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.
Easy to Fire, Easy to Hire
Spain’s austerity program plunged the country back into a recession, by sucking income and economic activity out of the country. It also exposed a crucial rift at the heart of the economy between job-holders (insiders) and job-seekers (outsiders). Spain’s economy has long afforded strong protections to the insiders, making it harder for the outsiders to break in.
“Insiders, such as labor union members and public employees, strongly prefer employment protection schemes that protect their jobs,” says Professor Mariely Lopez-Santana of George Mason University, who studies Spain’s labor markets. “Outsiders, such as the unemployed or those with temporary employment, favor policies that reduce labor protections to pry open more jobs.”
As the number of outsiders grew during the recession—including swelling numbers of unemployed young people and immigrants—the Zapatero government responded by scaling back some of its employment protections for the insiders. For example, the government made it easier and less costly to lay off workers, and drastically reduced its generous severance pay. It’s cheaper to hire somebody, the government reasoned, if it’s also cheaper to fire them.
Leftist critics cried foul, but many hailed the labor reforms as long overdue. One small business owner with eight employees and collapsing sales told me he would have to pay about $14,000 in severance per worker to lay off just two people. “Please explain to me how my business is to survive,” he asked me, “under the weight of all those employees that I no longer can support. Most of my friends are business owners. The talk when we get together is that we are all struggling to find some way to survive.”
Spain’s strict labor laws have contributed to a black market for jobs, with growing numbers of Spaniards accepting work under-the-table, so that employers can skirt the severance-pay law. In fact, Professor Lopez-Santana said one reason Spain’s unemployment rate is so high—an eye-popping 26 percent—is because so many people work in this “grey economy” and don't show up in official figures. Some have estimated that this underground market now accounts for 20 percent of GDP.