Spain

Politics:

• Analysis

  Spain politics: One year on

  Spain's prime minister: One year on

  Mariano Rajoy endured a torrid first 12 months--2013 is likely to be grim, too

  HE HAD hoped to dig Spain out of its hole without raising taxes, cutting services or hurting pensioners. But 12 months after he became prime minister, Mariano Rajoy has broken all of these pledges. Spain has more unemployed, more debt and a deeper recession. "For many it has been a year of pain and suffering," he has admitted.

  Yet it could have been even worse. Spain's public finances have not collapsed. Nor has the euro. Both seemed possible when Mr Rajoy took power. And during 2012 the budget deficit has shrunk by almost 2% of GDP, says José Ignacio Conde-Ruiz of Madrid's Complutense university. "That is pretty good in a recession"--even if it is not as big a change as Spain's euro-zone partners wanted.

  Mr Rajoy took over an economy entering recession, with 23% out of work, a budget deficit of 8.9% of GDP and a public debt at 69%. After a year of tax increases, spending cuts and bank rescues, only the deficit has improved. Unemployment is now 26%, debt has soared to 91% and GDP is due to shrink by almost 3% in his first two years. Property prices have fallen by 15% in the 12 months to September.

  Mr Rajoy's right-wing People's Party (PP) thought its mere presence in government would be enough to calm the markets. Holding off a first budget until April, after elections in Andalusia, wasted time. In March Mr Rajoy declared Spain's sovereign right to fix its own deficit target. But beggars cannot be choosers. By June Mr Rajoy was forced to ask for up to EUR100 billion ($125 billion) to rescue the banks. So much for sovereignty.

  At least the bank rescue, at a cost of up to EUR50 billion, has so far turned out cheaper than was feared. Regional governments, which pushed the deficit off-target, are being tamed. And labour reforms allow wage cuts to make Spain more competitive. Predictions of recovery in 2014 are credible, even if Spaniards face a harsh 2013.

  It was not Mr Rajoy who saved Spain, but Mario Draghi, head of the European Central Bank (ECB). Early in 2012 he flooded banks with cheap money. And the news that the ECB would back a new "soft" bail-out by intervening in bond markets kept Spain from a humiliating rescue like those for Portugal, Greece and Ireland. The announcement sharply reduced Spanish bond yields.

  Yet it was also assumed that Mr Rajoy would ask for a bail-out, which he has not done. Some suggest he may now wait until after the German election, or try to avoid a bail-out altogether. Spain must raise EUR230 billion in the markets in 2013.

  High interest rates are holding back recovery. Debt service will consume a big chunk of central-government spending in 2013. And the knock-on effects are damaging Spanish companies. Smaller firms cannot export or compete abroad without cheaper credit, warns Joaquín Trigo of the Institute of Economic Studies, a think-tank. Fitch, a credit ratings agency, says the housing-market overhang left over from a burst property bubble is also a big problem. According to Fitch, some 1.2m houses are empty and unsold, of which 200,000 are foreclosed properties; but with banks unwilling or unable to lend, demand is at rock bottom.

  With the outlook so grim, it is no surprise that Catalan politicians talk seriously of secession. But Mr Rajoy has few options. He must hold his course, pray that his reforms pay off--and, almost certainly, ask Mr Draghi to come to the rescue again.

  December 22, 2012

• Background

  Spain: Political forces at a glance

  Political outlook: Political forces at a glance

  Government: The conservative Popular Party (PP), led by Mariano Rajoy, was elected for a four-year term in the November 2011 general election. It enjoys an absolute majority in the lower house of parliament, the Congress of Deputies. However, recent electoral drawbacks and the unpopularity of its economic and social programme suggest that the PP's popular support is waning.

