Spain votes ‘no’ on failed economic policies

In Spain’s elections last Sunday, the two parties that have ruled the country for the past three decades took serious losses. This has important implications for the future of not only the country but also the rest of Europe. It is yet another example of how and why the eurozone remains in political upheaval, six years after the global recession. European economic policy, including austerity, has failed miserably; the eurozone has more than twice the unemployment rate of the United States. But the officials who decide economic policy are not offering a viable alternative; on the contrary, they want further fiscal tightening and regressive changes.

The ruling right-wing Popular Party (PP), headed by the country’s increasingly unpopular Prime Minister Mariano Rajoy, took 123 seats of a 350-member parliament, with 28.7 percent of the vote. The center-left Socialist Workers’ Party (PSOE), which lost to the PP in 2011 because of its support for austerity, won 90 seats. Since neither party is close to a majority, it remains to be seen whether a stable government can be formed.

Although the Spanish economy has been growing for the past year and a half, the recovery hasn’t trickled down to most of the population. Unemployment is at 21.6 percent — one of the highest among developed countries — and 47.7 percent for youths. About 60 percent of the jobless are long-term unemployed, out of work for more than a year. Since 2007, more than 3 million people have joined the ranks of those classified as at risk of poverty and social exclusion.

The two-party system was crashed first by Podemos, which surprised pollsters by winning 69 seats in Sunday’s vote. A leftist party less than two years in existence, Podemos grew out of mass protests against austerity, joblessness and the corruption of the PP, including Rajoy. Led by Pablo Iglesias, a 37-year-old professor with a long ponytail and inexpensive blue jeans, Podemos captured the biggest following in the country by November 2014. But then a new party, Ciudadanos (Citizens), appeared, sometimes referred to as the Podemos of the right. With clever marketing and an appeal to youths, Ciudadanos ascended quickly to media stardom and ended up with 40 seats in the elections. But it was Podemos that offered a programmatic economic alternative to current failures — including measures to increase employment, public investment and educational opportunities as well as progressive tax reform and an end to austerity.

Although there are other important political issues — for example, the question of independence for the region of Catalonia — the economy is the biggest one. Spain piled up massive private borrowing in the run-up to the world financial crisis and recession and had a real estate bubble even bigger relative to its economy than the U.S. did. Spain was hit hard when its real estate and stock market bubbles burst. But after some initial stimulus in 2009, the government was pressured by European authorities to adopt austerity policies that pushed the economy back into recession and increased unemployment.

Central to the austerity policy was what economists call internal devaluation. Because the country adopted the euro, it could not devalue its currency in order to reduce its trade and current account deficit. But it could make the currency effectively cheaper (in real terms) by pushing down wages and inflation. To do this requires mass unemployment and a recession, which the government succeeded in promoting. The downturn slashed imports because of a collapse in domestic spending, which helped reduce the country’s trade deficit. It’s a brutal strategy, of course, but Spaniards were told there was no alternative as long as the country stayed in the eurozone.

The PP-led government cut social spending and changed labor laws to reduce the bargaining power of workers. To deal with protests, it passed a gag law for unauthorized gatherings, with fines of up to $650,000, and became increasingly repressive.

The PP will remain the largest party in the new parliament for now. But the real significance of the vote was its rejection of austerity and current eurozone policy. With the Spanish economy growing, the PP — concurring with eurozone officials and the International Monetary Fund (IMF) — tried to convince voters that austerity was finally working. The vast majority of voters rejected that argument, and they were right. In fact, the numbers indicate that the recent return to growth was mainly a result of the government’s letting up on budget tightening in the year before the elections as well as favorable external factors: the decline in oil prices (which gave consumers more money to spend), the European Central Bank’s pushing down interest rates (through quantitative easing) and the depreciation of the euro (which helps reduce imports and increase exports). And the IMF has estimated that even when the economy returns to its full potential some years from now, there will still be more than 16 percent unemployment.

Voters in Greece rejected austerity in January and again overwhelmingly in June in a nationwide referendum, only to get it rammed down their throats by the European authorities. But Greece’s economy is less than 2 percent of the eurozone, and its new leaders from the leftist Syriza party — although they vociferously opposed austerity — made it clear that they would never leave the euro, no matter how much they were punished. Spain, with the fourth-largest eurozone economy, is possibly in a very different bargaining position.

The Spanish voters’ rejection of Rajoy’s argument that they must stick with the program because it is working is a vitally important message for Europe. And the elections could bring Spain one step closer to fixing its economy — with or without the approval of European authorities.