In a country beset by some of Europe’s worst economic woes, the Spanish Socialist Party (PSOE) has suffered its worst defeat since the country returned to democracy in 1978. The Popular Party (PP), led by Mariano Rajoy, had 34 percent of the municipal vote across the country,10 points higher than the Socialists, and they carried almost all of the 13 out of 17 of regions in play. The vote followed a week in which thousands of Spaniards engaged in mass protests nationwide, reflecting their anger at the failed economic policies of Prime Minister Jose Luis Rodriguez Zapatero’s government.
Spain’s more than 8000 municipalities were the most telling indication of how large this defeat was. In 2007, the PP had a victory margin of about 150,000 votes in cities and town across the nation. This time, their margin was around two million. These victories swept through the former Socialist-held town halls of Barcelona and Seville, and the region of Castilla-La Mancha, where the Socialists have never lost their grip on power.
Zapatero accepted the reality of the verdict in a nation hammered by three years of economic stagnation, which has led to an unemployment rate of 21%, the highest in the European Union. For Spaniards 18-25, the rate stands at a staggering 45%. ”These results have a clear relation to the economic crisis we’ve suffered for three years… I know that many Spaniards are going through great difficulties and fear for their jobs and future well being,” said Zapatero at a news conference. Yet the Prime Minister ruled out early elections, saying he intends to press ahead with economy-strengthening measures with help from his existing small-party alliances in parliament, where the Socialists still maintain the largest minority,“to carry out the economic reforms the country needs.”
Ironically, despite the success of the PP, considered a center-right party, much of the anger aimed at Zapatero had to do with his attempts to get government finances under control, via a series of austerity measures, economic overhauls and budget cuts. These are needed if Spain is to avoid becoming the next–and largest–European nation to need a bailout from the International Monetary Fund (IMF). This explains Citigroup bank economists sending a note to their investors last Friday in which they warned “a political defeat for the Socialist party would reinforce our doubts” about Spain’s ability to achieve its “too optimistic” targets for avoiding that fate. This fear was also reflected in last weeks .02 percent increase to 2.43 points in the spread of Spain’s 10-year government bond relative to the German benchmark, raising Spain’s borrowing costs to their highest level in more than five months.
That was Friday. On Monday, the spread was 2.57 percent, reflecting the angst of the financial markets regarding the election results.
Adding to that concern is the possibility that changes in the political makeup in regional and municipal governments would lead to discoveries similar to the one which occurred in Catalonia last November. When center-right Catalan nationalists replaced the Socialist government in that region, incoming officials discovered the local budget deficit was twice the amount than had been previously reported.
These so-called hidden debt concerns may be more widespread than is currently known. “[The election winners are] going to arrive and realize there’s no money,” said Ismael Crespo, political scientist at the Ortega-Maranon Foundation in Madrid. “Many of the regions have problems not only to meet the deficit target but to meet basic services, which until now have been hidden because of the elections,” he added. One of those regions is Castilla-La Mancha, a region where the PP and local business leaders claim invoices of $1.43 billion remain unpaid, and where Maria Dolores de Cospedal, the conservative party’s newly elected-regional president, has pledged to “audit” the region, which she characterized as “practically bankrupt.”
Spain’s 8000 municipal governments aren’t faring any better. The collapse of property prices resulting from over a million unsold homes has engendered a debt of $46.2 billion in unpaid bills, according to the Platform Against Late Payment, a Barcelona pressure group.
That group also illuminates a growing phenomenon in the country, namely, legions of blue collar workers working for months without pay, as employers struggle to stay afloat, due to the fact that thousands of small and mid-sized companies in the country rely on government contracts for work. Platform Against Late Payment estimates at least a half million businesses in the country have closed due to payment delays, a number which is likely to worsen once the scope of government debt becomes clearer.