  November 2011 general election results
  	No. of seats		% of vote
  	2008	2011	2008	2011
  Popular Party (PP)	154	186	39.9	44.6
  Spanish Socialist Workers' Party (PSOE)	169	110	43.9	28.7
  Convergence and Union (CiU)	10	16	3.0	4.2
  United Left (IU)	2	11	3.8	6.9
  Amaiur	0	7	0	1.4
  Union, Progress and Democracy (UPyD)	1	5	1.2	4.7
  Basque Nationalist Party (PNV)	6	5	1.2	1.3
  Catalan Republican Left (ERC)	3	3	1.2	1.1
  Galician Nationalist Block (BNG)	2	2	0.8	0.8
  Canary Islands Coalition (CC)	2	2	0.7	0.6
  Compromís	-	1	0	0.5
  Citizens' Forum (FAC)	-	1	0	0.4
  Geroa-Bai	0	1	0	0.2
  Others	1	0	4.3	4.6
  Total	350	350	100	100
  Note. CiU is a coalition of two centre-right Catalan nationalist parties; IU is a left-green coalition; Amaiur is a left-wing separatist Basque coalition and considered the political wing of Euskadi Ta Askatasuna (ETA), the terrorist group that called a definitive ceasefire in October 2011; UPyD is a liberal ant-nationalist party; PNV is a centre-right Basque nationalist party; ERC is a Catalan separatist party; BNG is a left-wing Galician nationalist coalition; CC is a diverse regional coalition from the Canary Islands; Compromís is a green-left regional party from Valencia; Citizens' Forum is a regional party from Asturias; Geroa-Bai is a regional party from Navarra.

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  Next elections: The next general election is due by November 2015, and the Economist Intelligence Unit does not expect early elections to be called. A European Parliament election will be held in mid-2014. The majority of regional elections will be held in 2015, while Andalusia, Catalonia, Galicia and the Basque Country have different electoral cycles.

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  July 25, 2012

• Structure

  Spain: Political structure

  Official name

  Kingdom of Spain

  Form of state

  Constitutional monarchy

  Legal system

  Based on 1978 constitution

  National legislature

  Bicameral Cortes (parliament): the Senate has 264 members, 208 directly elected and 56 appointed as regional representatives, but with little influence; the Congress of Deputies has 350 members, elected from closed party lists in individual constituencies

  Electoral system

  Universal suffrage over the age of 18

  National elections

  General election held on November 20th 2011. Next election due in 2015

  Head of state

  King Juan Carlos

  State legislatures

  17 autonomous community (regional) parliaments

  National government

  Council of Ministers headed by the president (prime minister), who is appointed by the king, but must win investiture vote in parliament. Mariano Rajoy, the leader of the Popular Party (PP), was sworn in as president following the PP's election victory in November 2011

  Main political parties

  Popular Party (PP); Spanish Socialist Workers' Party (PSOE); United Left (IU), including the Communist Party (PCE); Convergence and Union (CiU), a centre-right Catalan nationalist federation; the centre-right Basque Nationalist Party (PNV); Amaiur, a left-wing separatist Basque coalition which is seen as incorporating the political representatives of Euskadi Ta Askatasuna (ETA), the terrorist group that called a definitive ceasefire in October 2011; Catalan Republican Left (Esquerra Republicana de Catalunya-ERC), a left-wing Catalan separatist party; Canary Island Coalition (CC); Galician Nationalist Block (BNG); Union, Progress and Democracy (UPyD), a centre-left anti-nationalist party

  The Council of Ministers

  Prime minister: Mariano Rajoy Brey

  Deputy prime minister, minister of presidency & government spokesperson: Soraya Sáenz de Santamaría

  Key ministers

  Agriculture, food & environment: Miguel Arias Cañete

  Defence: Pedro Morenés

  Economy & competitiveness: Luis de Guindos

  Education, culture & sport: José Ignacio Wert

  Employment & social security: Fátima Báñez

  Finance & public administration: Cristóbal Montoro

  Foreign affairs & co-operation: José Manuel García-Margallo

  Health, social services & equality: Ana Mato

  Industry, energy & tourism: José Manuel Soria

  Interior: Jorge Fernández Díaz

  Justice: Alberto Ruiz-Gallardón

  Public works: Ana Pastor

  Central bank governor

  Miguel Ángel Fernández Ordóñez

  December 07, 2012

• Outlook

  Spain: Key developments

  Outlook for 2013-17

  • The Popular Party (PP) has an absolute majority and is expected to govern until the parliamentary term ends in late 2015. Social unrest will remain high and could affect the economy and political stability.
  • The government's main focus will be to implement the fiscal, financial and structural reforms attached to the banking and sovereign bail-outs that it is set to receive in the coming months.
  • The Economist Intelligence Unit expects Spain to receive a sovereign bail-out in the form of a credit line from European rescue funds and support from the European Central Bank (ECB), without fully losing market access.
  • Spain applied for emergency financial support from its euro zone partners, which under the agreement would amount to up to EUR100bn (US$130bn), but independent auditors estimated that about EUR60bn is needed.
  • The October European summit, in contradiction with the June summit, ruled out any retroactive direct recapitalisation by European rescue funds, so that the government will have to bear the cost of the banking bail-out.
  • The euro zone crisis will continue to weigh on investor and business sentiment, hampering efforts to improve competitiveness and productivity. We believe that the risk of a euro zone break-up remains high.
  • We expect that the government will miss by some distance its target of a budget deficit equivalent to 3% of GDP by 2014. The debt/GDP ratio will rise significantly as the government has to shoulder the bank bail-out alone.
  • The economy is expected to contract in 2012-13, partly as a result of harsh austerity measures. We forecast real GDP growth of about 1% a year in 2014-17.

