Despite a climate of increased anxiety and confusion in Europe brought about by the mounting tensions of a possible Grexit, there are winning nations that are finding the right recipe for growth and competitiveness. I would argue that Spain is one of them – or at least the country is on the right track to improving its competitive position in the world economy.
Spain is reaping the benefits of important reforms undertaken since the financial and economic crisis of 2008-09 as well as the collective efforts of Spanish society. While most of Europe flirted with recession last year, Spain has shown a robustness that would make many of its neighbors blush with envy! Germany, long the locomotive of European growth, has narrowly avoided recession, whereas Spain is showing one of the best growth rates in Europe.
Today, the world’s 13th largest economy has the best growth prospects of any of the large Eurozone countries, with forecasts hovering around 2.5 – 3%. The lower euro is spurring stronger exports and attractiveness to investments. “Vibrant Spain” – the country’s marketing slogan, should promote Spain as one of the world’s largest and dynamic markets, boosting an already positive image abroad.
But is export-led competitiveness sustainable in a stagnant Europe? Exports account for almost half of Europe’s GDP, compared with less than a fifth of U.S. and Japanese GDP. In Spain, exports represent a third of total output. So a cheaper euro will help boost Spain’s competitiveness by making its goods and services less expensive. But at the same time, some of the benefits of a cheaper currency will be lost because European countries conduct so much trade with one another: About 45% of European exports never leave the EU.
For Spain, export-led growth was the first sign of recovery but, although helpful, it will not lead to sustainable growth. Especially since around two-thirds of Spanish exports go into the recession-hit Eurozone. More domestic demand, improved productivity, further liberalization of markets and other sources of growth are needed.
“Good things have happened in Spain,” said IMF Chief Economist Olivier Blanchard. He attributed the Spanish recovery to improved competitiveness, increased productivity, wage cuts, better performance in exports and greater business optimism.
Still, one shouldn’t discount the pain of unemployment of 23% (representing more than 5 million Spaniards out of work), especially high youth unemployment (double the number), so there is still a lot of work to be done; the Spanish people continue to suffer from the legacy of the economic and debt crisis.
When you have a single currency region, like the Eurozone, there are huge divergences in internal competitiveness (look at Germany versus Greece). Trying to boost cost-competitiveness by lowering wages is not sustainable. Instead, it is a tradeoff between short-term gains in the price of long-term pain. More needs to be done to ensure stable and sustainable economic growth, improving skills and boosting productivity.
Some cost-competitiveness can be gained thanks to the fall in oil prices. Crude oil prices have tumbled nearly 60% since June to a six-year low below $50 a barrel due to weaker growth in the global demand for oil, increased shale production in the United States, and OPEC’s decision to not cut output. Energy pricing can have a significant impact on a country’s competitiveness. For Spain, the implications are important: According to BNP Paribas, every time the price of a barrel of oil drops by $10, Spain’s GDP growth increases by 0.6%, making the country one of the biggest beneficiaries of declining oil prices. If we do our math, and assume that oil prices are $50 cheaper, than Spain could easily sustain 3% growth.
What other factors do contribute to Spain’s improving competitiveness? Unlike France, Spain has made important structural reforms, shrinking its public sector and implementing austerity measures that have kicked in to improve the real economy. Consequently, unit labor costs have fallen and the external current account has shrunk from a deficit of almost 10% of GDP in 2008 to a small surplus. Sharp fiscal consolidation has also trimmed the budget deficit from 11% of GDP in 2009 to 5.7% in 2014. These are not small accomplishments!
Although the recovery is now fairly well entrenched, reform fatigue has set in and successful policies can be quickly reverted if people return to the streets. Spain is also witnessing net migration, especially of the young and skilled, who show their dissatisfaction by voting with their feet. Prime Minister Rajoy can only pray for an important uptick in employment if he hopes to maintain his post after the December general election. But, for the moment, that looks increasingly unlikely. Despite an increased environment of confidence and optimism, few Spaniards credits the government for the improvements.
Here are a few examples about Spain’s performance from competitiveness benchmarking studies such as those from the IMD Business School (World Competitiveness Yearbook—WCY)1 and the World Economic Forum (Global Competitiveness Report—GCR)2, both located in Switzerland:
- Spain has a large and dynamic market with strong ties to both Europe and Latin America
- The workforce ranks 16th out of 60 countries for its skills (WCY)
- Infrastructure is perceived as reliable, with high levels of connectivity, ranking 18th out of 144 countries (GCR)
- Spain is perceived as having an open and positive national culture
- The business community can boast a high degree of sophistication, ranking 38th/144 countries (GCR)
- And Spain ranks in the top third of its innovative capacity
But there are always two sides of a coin: Rapid economic growth, which came to an abrupt halt when the financial crisis hit Europe, raised expectations and created a euphoric environment in which wages rose faster than productivity, reducing competitiveness and increasing private sector debt. This credit binge left a painful hangover and Spain had to pay the price for a decade of excess borrowing and wasteful investment. Spanish businesses are burdened with regulation and excessive bureaucracy and restrictive labor regulations (ranking 58th out of 60 economies)3, which Rajoy’s government has been determined to unwind, especially encouraging less temporary employment in favor of more secure jobs.
Again, according to IMD’s WCY, other weaknesses include a lack of support for startups (56th) and poor access to venture capital (51st), which have fostered an unfavorable environment for entrepreneurship (57th).
Since competitiveness is never a zero-sum game, it appears that Spain’s achievements have outweighed its liabilities since the country’s overall competitiveness ranking improved to 39th position from 45th, out of 60 economies, as measured by IMD’s World Competitiveness Yearbook 2014. Spain has retained its 35th position, out of 144 economies, in the WEF’s Global Competitiveness Report 2014-2015. New rankings will be published soon and the jury is out to see what scorecard these Swiss institutions will give to the Rajoy government.4