IS SPAIN the next Germany? It may not feel like that to the 26% of Spaniards who are unemployed. GDP shrank by 0.8% in the fourth quarter of 2012. Yet in some ways, Spain resembles the Germany of a decade ago, when Gerhard Schröder brought in reforms to turn the sick man of Europe into its strongest economy. The efforts by Mariano Rajoy’s government to loosen labour laws and cut public spending are aimed at a German-style miracle.
Mr Rajoy claims that his government will lead the economy out of recession. There are early, if shaky, signs of progress. Unit labour costs are falling, partly because productivity is climbing. The current account has turned positive. And the number of self-employed workers is starting to rise even as unemployment increases.
Joachim Fels, chief economist at Morgan Stanley, is one of several backers of the Germany theory. “Spain is doing a lot of the things Germany did ten years ago, but in a much shorter time span and tougher global conditions,” he says, pointing to falling labour costs, rising exports and booming Spanish car factories. But, he adds, “Spain becoming Germany is really a two- to four-year story.”
Yet the differences are huge. Germany’s education and training system is more job-friendly than Spain’s. The German recovery was spurred by tax cuts, but Mr Rajoy has raised taxes to reduce a budget deficit which was still 6.7% of GDP in 2012. The huge cut in the structural deficit, claims Mr Rajoy, was a first for an advanced economy. But austerity has contributed to a collapse in consumer spending. And exports are stalling as the euro zone, Spain’s biggest market, is in recession.
More austerity awaits, so tax rates are unlikely to fall. Indeed, the pressure from the European Union is for another sales-tax rise. And as Spanish banks, helped by European rescue money, clean up their books, a credit squeeze is strangling growth. The IMF notes that interest rates are far above the euro average, especially for small firms that create most jobs.
The government says growth will return later this year or in 2014. But the recovery looks fragile even before it starts. More euro shocks could tip the economy back down again. Italy is a particular concern. If bond markets lose faith in Spain’s Mediterranean neighbour after its chaotic election, contagion could spread. “There is still insufficient differentiation between Spain and Italy,” says Nicholas Spiro, of Spiro Sovereign Strategy, who notes that Spain’s fundamentals are worse than Italy’s. “There’s always the risk that the woes of one country will drag down the other.”
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And if Spain does grow again, will that be enough to create jobs and restore confidence? Lorenzo Bernaldo de Quirós, an economist, believes that labour reforms mean that, whereas net job creation used to need 2.5% GDP growth, now it takes only 1.5%. Yet most analysts see GDP shrinking by 1.5% this year. Making predictions for 2014 is a mug’s game. Like Germany in 2003, Spain still has far to go.
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