Spain's Economy at a Crossroads: Challenges for the New Government

Strategic Insights -

The Socialist government in Spain has taken office during a critical period in the country's economic history. As Prime Minister Jose Luis Rodriguez Zapatero acknowledges, Spain's economy has been fueled by cheap credit and a construction boom for over a decade, creating 4.5 million jobs and expanding by 30 percent. However, economists warn that this model is close to running out of steam, and that the country needs a new liberalization effort to continue growing.

Key Takeaways:

  • The Spanish economy is fragile due to high oil prices, competition from China and eastern Europe, and a property bubble, which could burst if not managed properly.
  • The new government plans to promote training and improve productivity by reducing the number of employees on temporary contracts, which account for one-third of salaried employees.
  • Finance Minister Pedro Solbes aims to dismantle the collective wage bargaining system to allow individual companies to set their wages according to productivity.
  • The housing market is a concern, with property prices having more than doubled since 1996, and household borrowings at an all-time high.
  • The Bank of Spain has expressed concerns over irrational exuberance in the property market and has called for banks to moderate mortgage lending with little effect.
  • The new government wants to cool the property market with laws to promote the rental market, but its plans to build and sell subsidized homes have been criticized as too interventionist.
  • Further market liberalization does not appear to be a priority for the new government, with Industry Minister Jose Montilla hinting that regulated tariffs and Sunday shopping restrictions will remain in place.

Statistics:

  • 4.5 million jobs created in Spain over the past 10 years (The Economist, 2004)
  • 30 percent expansion of the Spanish economy over the past decade (The Economist, 2004)
  • 4.2 million employees in Spain on temporary contracts (National Statistics Institute)
  • 20 percent of mortgage lending in the EU absorbed by Spain (Spanish Central Bank)
  • House prices in Spain more than doubled since 1996 (The Financial Times, 2004)
  • Household borrowings in Spain at an all-time high (The Financial Times, 2004)
  • 8 percent of the European Union's gross domestic product accounted for by Spain (The Financial Times, 2004)

Sources:

  • The Economist, "Europe and the World", 2004.
  • The Financial Times, "Spain's Boom Time", 2004.
  • Spanish Central Bank, "Mortgage lending in the EU", 2004.
  • National Statistics Institute, "Temporary contracts in Spain", 2004.