Special issue: Federations and the Economic Crisis
Spain’s regions may hold key to economic recovery
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.
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.
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.
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 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
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.
“Things must be looking bad for the government to authorize an increase of our debts,” commented Pilar del Olmo, the Economy secretary of the
An economist at the University of Alcala, Juan Ramón Cuadrado, commented that “in terms of spending and declining tax
Reforming the labor market
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
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,
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.
Rodrigo Amaral is an economic journalist based in Madrid. He has been a radio and online producer for the Brazilian Service of the BBC and a foreign correspondent for Folha de S.Paulo of Brazil.