The Spanish government is trying to stave off fears that the country’s economy is as woe-ridden as Greece’s and could pose a threat to the stability of the eurozone.
Such concerns “do not in any way correspond to reality,”Prime Minister Jose Luis Rodriguez Zapatero, claimed recently in Brussels, even saying Spain was in a position to help Greece get its economy back afloat.
Such reassurances may not convince international analysts whose confidence in the Spanish economy had been shaken even before the Greek crisis put the spotlight on Spain and Portugal as well.
“In economic terms the heart of the crisis is in Spain, which is much bigger” than Greece, Nobel-winning US economist Paul Krugman, wrote.
For 14 years, Spain was one of Europe’s top economic performers, but experts now agree that the growth was based too largely on a real estate boom.
The global crisis hit Spain harder than most other Western countries as the overheated construction sector, which had contributed more than 10 per cent of the country’s gross domestic product (GDP), experienced a meltdown.
The 19 per cent unemployment is twice the European Union average, and Spain is the only major industrialized country not expected to rise out of recession before 2011.
The loss of tax revenue, growing unemployment benefit costs and economic stimulus packages have boosted the budget deficit to 11.4 per cent of GDP, one of the highest in the EU.
The Greek government has warned that its economic problems are part of a wider tendency in the eurozone and could spill over to Spain and Portugal as well.
The EU’s Competition Commissioner Joaquin Almunia — a Spaniard himself — agreed, saying Spain’s economic problems looked increasingly like those of Greece and Portugal.
The three countries had lost competitiveness since their integration into the eurozone, and had high public deficits, Almunia cautioned.
Mr. Zapatero’s socialist government mounted a counter-offensive, with Economy Minister Elena Salgado even meeting with the directors of London’s Financial Times to convince them that the newspaper’s critical assessment of the Spanish economy was unjustified.
The government has attributed some of the criticism to alleged Anglo-Saxon attempts to undermine the euro and to what Infrastructure Minister Jose Blanco, described as “somewhat muddy manoeuvres” by financial speculators.
Such “populist” claims lacked any credibility, economics professor Joaquim Muns complained, accusing the authorities of not facing up to Spain’s “very harsh” economic reality.
However, the government can argue that Spain’s debt is still relatively low at 66 per cent of GDP. Unlike Greece, “Spain retains a margin of manoeuvre to finance its public debt,” economic analysis professor Federico Steinberg observed.
Unlike other large EU countries, Spain has also avoided spending state money on bank rescues, with the country’s top bank Santander even making use of the crisis to expand further into the British banking market.
The government has tried to calm down fears over Spain’s economic situation by announcing an austerity package worth 50 billion euros (70 billion dollars) in an attempt to bring the budget deficit within the 3 per cent limit set by the EU in 2013.
The crisis has also prompted the government to adopt measures aimed at restructuring the economy by reducing the weight of the construction sector and by encouraging investments in high technology, innovation and productivity.
Plans are being prepared to make the labour market more flexible, but “serious doubts” remained about whether the government would dare to undertake socially sensitive reforms, the economic newspaper Expansion said.
The government’s credibility was undermined after it backtracked on plans to cut retirement payments immediately after sending them to Brussels.
King Juan Carlos’ alleged attempts to persuade the political parties to enter a pact against the economic crisis have not been successful as the opposition conservatives continue pressing the government to cut taxes.
The government did, however, manage to convince The Financial Times, which said Spain had adopted a “serious plan” against the crisis.