  Review

  • Catalonia's governing nationalist party, the conservative Convergence and Union (CiU), suffered a major setback at a key regional election on November 25th, making negotiations for greater autonomy more difficult.
  • CiU is now expected to engage in talks with the left-wing independentist Catalan Republican Left (Esquerra Republicana de Catalunya-ERC), but no significant outcome of the negotiations is to be expected.
  • In return for capital injections in four troubled Spanish banks, the European Commission has asked these institutions to undertake significant restructuring and to impose large losses on their bondholders and investors.
  • Real GDP contracted by a seasonally adjusted 0.3% between the second and third quarters, a deceleration of the decline compared with the second quarter (-0.4%), thanks to robust external demand and falling imports.

  December 07, 2012

Economy:

• Background

  Spain: Country fact sheet

  Fact sheet

  Annual data	2011a	Historical averages (%)	2007-11b
  Population (m)	46.1	Population growth	0.5a
  GDP (US$ bn; market exchange rate)	1,479.9b	Real GDP growth	-0.7
  GDP (US$ bn; purchasing power parity)	1,485.1	Real domestic demand growth	-2.4a
  GDP per head (US$; market exchange rate)	32,081	Inflation	2.2
  GDP per head (US$; purchasing power parity)	32,195	Current-account balance (% of GDP)	-6.5
  Exchange rate (av) €:US$	0.72b	FDI inflows (% of GDP)	3.0
  a Economist Intelligence Unit estimates. b Actual.

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  Background: After the death of General Franco in 1975, Spain embarked on a political transition to democracy. Following the legalisation of political parties, the first free election for 40 years was held in 1977. In 1978 a referendum approved a new democratic constitution and repealed many of the laws of the Franco era. In 1986 Spain joined the European Community (now the EU). Spain was one of the founder members of European economic and monetary union (EMU) in January 1999.

  Political structure: Spain is a constitutional monarchy. The king, Juan Carlos, will be succeeded by his son, Felipe. The parliament, or Cortes, is bicameral, but effective power resides in the 350-seat Congress of Deputies (the lower house). The Senate (the upper house) has 208 directly elected members and 56 regional representatives. Parliament is elected for a maximum term of four years. Alongside Germany, Spain is the most decentralised large country in the EU, but demands for greater autonomy by Catalonia and the Basque Country are a source of political tension.

  Policy issues: Economic policy will remain focused on facilitating a recovery and on improving the public finances and reassuring investors, notably about the banking sector. A new government will continue the work of the previous government in implementing reforms aimed at improving fiscal sustainability and the long-term performance of the economy, such as labour market and public pension reforms, but rigidities are likely to remain. Fiscal consolidation pressures will push the government to focus efforts on increasing efficiency in the public sector.

  Taxation: The top rate of personal income tax increased in several regions in 2011, but not nationwide, so the typical rate remains at 43%. The standard rate of corporation tax has stood at 30% since 2008. The flat rate of tax on capital income, which was previously 18%, was split into two brackets from July 2010. Capital income up to a EUR6,000 (US$7,800) limit is taxed at a rate of 19%; income above this threshold is taxed at a rate of 21%. The standard rate of value-added tax (VAT) has been raised from 18% to 21% in September 2012.

  Foreign trade: The share in GDP of exports of goods and services was 30.3% in 2011, and that of imports was 31.1%. The current-account deficit totalled an estimated US$52.3bn (3.5% of GDP) in 2011.