Much of these late payments by regional and municipal governments grew out of habits adopted during the economic boom that followed Spain’s adoption of the euro in 1999. Those governments, which were also piling up debt at the time, used the delays as a way of freeing up funds for other spending projects. According to Spanish central bank data, aggregate public debt from the 17 autonomous regions amounts to more than $161 billion; public debt from the country’s municipalities and provinces is $49 billion, and the central government’s public debt amounts to $684 billion.
Unpaid Spanish workers have nowhere to go. If they quit, they don’t qualify for unemployment benefits. And despite being owed weeks or months of back wages, they know that facing a job market where one-in-five of their countrymen are unemployed is probably worse. Yet as last week’s demonstrations revealed, their patience is wearing thin with three years of austerity programs they blame on having to “pay” for the faults of irresponsible politicians and bankers who created the financial crisis. Apparently, the politicians recognized the severity of the anxiety: despite a government ban on protests extending past midnight, law enforcement officials made no effort to break them up. Interior Minister Alfredo Perez Rubalcaba, who had initially insisted the government would “enforce the law,” backtracked. “The police are not going to resolve one problem by creating another,” he said.
Many of the protesters echo a concern, first expressed during the bailout of Ireland, that they’re being held hostage by “international financiers in the bond markets” who are more concerned with getting repaid than they are with the plight of the average citizen in any of the affected countries. Yet the protesters themselves, while having a legitimate point, are apparently unable to come to grips with the limits of socialist ideology: parts of the austerity package they’re protesting include raising the retirement age, and making it easier to fire workers. Some of the “reforms” they’re demanding center around the unrealistic efforts to abandon ailing banks and government-guaranteed access to housing.
Perhaps there is another way. U.S. economist Warren Mosler suggested an alternative to the current system. “For the euro zone, I propose a distribution from the European Central Bank to the national governments of perhaps as much as 20 percent of GDP to be done on a per capita basis so it will be fair to all the member nations,” he said. This would allow governments like Spain to stimulate employment and pay for services without being beholden to the international bond market. If the EU refuses? Once again, the specter of a country withdrawing from the union and re-establishing its own currency rears its head.
In the meantime, the PP is calling for an immediate general election instead of waiting until the regularly scheduled one next March. ”Zapatero and the whole Socialist party must reflect on what has happened. Spain cannot waste another year like this,” said PP General Secretary María Dolores de Cospedal. Zapatero, who is resigning at the end of his term, has avoided both losing budget votes and having to call early elections due to PSOE party support from smaller parties like the Basque Nationalist (PNV). And despite its victory, the PP does not have enough seats in parliament to currently win a vote of no-confidence and force an election.
So Zapatero stays. ”They’re waiting for the rain to stop. If the economy improves in the third quarter and unemployment also improves, they can say it’s because of their economic reforms,” said Antonio Barroso, analyst with Eurasiagroup consulting firm, who believes Zapatero will weather the storm.
Perhaps he will. But financial markets around the world were down on Monday, reflecting the concern, not only with Spain’s election results, but the downgrading of both Italian and Greek debt as well. The EU also announced it will be selling $6.7 billion worth of 10-year bonds to help fund the bailouts of Ireland and Portugal, who received its own bailout in order to reduce its reliance on European Central Bank funding. The bonds will be funded through the European Financial Stabilisation Mechanism (EFSM). The European Financial Stability Facility (EFSF) will subsequently issue five-year notes to both countries. Including loans from the IMF, Portugal will be getting a total of $73 billion, while Ireland will be getting $56.3 billion.
Where does it end? Impossible to say. But if this election and the recent one in Canada are any indication, it would appear that being the incumbent party in a time of financial turmoil is toxic. Given that the term “right-of-center” has different meanings in both Canada and Spain, compared to its meaning in the United States, it would be somewhat premature to characterize both elections as a defeat of socialism. However one interprets these elections one thing is beyond dispute: “it’s the economy, stupid” resonates more now than ever.
Arnold Ahlert is a contributing columnist to the conservative website JewishWorldReview.com.
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