In 2007, the E.U. state of Spain “was hopelessly addicted to a
credit-fueled construction boom that produced a shattering bust, leaving banks
collapsing in the face of bad loans.”[1] A
decade later, the state’s economy was “expanding at around 3 percent” over the
previous year, “producing goods for export, generating jobs,” and pointing to
possible E.U.-wide economic recovery.[2] The
Spanish economy had returned to its pre-crisis size, according to the state’s
government, yet the economy had not yet solidified a firm foundation and
unemployment was still stubbornly high.
Although the credit-based building boom was doubtlessly not
sustainable and fraught with risk, the ensuing budget austerity mandated at the
federal level inhibited the state’s government from spending more money “on
infrastructure projects to generate jobs.”[3]
Contracting government spending exacerbates rather than ameliorates an economic
downturn, even if deficits go up. The federal law on state deficits being at or
below 3.5% of a state’s GDP did not have enough flexibility for the Spanish
government to be able to minimize the period of the downturn.
Hence, The New
York Times concluded at the time of the recovery, “Spain’s resurgence is less
cause for celebration than a grim reminder of how long it took.”[4] That
is to say, the steep unemployment level, which had reached 25 percent, need not
have endured as long as it did. Even in 2017, the unemployment rate remained
above 18 percent (near 39 percent for the state’s youth).[5]
It
is difficult, therefore, to see even a return to the size of the economy before
the debt-crisis as a recovery. To be sure, exports had grown “to close to
one-third from about one-fourth of the economy,” and such an economic engine is
clearly more stable than an over-leveraged construction-led economy.[6] An
economy fueled by consumption-buying from
within would be more stable still, however, and the stubbornly high
unemployment rate attests to why such a solid foundation had not yet
materialized. Even though the large SEAT auto-factory put €3.3 billion (about $3.8 billion)
of new machinery into the operations, relying on one company for the surge in
exports is not as solid as a diversified export-base.
To be sure, the increasing tax
revenue in the state, albeit very modestly, enabled more money to flow back
into the economy. Work on the long-planned expansion of the Barcelona subway
system, a €6.8 billion project, had resumed. Yet such an infusion was
needed especially during the crisis and in the ensuing years of extremely high
unemployment. The inflexible federal
strictures of budget discipline did not allow for such counter-cyclical
measures even in a rather extreme cyclical downturn.
Related: See Essays on the E.U. Political Economy, available in print and as an ebook at Amazon.com.
[1] Peter
S. Goodman, “Spain’s
Long Economic Nightmare Is Finally Over,” The New York Times, July 28, 2017.
[2]
Ibid.
[3]
Ibid.
[4]
Ibid.
[5]
Ibid.
[6]
Ibid.