  Principal exports 2011	% of total	Principal imports 2011	% of total
  Machinery and transport equipment	34.0	Machinery and transport equipment	27.1
  Food, drinks and tobacco	13.4	Mineral fuels, lubricants, and related materials	20.8
  Chemicals and related products, n.e.s.	13.2	Chemicals and related products, n.e.s.	14.4
  Mineral fuels, lubricants, and related materials	7.5	Food, drinks and tobacco	9.5
  Main destinations of exports 2011	% of total	Main origins of imports 2011	% of total
  France	17.7	Germany	12.5
  Germany	10.1	France	11.4
  Portugal	7.9	Italy	6.8
  Italy	7.8	China	5.9
  EU	67.7	EU	54.6

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  December 07, 2012

• Structure

  Spain: Economic structure

  Data and charts: Annual trends charts

  
  

  

  December 07, 2012

• Outlook

  Spain: Country outlook

  Spain: Country outlook

  FROM THE ECONOMIST INTELLIGENCE UNIT

  POLITICAL STABILITY: The prime minister, Mariano Rajoy, leads a strong and stable centre-right Popular Party (PP) majority in the Congress of Deputies (the lower house) and is expected to remain in power until the end of the four-year parliamentary term in 2015. The government is implementing wide-ranging austerity measures in the 2012 and 2013 budgets and beyond. However, extensive labour market reform and spending cuts, which tend to affect the least well-off in Spanish society, are fuelling social discontent. Although anti-European sentiment is still comparatively low, the social situation is relatively unstable and unrest could flare up at any time. Periodic protests have taken place since the start of the crisis, but recently they have not been as widespread as the first protests in May 2011.

  ELECTION WATCH: In addition to an absolute majority in parliament, the PP secured victory in each of the 13 regional parliaments where elections were held in May 2011, and outright majorities in eight. Although it has since lost momentum domestically, facing further unpopularity as it implements fiscal austerity and structural reform, the party was still able to increase its support in the Basque Country and defeat the main opposition Spanish Socialist Workers' Party (PSOE) in Galicia at regional elections in October 2012, and to increase marginally its support in Catalonia in November 2012. Given its large parliamentary majority, the PP is not expected to call an early election, and the Economist Intelligence Unit believes that the next general election will be held in 2015.

  INTERNATIONAL RELATIONS: Mr Rajoy is not expected to change Spain's stance and role dramatically, but we expect the government to give greater priority to foreign affairs than the previous PSOE administration. The country's position in Europe has been greatly weakened by its fiscal and financial difficulties. The current negotiations about bank and sovereign bail-outs have put Spain in a delicate situation, whereby it has been forced to adopt EU-dictated policies, although without presenting them as such. It will take several years at least before Spain can hope to regain a stronger voice in EU developments, but it will remain a supporter of moves towards greater European governance and closer fiscal co-operation.

  POLICY TRENDS: Spain has officially applied for a banking sector bail-out. We expect it to apply for a sovereign bail-out by early 2013, although the government will do its best to delay or avoid this. Its main challenge will then be to meet the conditions.

  ECONOMIC GROWTH: Spain faces a protracted adjustment as it undergoes a correction of the imbalances accumulated during its decade-long boom to 2008, which include a burst house-price and construction bubble, overindebted consumers and a fragile banking sector. The economy has fallen back into recession, contracting quarter on quarter since the fourth quarter of 2011. We expect fiscal austerity and rising unemployment to keep the economy in recession in 2012 and 2013 at least. The recession has so far not been as harsh as expected, but there is a risk that it becomes deeper and more prolonged than currently forecast. Weak growth is expected in the second half of the forecast period, at an average about 1% in 2014-17, but this outlook has significant downside risks.

  INFLATION: Inflation will be restrained by spare capacity in the economy and the fact that wages will be held back by the need to regain competitiveness. However, high global commodity prices, the introduction of co-payment for medicines and a rise in the value-added tax (VAT) rate will put some upward pressure on consumer prices, which are forecast to rise by 2.5% (EU harmonised measure) on average in 2012 despite weak demand, increasing to 2.9% in 2013. Inflation should stabilise at about 1.9% on average in 2014-17.

  EXCHANGE RATES: Although not our central forecast, there is a high risk that several countries will be forced to leave the euro in 2012-13. Such fears have caused flight from euro assets, and partly explain the volatility of the single currency, which has fluctuated in a range between US$1.20:EUR1 and US$1.35:EUR1 during 2012, standing at US$1.30:EUR1 in late November. Even assuming that it survives in its present form, the euro will remain volatile in response to shifting risk appetites, protracted economic weakness and lower reserve accumulation by China. We expect it to average US$1.26:EUR1 in 2013 and US$1.25:EUR1 in 2014-17, but there is a significant risk of sharp movements either way.

