along the way. In Madrid, the miners’ column protest swelled into a massive rally on Paseo de Castellana, the city’s leafy main avenue.

It was hardly a dull scene.  Stone-throwing, tear gas, rubber bullets and hovering police choppers made up a picture that had little to do with the typically subdued protest style of Spaniards in revolt. The miners’ march on Madrid seemed to be just the beginning of a different age in Spain’s protest politics. Flash protests organized by a broad array of actors, ranging from pot-banging burghers to flamboyantly militant youth, spread like wildfire throughout the country as police tactics became more violent. For weeks, the phantom of protesting Athenians has been visiting Spain on a relatively regular basis and comparisons with Argentina’s corralito era became standard references.

July 2012 may mark the definitive end of the legitimacy of the socio-economic model crafted in the late 1970s. Unemployment now reaches nearly 25 percent, most youth can realistically expect East European wages, and precarious work levels were the highest among developed countries. Massive cuts in the country’s education, health, and welfare systems have struck at the heart of the post-Franco settlement: social peace in exchange for redistribution. A laggard in innovation, Spain saw further cuts in public spending on research.

The Spanish model is broken and cheap fixes like easy credit and construction bubbles are no longer working. The external causes of its deterioration are well-known, with the ill-designed euro and misguided austerity politics being the chief culprits. Less talked about are the ills of domestic bipartisan consensus about what Spain’s economy should look like.

The basic parameters of this consensus have not changed since Spain’s transition. The first pillar of the consensus is a relaxed position on unemployment on the part of the policy establishment. During the past thirty years the prevailing diagnosis of Spain’s persistently high unemployment rates has viewed this as a problem of the supply-side (overregulation, education) and neglected the inclusion of demand-side factors in its causal generators.

Yet despite significant moves towards deregulation, unemployment continued to grow and in July even the OECD, an ardent supporter of the supply-side argument, conceded that further reforms won’t reduce unemployment levels, whose causes are macroeconomic. In turn, putting more young people into college seems like a wasted strategy as well, as data shows that more education fails to improve one’s chances of finding a job, with a large swath of job postings for educated youth consisting of internships that pay remunerations close to the average wages in Romania and Bulgaria, the EU’s poorest members.

Today, the seriousness and the persistence of the unemployment problem is marked by an environment that lacks the balancing mechanisms of the past. Thus, austerity shrunk the possibilities of social compensation through the welfare state, the banking crisis killed both consumer credit and the real estate bubble, while the savings of the famously solidaristic Spanish family have been eaten away by three years of crisis. The wearing out of these compensation mechanisms calls for a systematic and imaginative overhaul of the Spanish approach to unemployment.

Second, Spain’s bet that finance and services should be the main engines of the economy needs to be reconsidered and the bases of the Spanish economy need to be drastically rearranged. It is now painfully obvious that both these sectors fueled the doomsday machine of Spain’s private indebtedness during the 2000s while covering up the true causes of high unemployment and generating a great deal of precariousness in the workplace. Moreover, the costs of their failure have been passed onto taxpayers through bailouts, austerity and external policy conditionality.

Alternatives exist and should be swiftly considered. Spain has fantastic potential in manufacturing. So far, when Spanish policy elites did not brag about Spain’s performance in finance and services, they liked at best to stress Spain’s competitiveness in niche manufacturing. Granted, Spanish wind turbines and medical equipment are world famous, but the success of Germany, Austria or the Scandinavian countries suggests that employment-rich and low-key manufacturing is not something to be scorned and relegated to some “developing country” status.

The success of Northern Spain at becoming internationally competitive in auto parts, tools and machine tools should be noted in Madrid, especially as unemployment levels there are much lower than in the rest of Spain. This reorientation demands a reconsideration of the bases of the education system, as reindustrialization demands high investment in highly skilled engineering jobs. This means better vocational education and state-business-labor relations that ensure an adequate supply of manufacturing jobs paid with a living wage.

Post-Franco Spain gave birth to a liberal political and economic model whose structural weaknesses have been magnified by the Great Recession to the point that its political and economic institutions have lost much of their social support. The linchpin of its debilitating crisis has been the problem of unemployment. Until the crisis, various compensatory mechanisms ensured that this problem would not disrupt the functioning of Spain’s political economy.

But the crisis and particularly the dramatic twist taken by this country’s austerity politics disrupted the functioning of these mechanisms, calling for a new settlement. Unlike in 1977, the terms of this settlement are hardly obvious and the paralysis of policy imagination seems to be the status quo characteristic of policy elites. Perhaps that needs to change. And soon.

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