Global Trends and Politics

Spain needs a new business model

It is essential that the next Spanish government revitalise the innovative strength of its country's industry says Michael Menhart, Chief Economist at Munich Re.


Spain is to elect a new parliament this Sunday. Prime Minister Mariano Rajoy's conservative Partido Popular (PP) is hoping to capitalise on the country's surprisingly strong economic recovery. With economic growth expected to be around 3% in 2015, Spain is currently one of the eurozone's fastest-growing economies. Rajoy's government has certainly achieved a lot. The labour market is a good example: a reform package similar to Germany's "Agenda 2010" was passed in 2012 and is now beginning to bear fruit. Unemployment has fallen to 22% from an all-time high of 26% in 2013. Unit labour costs have fallen by 4.6% since 2008. Spain has been transformed from a net importer into a net exporter.
The financial sector reform has also played a key role. Even the property market seems to have effected a turnaround. The first six months of the year again saw €1bn of investment in office buildings in the capital alone. Public administration was also greatly simplified – nine out of ten administrative processes can now be completed online.
But the general election hangs like the sword of Damocles over the country's economic future. Despite carrying out successful reforms in his country, Prime Minister Pedro Passos Coelho of neighbouring Portugal was punished for his austerity programme – and was voted out of office. As long as the economic recovery is reflected in the key figures but not in the daily lives of citizens, the government of austerity runs the risk of losing voters to parties of protest which, against their better judgement, promise simple and pain-free solutions. This is a real concern in Spain, notwithstanding recent polls favouring the PP. Youth unemployment lingers at a worrying 53.2%, and corruption scandals badger the governing party in their election campaign.

Catalonia steps towards independence

What is more, a political storm is brewing on another horizon: Catalonia's new government has already initiated concrete steps towards independence from Spain following September's regional elections. But the threat of division could serve to bring together Spaniards in favour of stability and continuity. Indeed, approval ratings of left-wing protest party Podemos halved over the summer and, according to the polls, are currently at just 15%. Ciudadanos, a relatively new party in favour of Spanish unity and reforms, has good reason to be hopeful of entering government as a coalition partner.
Spain appears to have been spared Portugal's fate – thus far at least. But the country, considered by some to be a model pupil, is still far from out of the woods. Even if the reforms provided the foundations for strong growth, Spain has benefited greatly from low oil prices and interest rates. Without these two "stimulus packages", economic recovery would have been almost unthinkable, in spite of the reforms. But reliance on low-priced OPEC oil and cheap money from the ECB is not a sustainable business model for a country – just as little as was the property bubble created with borrowed money prior to the crisis.

Cutting red tape and promoting business creation is essential

It is therefore essential that the next Spanish government revitalise the innovative strength of its country's industry, found mainly in small businesses and microenterprises. Many of these are not competitive and still do not have satisfactory access to finance. It is for the benefit of precisely these companies that cutting red tape and promoting business creation ought to be high on the new government's list of priorities. The same also applies to state finances.
Prime Minister Rajoy has promised considerable tax cuts in his election campaign. At the same time, the European Commission is predicting that Spain is likely to run a budget deficit of 3.6% in 2016. Commitment to budget consolidation is something else entirely. The journey to economic reform is not over yet – Spain and Europe will no doubt be hoping that voters see it that way, too.

Munich Re Experts
Michael Menhart
Michael Menhart
Head of Economics, Sustainability and Public Affairs