Historic GDP decline. Historical rise in the savings rate, the deficit, the debt. Consumption collapse: historical, of course. The temptation to eat breakfast every morning with a new historical phenomenon devalues that term, but the Spanish economy has suffered two memorable setbacks in 10 years. The country of that arrogant economic miracle woke up in 2010 to the strident prick of a super bubble. In 2020 the crisis was of a different nature: a shock external, the pandemic. Spain was one of the worst affected countries and suffered one of the deepest recessions. The Economic Advisory Council reduces the optimism of the Executive for 2021. And up to half a dozen international experts agree with a relatively pessimistic view on Spain. They emphasize that the Spanish economy is a case worthy of study, due to the hit it suffered. They emphasize that the Government is gambling with the management of European funds. And they point out that the power of recovery depends on the vaccine and the management of uncertainty.
From the outside, the economists consulted look at Spain as an extreme case of how the pandemic negatively affects the economy. And they are reasonably negative: “The collapse of the Spanish economy is the biggest in the euro area, and the fiscal situation is going to be worse; I am pessimistic, but not too pessimistic as long as the ECB and Brussels are not wrong. Spain is going to benefit more than the average if vaccines are effective ”, sums up Paul De Grauwe, from the London School of Economics. But above all “Spain cannot fail with European funds”, both De Grauwe and several of the experts consulted point out.
Spanish economists emphasize vaccines, the use of EU funds and the need for reforms. But outside of Spain the thousand times promised change in the economic model worries less than the outright exit from the hole. “The Spanish government has done more or less the same as everywhere else. Somewhat less, because in general the most indebted countries have been more timid despite the ECB. For the next two years everything depends on the effectiveness of the vaccines, the activism of the central bank and the European funds being something more than a wonderful idea loaded with symbolism: I am afraid that their structure, their excess of politicization and bureaucracy are hardly going to support short-term recovery, which should be the priority, ”says Charles Wyplosz, from the Graduate Institute in Geneva. “The danger is that some governments become obsessed with public debt too soon and spoil the recovery,” he adds as a warning to sailors.
Lorenzo Codogno, former secretary of the Italian Treasury, draws a parallel between Italy and Spain given the possibility that an asymmetric recovery in Europe will put the magnifying glass, once again, on the large economies of the South. “The European economic policy response has been much stronger than in previous crises. With rates below zero and the ECB buying debt, the chances of a sovereign crisis are nil in 2021 and reduced later, but at some point the financial conditions will normalize, and at that time the structural weaknesses of each country will be seen. Spain, like Italy, has a unique opportunity to bring order to those weaknesses. If we don’t, the problems could be enormous in the not too distant future, ”he warns.
The vaccine, key
Michael Pettis, from the University of Peking, emphasizes that it does not make much sense to make forecasts for 2021, “because absolutely everything depends on vaccines.” And the economic historian Barry Eichengreen, from Berkeley, extends the uncertainty “not only to vaccines, but to their effectiveness if new mutations of the virus appear, and especially to the percentage of the population that will want to be vaccinated voluntarily.” Eichengreen recalls that around a fifth of Spaniards have doubts about it. If those unknowns are resolved, the half dozen economists consulted are optimistic about the Spanish recovery. “Consumption will return as the health situation returns to normal. And tourism will return. And if confidence returns, Spain has it easy to grow from so low, “says Pettis, after a contraction in GDP that probably exceeded 10% last year.
The other challenge is the direction of European economic policy. Brussels suspended fiscal rules and approved a multi-million dollar recovery fund in the most acute phase of the pandemic; the ECB, after an initial mistake, has tightened the accelerator of monetary policy. The problem will come if the North and Central Europe recover faster and press to normalize fiscal and monetary policies, something that may begin to happen in the last part of 2021 and, above all, throughout 2022.
And there nobody has them all with him. “The EU has been pragmatic, but has difficulty looking to the horizon. The recovery fund was the minimum necessary to avoid a crisis in spring. The problem is not going to be that Germany and Brussels start asking for cuts from Spain, even from France. The problem is that in 2022 Berlin will apply its own rules. The deficit brake is contained in its Constitution: if Germany, the Netherlands and the North return to austerity, it will be difficult for Spain to present very high deficits ”, predicts Wolfgang Münchau, director of the think tank Eurointelligence. “The pressure will be indirect, but very strong. Even if the ECB continues to buy debt, the chances are that then Spain will also impose austerity on itself too soon ”, Münchau closes.