*Faculty member, Universidad de Murcia.

The COVID-19 pandemic has hit the Spanish people with great severity: when the first patient tested positive for the coronavirus on January 31^st, few people expected that just two months later there would be 152,446 infected persons, and 15,238 deaths.[1] And developing along with the human drama is what may be the worst economic crisis since we have official historical data.

In this grave health crisis, estimates by specialists indicate that within weeks, or at worst one or two months, the epidemic will be under control. But its economic and social consequences will be quite different. Although during the month of March events have accelerated (the most significant issue being the declaration of a “State of Alarm”, and the confinement of the population), and sufficient data that could evaluate the dimensions of the problem are still lacking, the few, but significant indicators that are available point to a slowdown of the GDP without precedent: some media place the impact along a curve that goes from 4% to 10% decline of the GDP.[2] Unemployment, according to figures provided by the Public State Employment Service (Servicio Público Estatal del Empleo SEPE), will have increased to almost one million persons in just one month—never before has such a fast and intense elimination of jobs happened. This could shoot up the unemployment rate from 13.8% (in fourth quarter of 2019) to 18%, and it is not absurd to think that the final figures will go well beyond these estimates.

Moreover, it must be kept in mind that as of the official declaration of the “State of Alarm” (on March 14^th), many economic activities were suspended. The partial confinement of the population paralyzed almost all activities related to the service sector (the most important exceptions being food distribution, transportation, gas stations, pharmacies, corner stores….) and, of course, everything related to leisure and tourism. It must also be kept in mind that every year we receive visits from more than 80 million foreign tourists—a figure that maintained its rise during the last decade. Tourism is not only a very important job creator (“Spanish oil”), but also the main component that compensates for our Commercial Balance deficit.

Although it is too soon to evaluate the extent of the crisis, we do certainly have elements that can be used towards a preliminary analysis of the response of the Government as related to economic policies. In fact, the most significant component of this situation is the strong contrast between the strategy adopted by the current administration and that which was designed by the Cabinet during the time of President Zapatero in the course of the crisis that erupted in 2008 with the implosion of the real estate bubble and the global financial crisis.

The first element to take into consideration is that, after a brief period of recuperation (2014-18), the Spanish economy had already entered into a process of deceleration parallel to that which was happening in the major economies of the European Union. In fact, in 2019 the Spanish economy grew by only 1.9%, a rate clearly insufficient to reduce the unemployment level, stuck at 14% of the active population. With the pandemic or without it, the Spanish economy was headed for a recession.[3]

Secondly, it is necessary to point out the difference in diagnosis: when in 2007 the real estate bubble imploded in Spain, the government did everything it could to make the population believe that we were not facing a severe economic crisis but what President Zapatero qualified as a “soft landing” (a small reduction of the GDP and a small increase in employment). Deny reality and take no action: that was the strategy during the first few months. Perhaps there were good intentions: avoid feeding negative expectations that would precipitate a recession. Of course this did not work, and the figures bitterly modified governmental foresights: the GDP shrank by 4% and the rate of unemployment grew from 8% in 2008 to 26% in 2013.

As the 2007 crisis worsened, the Spanish government, in agreement with the strategy implemented by the European Commission, adopted a more active economic policy: it initiated the so called “Plan E”, a program of public spending with clear Keynesian connotations, financing public works to be executed by municipalities, with an estimated value of 3% of the GDP. But in 2009, both G-20 and the European Union hawks (the governments of Germany and Holland), forced a swing towards budgetary austerity: from then on Keynesian whims would end, national governments would have to concentrate on budgetary adjustments in order to “recuperate the markets and the international investors’ trust,” under penalty of losing the resources that the European Central Bank contributed to its financial systems. 

The economic-institutional context in which the current government has to act is the same: monetary policies are dictated by the CEB; fiscal policies cannot ignore the tight limits imposed by the 1997 Stability and Growth Pact (Pacto de Estabilidad y Crecimiento, PEC). However, the response has been different: the Spanish government has recognized from the beginning that we are facing a crisis without precedent, and it has announced a plan which (whether it will really be carried out only time will tell) will mobilize resources equivalent to 16% of the GDP—that is, five times more than the already mentioned “Plan E”. Moreover, the announcement and the first legislative measures have been completed in record time: the corona virus made its appearance in Spain at the end of January, and up to today three Royal Decrees have been approved – laws of economic and social content.

