Spain: Optimism, ma non troppo

The idea of European as well as Spanish economic policies having worked at the end became widely accepted in last weeks. Spain’s risk premium significantly fell. Current 163 basis points taste heavenly if compared with 650 gap of 2012’s summer. Second half of 2013’s GDP has been confirmed positive and the creation of net employment  started. This is what February and March’s social security registrations say. The conclusion is that the relative budgetary rigour of Finance Minister Cristóbal Montoro since May of 2010, the internal devaluation and a further relaxation of labour market bore fruit.

The relevant question is that disaster has been avoided- despite Spanish banking sector’s bail-out- and consequently the economy grows some again. This is said not only by the government who aims to win next European elections by selling optimism, but also by economic agents. The chairman of CEOE (the Spanish organization gathering main employers) Juan Rosell recently pointed to a growth stronger than expected. A survey conducted by an institution of family-owned companies that mean 17% of Spain’s GDP, suggests the country’s economic climate increase to 4.09 within a range of 0 to 9 points. It still represents to fail, though softly, the exam, but implies a very significant upturn regarding 2.22 of last year. Far from these businessmen’s sphere, the public Center for Social Research publishes an index of economic confidence which still stands very low at 33.3, although it increased nothing less than 40% compared with 2013’s same month.

This optimism should be refined, however. The reform and rigour fatigue in Southern Europe could grow as warned by last IMF’s report if the political doubts remain unresolved. That is right. When Spain is hardly leaving behind the worst crisis since 1929 and after two years of centre-right government with absolute majority, the reality is that political confidence is under the economic one. Citizens  place political confidence index at 29.5 against 29.9 of political’s . Businessmen increase political confidence from poor 2.16 to another poor 2.33.

What is happening, then? The so much discussed but effective economic management of government is not correctly transferred to political confidence. Why? There could be three more reasons. Firstly, people believe that policies are established by Europe- which is partly true-. Secondly, economic policy has not been reasonably explained, and Minister of Finance Cristobal Montoro’ proposals- changing from one day to the next- do not convince.  Third, there are severe problems such as Catalonia’s conflict, getting more complex instead of resolving. So, the lack of political flexibility and willingness to reach an agreement puzzle companies and worry population.

Nevertheless, political doubts aside, the economic horizon is not  brilliant either. Last IMF’s report say that Spain will grow again in 2014 but by 0.9% under the government’s forecasts, while the EU’s average is to grow by 1.5%. This pattern of lower expansion will be repeated again in year 2015 – 1% against 1.9%-. The most concerning point is that IMF expects a long period of low growth for Spain- a maximum of yearly 1.3% until 2019. This involves Spanish GDP will still be under 2008’s levels by that year. Spain’s GDP by 2019 will be 99.6% of year 2008’s. A long decade lost!. Consequently unemployment rate will continue to be the highest in the whole Europe over 21%.

Furthermore, Spain still has a primary deficit against Greece, and the ECB’s monetary policy does not enable credit to flow more or less in the same way and at the same price that Germany.Also the IMF warns that Spain had more options to fall in deflation than its counterparts if the country’s internal devaluation do not keep on.

The most important thing is that employment has returned to the growth path in February and March because the whole country is aware of the Herculean task left ahead. The horizon is complex, the lack of political consensus and of internal criteria within the political class makes the recovery difficult and does not help holding a good reputation in the markets.