MADRID – It’s been more than a rocky few years for Spain. It’s been a rocky half-century.
Run by a military dictator until the 1970s, Spain emerged in the early 2000s as a model of social democracy and the poster child for the European Union. Then the global economy collapsed in 2008, and suddenly Spain was suffering from Depression-era levels of unemployment and an economy melting down like a Dali horrorscape. In a few years it had gone from budget surpluses, a growing middle class, and generous social supports to wrenching austerity policies and collapsing wages, triggered by the massive failure of Spanish banks.
When the global crisis struck in 2008, Spain was headed by the Socialist government of Prime Minister José Luis Rodríguez Zapatero. Unlike Greece, it was not a chronic over-spender. Its debt was merely 36% of its GDP in 2007, about half the debt burden of the U.S. and Germany at the time. The Socialist Party wasn’t stocked with bank industry shills, or slavish admirers of greedy capitalism, but their reaction to the crisis devastated their own constituents just as Spain’s decades-long economic model was coming undone. There are lessons for Americans in understanding what happened to Spain.
The Spanish Model: Home Is Where the Economy Is
In a way, Spain’s bubble lasted for the entire second half of the 20th century.
Its economy had been heavily dependent on real estate and construction since General Francisco Franco’s dictatorship in the 1950s. This was an anomaly from the rest of western Europe, which enjoyed a post-war boom in manufacturing growth. Still, the emphasis on housing continued after Franco’s death in 1975 under the first Socialist government with Felipe González. As researchers Isidro López and Emmanuel Rodríguez noted, Spain’s ongoing property bubble, aided by an expanding European financial industry, was its domestic motor for economic expansion. López and Rodríguez called it “asset-price Keynesianism.”
For years, the strategy worked. Spain had high unemployment throughout the 1980s and 90s – often over 20 percent of the work force – but in less than three decades it rose from being a poor, backward country run by a dictator to a modern, wealthy, technologically-advanced European social democracy. In the 1990s, the Spanish bull economy grew at nearly 4 percent a year, much faster than most of Europe or the U.S. Job creation soared and by the mid-2000s the unemployment rate was in single digits for the first time in modern history. Once again, houses were the heart of it: in 2007 the levels of private home ownership topped off at 87 percent, one of the highest rates in the the world (it’s never been above 70 percent in the U.S.).
The Spanish middle class had arrived. But just as the American middle class would discover, housing prices always rise—until they don’t.
The global economic collapse of 2008, the most destructive since the Great Depression in the 1930s, started in the housing markets of the U.S., fanning out around the world, and slamming Spain, Ireland and the United Kingdom. Suddenly the sector that for decades had driven the Spanish economy crashed. For-sale signs are so abundant that one source told me they had become “Spain's national tree.”
From Stimulus, to Austerity, to Depression
Like its US and European allies, the Zapatero government initially used stimulus to dull the recession. The Socialists launched the largest stimulus package in the European Union, as a share of the economy. But despite this intervention, the Spanish economy was still stagnant by 2010 and the deficits were staggering. Regional banks and governments, which political parties had historically used to reward their cronies with construction projects (e.g.: sports stadiums and “airports to nowhere”), began to fail en masse. It fell to the national government to take on their debts.
Practically overnight, Spain’s debt burden doubled. As Greece’s own crisis raised fears of its default, European leaders envisioned a domino effect that could engulf Spain, Portugal, Ireland and even Italy, and threaten the stability of the Euro currency itself. European leaders were looking into an abyss and fearing an imminent collapse of the entire post-World War II project. The Zapatero government—without enough tax revenue to pay for its elevated spending and facing high and rising interest rates to borrow the difference—came under immense pressure from both its European allies and the bond markets to cut its spending.
If Spain controlled its own currency, like the U.S. does, it might have printed money and risked inflation to pay off its debt. Instead, Spain is tethered to the euro and has little control over monetary policy. Zapatero felt he had no choice but to cut spending and raise taxes to win back trust of Spain’s investors. His plans included a 5-percent salary cut and a salary freeze for public employees, a cost-of-living freeze for pensions, a higher retirement age, the elimination of “kiddie stipends” (the widespread European practice of providing several hundred dollars per month per child to families), an increase in the value-added tax, and modest cuts in health spending.
These cuts weren’t merely painful. They were particularly painful to public employees and pensioners—the heart of the Socialists’ core constituency. Austerity, which had destroyed hundreds of thousands of jobs, would inevitably destroy the Socialists, themselves.