Have you ever travelled to Spain?
Have you ever visited Barcelona, Madrid or the Canary Islands?
Well, if you have, I’m sure there is something that might have surprised you.
Despite the fact that Spain is in a crisis and has the second highest unemployment rate
in all of Europe, it totally looks like a wealthy country.
The cities are clean, the roads have brand new pavement, there are international airports
in every other city and there’s a state of the art high speed train throughout most
of the country.
At least on the surface, Madrid has no reasons to be jealous of Zurich or London.
Then again, we are talking about a country that was at the edge of bankruptcy not such
a long time ago and that now has gone through one of the biggest political crises in their
recent history.
The Spanish Premier, Mariano Rajoy will have to leave the Government.
The Congress has passed an impeachment bill.
Impeachment means that the Congress, that is, the legislative power, votes to kick the
executive out.
Unlike other countries like America, in Spain you need to propose an alternative government
that will substitute for the former.
This makes impeachment attempts almost impossible to pull off in this country.
But these are strange days in Spanish political life.
The brand new Spanish president, the social democrat Pedro Sanchez has managed to convince
the radical left, the nationalist right, and the independent Catalonian parties to vote
against the conservative Government of Mariano Rajoy.
They all have one thing in common: they didn’t want more of this.
And now you might wonder…
Why did Rajoy have so many haters?
Well… you might think it’s corruption.
And, of course, this is the official reason.
But beyond the surface is way more.
As we said before, Spain is one of the most damaged countries from the big financial crisis
of 2008.
And the former government likes to brag about their economic achievement with statements
like this one.
“It has been a honor to leave this country in a better shape than I found it” –Mariano
Rajoy
This is why, in today’s video, we have a lot of questions cover.
First… has Spain gotten over the crisis already?
Despite some economic growth and unemployment reduction, this country still has more than
a 16% unemployment rate.
And other EURO countries like Ireland are growing faster than Spain.
So… can we really say they have left the financial crisis behind?
And if so… what credit should we give to the conservative government?
Is it a good moment to invest in Spain?
Today, we are going to answer all of these questions but before we do, let’s take a
look back at history.
MEN IN BLACK
In the year 2002, the EUROZONE was created.
All of a sudden, Spain, Germany, France and many other countries started to use the same
currency, the EURO, and the same interest rates, the ones that the European Central
Bank fixes.
This seemed to be a great idea.
Having the same currency, a German bank can lend money to a Spanish company on the same
conditions as they would with a German company.
But these advantages come with a risk.
If Spain goes bankrupt, this German bank, with Spanish debt, might go bankrupt too.
In other words, if a country does poorly, they might spread the problems to other countries.
This is why when you join the EURO, you must follow some rules.
One of them is that no country can have a deficit bigger than 3%.
This means they cannot spend more than what they collect in taxes.
This said, let’s go fast forward in history.
2008, year of the international financial crisis.
Many European countries suffer.
Spain among them.
Suddenly, the unemployment rate goes sky high til it’s surpassed 20%.
This means that, all of a sudden, the Government collects little money in taxes and…
Do you remember those international airports and high speed trains I told you about?
Well, they are not cheap.
And this is why the inevitable happened.
Spain, Greece and Ireland had the highest budget deficits in the EU in 2012
So, while the maximum deficit a Euro country could have was 3%, Spain had 10%.
This meant nobody wanted to lend money to their Government.
At the end of the day…
How are you going to pay it back if you spend 10% more than what you collect?
If you’ve followed VisualPolitik for a long time, you already know what happens when investors
don’t trust your credit reliability, right?
What do they do…?
Exactly!
They ask for higher interest rates.
Now listen, in the EUROZONE, we have an index to measure the chances of a country defaulting:
the so-called RISK PREMIUM.
Basically, what they do is take the most trustworthy debt bond that exists in Europe.
This is the GERMAN bond.
Then, they compare the interest rate of the German Bond with the interest rate of the
other ones.
The number that you get with this comparison is called the RISK PREMIUM.
So in the year 2010, the Spanish debt had a risk premium of 50 points.
That was OK.
One year later, it had 250.
5 times more.
Spanish Bonds at Risk as Contagion Gathers Force
And this is when the MEN IN BLACK came into picture.
Yes, the men in back was the name given by the journalist to the European Central Bank
workers.
These ECB people went to the most problematic countries in the EUrozone and requested that
they follow the rules.
Basically: it says right here that you can’t have a deficit bigger than 3% but you’re
having it your way.
Stop wasting money like crazy or we’ll punish you.
In countries like Ireland, these men in black were especially strict.
In some, like Italy, they even forced the parliament to choose another prime minister
who was more fiscally responsible.
But… what happened in Spain?
What did these men in black do in the country of sangria and paella?
Let’s have a look!
THE QUIET MAN
November 20th, 2011.
This is the day when the Spanish People’s Party kicks ass in the elections.
The conservative leader, Mariano Rajoy becomes one of the most supported leaders in Europe,
only surpassed by Viktor Orban in Hungary.
The Spanish People’s Party or, as it’s better known, the PP, got 53% of the seats
in Congress and they ruled in most of the regional governments.
Basically, Mr. Rajoy might as well have changed the name of Spain and started calling it RAJOYLAND.
He’d have had enough support for it.
So what was his political program during the elections?
Well… basically, Rajoy said the European Central Bank ‘Hey guys!
Don’t worry, I’m conservative so I know my economics!
First I’m gonna reduce taxes and make lots of cool business friendly reforms that would
make this country look like Silicon fucking Valley.
