Published in El Periódico, November 26, 2013 (supplement Valor, 6-7).
Foreign investors are back in Spain, with their sights set on anything from property to shares. The Spanish Stock Market has risen by 19% in a year, the sovereign risk premium is almost half what it was and the implicit probability of default has dropped from 43% in July 2012 to 13%.
At current prices, Spanish assets are a bargain, especially large companies with market power. They are obviously risky, but globally-diversified investors don’t worry about the risk of individual assets, only about their expected returns.
Spaniards do worry about their risk, however, and that 13% figure makes it clear that the Spanish economy does not inspire much confidence. The apparent recovery in solvency can only be attributed to the European Central Bank’s willingness to take Spain’s debt as collateral. Retaining ECB credit and, in the longer term, preserving the Spanish people’s wellbeing depend on far-reaching reforms to improve productivity.
So far, the signs are mixed. Private consumption has been reduced and competitive private industries radically re-structured, as confirmed by the increase in exports.
But the public sector and protected monopolistic industries have undergone just enough reforms to convince Spain’s reluctant European partners that it deserved credit. Spain has thus reaffirmed the duality whereby half the country works in competition and the other half in monopoly.
The public sector is still spending well above the country’s means, and taking on yet further debt. It has cut back wages and temporary staff but it has not eliminated cushy sinecures and hierarchical levels, nor closed services to focus on the most valuable ones. National and regional governments still decide in line with their short-term political strategies and budgetary games. Wages are therefore frozen, budgets cut back, and payments deferred where the reaction of those affected best serves political interests, while criteria of efficiency and social wellbeing take the back seat.
Structural reforms have not gone far enough. Labor reform has left the country with rules that are still more rigid than those in the rest of Europe. And the recapitalization of the savings banks is starting to look insufficient.
Other reforms have hardly even been considered. Retailing, which could attract investment and create employment fast, is still held back by medieval opening and licensing regulations. And privatizations either do not go ahead or are designed, like that of the airports agency, to perpetuate monopoly and political control.
And other measures have actually worsened the business environment. Not only have Social Security contributions not been cut back but direct taxation has gone up, discouraging firms from hiring and investing in human capital. Regional taxes on real estate transfers have also been raised even though they were already the highest in Europe and, given the current paralysis of the market, raising them was probably detrimental even in terms of tax revenue. This shortsightedness is prevalent not only in the regions but also in the national government, which in a similar fashion raised airport fees even though airports are grossly underutilized.
These mistakes are harmful but easier to correct than those undermining the rule of law, such as the retroactive changes in energy regulations, and the populist measures in favor of current debtors. Mortgages have lost much of their value as guarantees, making credit more limited and expensive. As a consequence, few mortgages are signed today on property that does not belong to the lending bank. Nobody lends if they are afraid the loan will not be paid back; but, instead of acknowledging this fact, even the “troika” emphasizes that credit is not “flowing” into private sector, treating it as a mere macroeconomic problem.
Such mistakes are not caused by failings in the political system, which transmits citizens’ wishes, even though these may well be built on concealment and propaganda. Reforms fall short and fail because this is what the people want: they are deeply conservative and prefer to invent excuses and believe in magic solutions. Most Spaniards are aware that their “welfare state” is unsustainable, but those trying to rationalize it are accused of dismantling it, even though the proposals would only bring it in line with European standards of shared responsibility. And, instead of leading, politicians busy themselves with helping voters believe that their wellbeing could become sustainable with the wave of a wand over taxation or the institutions.
Altogether, Spaniards are making a huge effort to not face reality. Foreign investment flows in because the country was bailed out and assets are going cheap. But Spain needs much more investment and, to attract it, profitability must be ensured. If, instead of introducing reforms, Spain buries its head in the sand or just daydreams, this will not happen. Nor will it happen if the rule of law is put in doubt, subjecting all types of contracts, from mortgages to the Constitution itself, to populist and shifting interpretations.