  EXTERNAL SECTOR: The economy is undergoing a correction of the large current-account imbalance in 2003-07, which has already shrunk from 10% of GDP in 2007 to 3.5% in 2011. Having contracted to an estimated 1.2% of GDP in 2012, the current-account deficit is expected to fall further in 2013, owing to weak domestic demand and growth in exports. The current account is then expected to post moderate surpluses throughout the rest of the forecast period. Banks will still be forced to restrain their lending as a result of difficulty in attracting capital inflows, although the ECB has made large amounts of liquidity available to banks.

  December 07, 2012

• Forecast

  Spain: Country forecast summary

  Country forecast overview: Highlights

  • The conservative Popular Party (PP), led by Mariano Rajoy, is expected to remain in office until the end of the parliamentary term, in late 2015. Social unrest is gathering pace, and is expected to escalate further as austerity measures begin to affect living standards. As some regions lost market access, the government had to provide liquidity assistance, leading to an intense political row between the federal and regional levels. Regional and nationalist sentiments will therefore continue to rise.
  • The situation of the banking sector forced Spain to access emergency financial support from its euro zone partners, which under the agreement would amount to up to EUR100bn (US$130bn). The October European summit, in contradiction with the June summit, ruled out any retroactive direct recapitalisation by the European Stability Mechanism (ESM), so the cost of the bank bail-out will add to the country's public debt, although it is likely not to be included in the deficit.
  • We expect Spain to apply for support by early 2013, probably in the form of a credit line from the ESM, so that it will avoid complete loss of market access. This will allow the European Central Bank (ECB) to buy short- to medium-term bonds in secondary markets, thereby reducing yields for short-term debt. The bail-out will, however, entail additional painful austerity measures, potentially triggering further social discontent. The government's main focus will be to negotiate and implement the fiscal, financial and structural reforms attached to the banking and sovereign bail-outs that it is set to receive in the coming months.
  • The successive austerity measures passed by the government, at a time of recession, will prove self-defeating, and improvements on the spending side will hardly compensate for the fall in revenue. The general government budget is expected to remain high, even without taking into account the bail-out of the banking sector. The deficit targets set in accordance with the European Commission will be missed. Public debt is forecast to rise sharply in the coming years, both as a result of large deficits and bank recapitalisation costs.
  • Our central scenario is that Spain will remain in recession in 2013, primarily as a result of falling domestic demand. GDP growth will continue to be subdued even in the second half of the forecast period. Moreover, significant downside risks are attached to this outlook, so that the recession could be deeper and more prolonged than currently forecast.

  Country forecast overview: Key indicators

  Key indicators	2012	2013	2014	2015	2016	2017
  Real GDP growth (%)	-1.5	-1.6	0.5	1.1	1.2	1.3
  Consumer price inflation (av; %; EU harmonised measure)	2.5	2.9	1.6	1.7	2.0	2.1
  Government debt (% of GDP)	82.1	89.7	93.1	95.0	95.4	95.7
  Budget balance (% of GDP)	-7.4	-6.4	-5.0	-4.0	-3.5	-3.1
  Current-account balance (% of GDP)	-1.2	-0.2	0.3	0.5	0.5	0.7
  3-month interbank rate (av; %)	0.6	0.2	0.6	1.1	1.8	1.8
  Exchange rate US$:€ (av)	1.28	1.26	1.25	1.24	1.26	1.26
  Exchange rate US$:€ (year-end)	1.29	1.26	1.24	1.26	1.26	1.26
  Exchange rate ¥:€ (av)	101.88	104.31	108.60	110.13	116.13	115.09

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  December 07, 2012

View detailed map

Country Briefing

Total area

504,880 sq km; including 30% arable, 8% permanent crops, 13% pasture, 33% forest

Population

45.2m (January 2007 official estimate)

Main towns

Population in '000 (January 2007)

Madrid (capital): 3,132

Barcelona: 1,595

Valencia: 798

Seville: 699

Climate

Mediterranean in east and south; temperate in north-west

Weather in Madrid (altitude 660 metres)

Hottest month, July, 16-32°C (average daily minimum and maximum); coldest month, January, 0-8°C; driest month, July, 11 mm average rainfall; wettest month, October, 53 mm average rainfall

Languages

Spanish (Castilian), Catalan, Galician, Basque

Weights and measures

Metric system

Currency

Euro (€) = 100 cents

Fiscal year

Calendar year

Time

1 hour ahead of GMT

Public holidays

Nationwide public holidays are January 1st and 6th, Good Friday, May 1st, August 15th, October 12th, November 1st, December 6th and 8th, December 25th. Regions and municipalities also set a number of other labour holidays in their territories

March 05, 2012