The stakes involved for the Spanish government are relatively easy to explain: to avoid a commercial collapse such as the one which took place beginning in 2008. If enterprises fail, not only is production interrupted, but the relations between enterprise and workers, and between enterprise and clients—which are difficult to restore amid favorable situations—but human capital is also lost, and enterprises are split up. Thus, the government is betting on letting the entrepreneurial sector “hibernate”, so that the chain of receipts and payments (supplies, salaries….) will be affected in the least possible measure, so that an eventual “rebound” of the GDP, in two or three months, will bring everything back to normal.

The mechanism to achieve this is principally based on a broad system of guarantees that would permit enterprises and autonomous workers to obtain bank credit with which to pay creditors (including taxes), in spite of the current significant decrease in revenues; that is, continue to earn income (to be returned at some future date) in spite of not having any productive activity. In fact, it is considered that the sudden interruption of banking credit was the main cause of the economic collapse that followed the real estate bubble implosion in 2007. Of course this plan is much more complex and will include social measures absent during the previous crisis. For example, the possibility that citizens accept a moratorium on the payments of leases and mortgages. Contemplated as well is the extension of social benefits to those temporarily laid off (Temporary Layoff Plan [Expedientes de regulación temporal de empleo, ERTE])—because the previous crisis did not only leave a mass of bankrupt enterprises[4] and unemployed workers, but also a new phenomenon: massive evictions. It must be kept in mind that Spain is traditionally a country of home owners; renting has always had a marginal weight in the housing market.[5] The real estate bubble through which we suffered during the years 1999 to 2007 substantially raised the price of residences and the cost of mortgages that families with modest incomes had to finance. The crisis struck down the capacity to pay, and many families lost their homes.[6]

Of course an exhaustive, critical analysis of this plan requires a wide scope and goes beyond the aim of this article, but it is appropriate to ask ourselves whether the plan of President Pedro Sánchez will work.

There are two critical elements that maintain a strong relation to the economic plan: the duration of the health crisis and the financial coordination with the European Union.

With respect to the first, if the specialists are right (and there are no reasons to think otherwise), the duration of the health crisis depends on the rigor with which the population accepts the confinement. It is certain that, in general, we can confirm that the level of compliance is very high. Its economic-financial consequences are immediate: the later the end of the pandemic, the higher will be the cost in terms of the reduction of the per capita GDP, the rise in unemployment and fiscal deficit∕ public debt…. a deficit∕debt that will require subsequent adjustment … and the more difficult will be the so desired “rebound” of the GDP.

With respect to the second critical element, the financial coordination with the EU is essential, except if there should be a consideration to abandon the euro and the Stability and Growth Pact (PEC)—a possibility that neither the government nor the majority of parties with parliamentary representation is contemplating in any way whatsoever. Given the PEC, countries whose public deficit exceeds 3% of their GDP (or their structural deficit exceeds 1%) must undertake an adjustment plan or face severe economic sanctions by the European Commission. Moreover, within the context of the freedom of movement of capital, expansive policies can be terminated by the markets in terms of increases of the risk premium to the point of making the debt unsustainable. In such a situation, for a country that participates in the euro it becomes essential that its financial system rely on the assets contributed by the European Central Bank—the institution that in the past (in the cases of Spain, Greece…) has already discretionally used this option, subordinating the support of countries in crisis to the implementation of neoliberal austerity plans.

As we said before, compliance to the confinement on the part of the Spanish people is exemplary; however, the EU is showing itself to be very reticent in its financial support of those countries whose economy is being pummeled by the corona virus. During the last two weeks, various countries (particularly Spain, Italy and Portugal) have requested a financial rescue strategy for those countries affected by the corona virus—specifically a massive issue of bonds by the EU so that those national governments won’t be “left out in the cold” of the international financial markets. The governments of Germany and Holland have blocked this request and the debate remains active in the European institutions.

Little more can be said at this time about the future of the Spanish economy. From the 2008 crisis the collective imaginary has retained the idea that the authorities “rescued banks instead of people”. Today, as we have indicated, both the diagnosis and the measures implemented are very different (and better), which should give a reason for hope. But it is also just as uncertain that not everything can be credited to the experience gained by the government related to the management of a crisis: the debate on the division of the costs of this crisis is ongoing and the contenders (among them the working class) should remain vigilant towards the course of the events.

[Translation: Catharina Vallejo]