After the euro-zone crisis, Spain emerged as a sort of model for how the monetary union’s more fragile nations might prosper. The economy expanded steadily as tight labor laws were loosened, and investors flocked to Madrid, pushing its government bond yields well below Italy’s.
Subsequently, Spain strengthened its political clout in the European Union, challenging Italy’s position as the third-most influential member state after France and Germany. As Rome’s fortunes waned, Madrid’s waxed.
The Covid-19 crisis risks undermining much of this progress. Alongside Italy and the UK, Spain was one of Europe’s epicenters for the first wave of the pandemic, and it’s now struggling more than its neighbors with a summer resurgence. The country is also having a terrible time of things economically. In the first half of this year, Spain’s gross domestic product shrunk by nearly a quarter when compared with the end of 2019. That’s much worse than Italy and France. Among the larger countries in Europe, only Britain came close.
This setback reflects structural problems in Spain’s institutions and economy. The pandemic exposed severe shortcomings in the public-health system, as emphasized in a report from the Real Instituto Elcano think tank. There have been conflicts between the central government and the powerful, sometimes secessionist regions. In March, Madrid clashed with Catalonia over the latter’s decision to tighten restrictions beyond what had been decided nationally.
As with Italy, there was also an element of bad luck. Spain too faced the first wave of Covid-19 before other countries and hence had less time to prepare.
That doesn’t, however, absolve Prime Minister Pedro Sanchez’s coalition government of blame. In the spring, Spain allowed mass gatherings such as political rallies and football matches to take place unchecked even though hundreds of cases had already emerged, and Italy was showing how destructive the pandemic could get.
And then, after bringing the first wave under control, Madrid went too far in easing its until then draconian lockdown, especially by allowing Spanish nightclubs to reopen. It has had to shut the dance floors again after they contributed to a new surge in cases and the authorities found it difficult to trace clubbers who’d been in contact with the infected. Italy has performed a similar U-turn, but — for now — Rome has done a better job of handling the new increase in infections, which is affecting western European countries as they try to restart their economies.
Spain’s poor management of the crisis is having a bad effect on its economy. The country relies heavily on tourism, and the sharp slowdown in international travel was always going to take a heavy toll. But the early return of the virus means Spain has been the first southern European country to face renewed travel restrictions from other states, including from Britain. Spain’s restaurants and hotels would have benefited hugely from another few weeks of unfettered movement during the crucial summer holiday season.
The government has unveiled a number of measures to deal with the financial fallout, including a generous furlough scheme to keep people employed. It has offered widespread guarantees on bank loans, whose take-up appears to have been higher than in other countries. For now, Spain’s sovereign bond yields remain very low, though that’s also thanks to the European Central Bank’s emergency asset-purchase programs.
Madrid will have to rely heavily on other forms of European help to plug the deficit. It has already applied to the EU program to support labor markets, and it will be among the chief beneficiaries of the European Commission’s new “recovery and resilience facility” agreed in mid-July.
Still, the political outlook looks uncertain. Sanchez leads a wobbling minority government, which unites his Socialist party with the populist left-wing Unidas Podemos. Unlike most leaders in Europe, the prime minister didn’t become more popular during the first stage of the pandemic, although his approval ratings have improved recently. His big challenge is to pass a budget in the autumn, something he’s failed to do since he came to power in 2018.
The Sanchez star is fading in Europe too. Spain played a decisive role in pushing through the EU’s ambitious 750 billion-euro ($890 billion) pandemic fund, but it suffered an embarrassing political defeat when the euro zone overlooked Nadia Calvino, Spain’s economy minister, for the post of president of the Eurogroup — the grouping of the bloc’s finance ministers. The position went to Ireland’s Paschal Donohoe instead.
Spain has the potential to bounce back, as it did a few years ago. But at a time when countries need decisive leadership, Madrid has too many weaknesses at the top.
Bloomberg
