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special issue: federations and the economic crisis
Spain’s regions may hold key to economic recovery
REUTERS/Sergio Perez
Spain’s Prime Minister Jose Luis Rodriguez Zapatero (left) is applauded by fellow Socialist party members after delivering a speech that outlined Spanish government plans to cut taxes on smaller businesses as part of a drive to curb unemployment.
By rodrigo amaral
Spain is faring poorly in the economic crisis compared to other European Union economies. First came the dramatic burst of a real estate bubble – a bubble which had helped drive the economy for a decade.
REUTERS/Juan Medina
A protester holds onto a banner during a demonstration against the economic crisis and the 2009 meeting G20 meeting of world leaders in Madrid.
Now Spain’s Gross Domestic Product is predicted to contract by 3 per cent this year, according to the Banco de España, Spain’s central bank, or even by as much as 3.6 per cent as forecast by the Spanish government.
The unemployment rate stands at about 18 per cent and experts believe it will hit 20 per cent by the end of the year. Not long ago, Spain was a model of fiscal restraint. Now its deficit appears to be on course to exceed 10 per cent of GNP in 2010, the central bank says. Efforts to mitigate the effects of the crisis have shown that Spain has a highly decentralized territorial structure.
Although not formally a federal country, in many aspects Spain works like one. The government is organized along three levels. The central administration in Madrid stands at the top. Just below come 17 regions known as autonomous communities – from the Basque Country in the north to Andalusia in the south. The final layer, composed of local governments, includes 50 provinces and more than 8,000 municipalities. In the past three decades, the central government has delegated important responsibilities to the autonomous communities.
Regional governments are free to spend the funds assigned by Madrid but only in areas like education and health. As a result, the key extraordinary measures aimed at countering the current economic crisis have been initiated by the centre-left government of Prime Minister José Luis Rodríguez Zapatero.
Spain spends to create jobs
In January, Mr. Zapatero announced that several billion euros would be directed to local governments to be spent on short-term infrastructure works and create jobs. He may have succeeded in the short term, as recent statistics showed a slight decrease in unemployment, but the crisis isn’t over yet.
In May the government presented a new set of emergency measures. Some were hailed as clever ideas to boost the economy. For example, Mr. Zapatero announced the elimination of a subsidy to homeowners that was widely seen as one of the main drivers responsible for the real estate bubble of the 1990s and early 2000s. The end of the subsidy only affects high-income earners and is projected to take place in 2011. The idea is to encourage affluent consumers to rush out and buy new homes, taking advantage of the subsidy before it is scrapped, to accelerate the real estate recovery.
Mr. Zapatero proposed, among other measures, a reduction of corporate tax for small- and medium-sized companies and subsidies for schools to purchase computers. But his party is seven seats short of a majority in the Spanish Congress and he had to make concessions to nationalist parties that favor the vested interests of the autonomous communities. As a result, some of the laws were weakened before being passed.
Buying assets, raising taxes
The central government’s measures also include a program to buy high-quality financial assets owned by banks and to guarantee bank bond issues. Tax hikes, which began with tobacco and fuel taxes in June 2009, have started to take effect to help finance government spending.
Autonomous communities have also adopted their own measures to fight the economic downturn. Some have opted to inject new money into the local economy by funding public works and other infrastructure investments. Others have chosen to reduce the fiscal burden on companies and individuals.
Their scope is limited, however, because most such powers are in the hands of the central government. In the negotiations leading up to the recent budget, the central government agreed to allow regional administrations to increase their combined debt levels to 2.5 per cent of GNP from 2 per cent. Some officials saw this as an ominous sign.
“Things must be looking bad for the government to authorize an increase of our debts,” commented Pilar del Olmo, the Economy secretary of the
autonomous community of Castile y Leon, to the newspaper Expansión.
Regional governments have been trying to implement their own anti-crisis programs. The government of Castile y Leon, for example, launched tenders for 1 billion euros in infrastructure works in the first quarter of 2009, hoping to create 25,000 new jobs. Castile y Leon also promised 2 billion euros to help
companies in the region.
An economist at the University of Alcala, Juan Ramón Cuadrado, commented that “in terms of spending and declining tax
revenues, both the central and the regional governments have been doing a lot.”
Reforming the labor market
Experts and business people argue that Spain should capitalize on the crisis and take dramatic action to eliminate restrictive practices in its economy.
The governor of the central bank, Miguel Fernández Ordóñez, has argued that several reforms need to take place. One is the removal of hurdles to the hiring and firing of workers. Mr. Cuadrado estimates that, before the
crisis, about 70 per cent of all Spanish workers had protected job contracts that made them almost impossible to fire.
The other 30 per cent are employed under temporary contracts. As a result the brunt of the layoffs, which Spanish companies had undertaken since the start of the economic downturn, was borne by temporary workers. Mr. Fernández Ordóñez has called for more flexible working arrangements that fall between the two extremes.
Opposition to labor reform is led by the country’s active workers’ unions, some of whom have close links to the governing Socialist Party. But autonomous governments constitute a hurdle to another reform sought by Mr. Fernández Ordóñez: the adoption of new rules for the banking system.
Spanish banks did well in the early stages of the global financial crisis, thanks to prudent risk management and conservative regulations applied by the central bank. But they are bracing themselves for some bumpy months ahead.
Rescuing troubled banks
Most affected are some of the 45 regional savings banks, called cajas de ahorro. To save these banks, the central government has approved a new rescue package. Experts say the best solution for a number of the troubled savings banks would be to take part in mergers. But regional governments have the power to veto mergers involving the cajas located within their autonomous communities. Madrid’s rescue package forbids the regions to veto mergers of regional savings banks that need to be rescued by the central bank. Inter-regional mergers are politically sensitive. Catalonia and Andalusia, for example, have already warned that they won’t have any of it.
But autonomous governments are capable of boosting their economies in areas where the central government is criticized for not doing enough. Much is said in Spain about the country needing to change its economic model, especially to avoid overdependence on construction, tourism and other low value-added sectors. Tourism alone has declined by 12 per cent this year, and is always vulnerable in economic crises because most tourism is based on discretionary spending.
The alternative economic model that everyone talks about would promote industries like pharmaceuticals, biotechnology and aerospace. Thus far,
investment in research and
development by Madrid remains low.
In Catalonia, steps are underway to attract a range of high technology companies, often small start-ups, which are transforming the city into a vibrant hub of the so-called creative economy. The Valencian community has also been praised for developing a state-of-the-art program to provide research and commercial support for its small and medium-sized companies, so they can become more competitive and enter new markets. Toys made by Valencian companies have held their ground against Chinese imports in Spain and are also exported. 
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