Then those companies will make billions, hire people, and booom!
Deficit problem solved!’
Basically, the whole Rajoy campaign was based on the idea of low taxes.
The mantra for any problem was to reduce taxes on everything.
But, my dear viewers… you know that what you say during the electoral campaign is one
thing, and that what you do just ONE DAY after you take office is another thing entirely.
“This government must raise some taxes for some time”
During the first months of Rajoy, the Government raised ALL of the taxes, including VAT, income
tax and all the special taxes on tobacco and gasoline.
Yes, a conservative Government made the biggest tax increase in Spanish history.
And what about all those wonderful business regulations that would turn Spain into the
new Silicon Valley?
Well… you can imagine what happened with that too.
So what happens when you promise a business friendly agenda and come up with the opposite
once you’re in office?
Well… voters, angry as they are, cannot do anything until the next elections.
But the international investors… they can give you their backs the very moment you break
their trust.
And this is exactly what happened in Spain.
Spanish economy in "huge crisis" after credit downgrade
Basically, the Spanish debt bond fell under the category of trash in just a glance.
Do you remember the RISK PREMIUM I told you about before?
Well, so at some point, it went to the Satanic figure of… 666.
Many Spanish banks where ot the edge of bankruptcy.
And nobody wanted to buy Spanish debt.
Spain was about to collapse.
And that would mean no money to pay doctors, school teachers and tax collectors.
Only one team could solve this problem.
And they were… the MEN IN BLACK.
Spain to Accept Rescue From Europe for Its Ailing Banks
So what was this bailout all about?
Basically, Europe would borrow money at a lower interest rate so Spanish banks would
not go bankrupt.
In exchange, they requested the Government to cut its spending.
And here is where Mariano Rajoy did his big, badass movement or as we like to call it,
RAJOY-OMICS.
Basically, once the European Central Bank had already bailed out the banks, Rajoy went
to those men in black and said…
‘Hey, you, ECB guys… you think you can tell me what to do?
Look, see these three fingers here???
Read between the lines.
Rajoy’s theory was that Spain was too big to fail.
So, despite having the worst credit rate you can imagine, the European Central Bank would
eventually buy all the debt bonds without asking for any interest rate.
How?
Printing money!
With this Money, Spain could keep being as it was without making any costly reforms.
But why would the ECB accept all of this?
Easy…
Spain has the 4th biggest economy in Europe.
Nobody’s gonna let it fail.
So months kept passing.
Unemployment kept growing and so did the Risk Premium.
The Conservative government of the People’s Party, far from making business friendly reforms,
did the opposite.
Do you want an example?
Here it is.
Prior to them, professional services like taxi drivers where going to be liberalized.
But, in Spain, taxi driver associations are well connected with the conservatives.
So the right wing passed a bill to protect taxi drivers from competition.
This is why, many sharing economy companies like UBER and AirBNB now have so many restrictions
in the Spanish market.
The question is… do you think Rajoy’s challenge to the European Central Bank worked?
And the answer is…
YES.
“The ECB is Ready to do whatever it takes to preserve the euro and believe me, it will
be enough”
SUPER MARIO COMES TO THE RESCUE
For months, the ECB president, Mario Draghi, said that he would not compromise with Spain.
Basically, Rajoy wanted him to print more money so he could buy Spanish debt.
In other words, Rajoy wanted the wealthy EURO countries like Germany and Finland to give
money to Spain at no political cost.
Just because… reasons.
It doesn’t sound very fair, does it?
Well… sometimes life is not fair.
And Rajoy was right.
Spain was too big to fail.
ECB could be ready to buy weak Italian, Spanish bonds
Since then, 25% of the Spanish debt is in ECB hands.
And those words from Mario Draghi, saying he would do ‘whatever it takes to save the
Euro’ were like magic.
One day at a time, the Risk Prime of Spain started falling.
Investors started buying debt bonds because they knew they had the backing of the ECB.
And this is how Spain could keep piling on more and more debt.
This country now has a debt that represents more than 100% of their entire GDP.
Meanwhile, the rest of the European countries have started growing.
Since 2012, Germany has become the biggest export powerhouse in the entire world.
China has gone from being the World’s factory to developing a brand new consumer market
where everybody can sell their products.
In other words, EVERY European country is growing now.
And that, of course, includes Spain.
Nonetheless, this was good news.
And every government likes good news.
Rajoy: "Spain has gotten over the crisis in record time"
This is already 2015.
In this year Spain has elections again.
And the government decides to celebrate the end of the crisis with a tax cut in the middle
of the electoral campaign.
Brilliant, right?
You raise taxes at the beginning of one election and then, one year before the next election,
you put them where they used to be.
And then, guess what happened right after Rajoy won the elections again!
Yup, you got it right!
Rajoy raises taxes… again In 2017, the Government will have to cut 15
billions deficit.
As you can imagine, raising and reducing taxes depending on when you have elections is not
the best policy if you want to attract foreign investors.
Add red tape that’s almost the same, if not more prevalent than before and all the
territorial problems and you’ll understand why the unemployment rate in Spain is still
at 16%.
While other EURO countries like ESTONIA and IRELAND, which had really bad recessions,
are now way better than 10 years ago, Spain remains almost the same.
So now it’s your turn…
Do you think the brand new Spanish Government can do any worse than the previous one?
Do you think Spain has solved its crisis or do you think there’s still a lot of work
to do there?
Please, leave your answer in the comments section below.
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