Summer 2007

How Spain Got Serious: An Old Country With a High-Speed Train

Tom Burns Marañón

Like many 19th century romantic travellers who roamed around Spain on horseback in search of adventures that would ensure a bestseller or, at least, good dinner table yarns when they got back home, the Englishman Richard Ford mused that the railway would never come to the parched peninsula. Most argued that the towering sierras and the deep ravines that scored the vast plateaus and isolated the country’s crumbling cities from each other made it quite impracticable to lay down tracks. But Ford added a further insight borne from his knowledge of the tough muleteers who were his constant companions on the Iberian byroads. This weather-beaten breed of men, thuggish and chivalrous by turns, who ensured internal trade in the manner of oriental caravan trains, would never allow the Lutheran locomotive” to take their bread away from them. Should the impossible however happen and modernity arrive as foreign capital and engineering skills made railways possible, Ford believed the seal would be broken on the hermetic country” he had grown to love, the Spanish siesta would be shattered by thundering steam engines and prosperity would be assured. The first tracks were eventually built in 1848, a decade and a half after Ford had returned to his estate near Exeter and settled down to write a monumental, and brilliant, book that he was to call The handbook for travellers in Spain and readers at home.

GDP Growth, percentage increase on a year earlier. Comparison between Spain and Italy GDP between 1985 to 2006.
Spain in 1985 is 3.5% and decreases 1993 to minus 1 growth. At 2006 it stands at 4 %.
Italy in 1985 is 3% and decreases 1993 to minus 1 growth. At 2006 it stands at 2%
The reign of Spain

Source: Source: International Monetary Fund, World Economic Outlook

The romantics delighted in the rural time warp of antiquity south of the Pyrenees that so sharply contrasted with creeping and, in England, rapid industrialisation. Ford, who was the best of the bunch, did too. Twenty first century Spain would, obviously, have astonished all of them. In general, present day foreigners are equally surprised for they have grown up with the Spain is different” (i.e. quaint and charmingly backward) canon of clichés that was created by such travellers. So indeed are many Spaniards as they come to terms with 13 years of uninterrupted economic expansion and an annualised growth rate that accelerated to 4.1 per cent in the first quarter of 2007.

Goodbye land

What most strikes them is that a once isolated Spain, a Goodbye Land that forced its people to leave because there was not enough work to go round, is now fast becoming a diverse, multiracial society that needs foreigners to make up labour shortages. Half a century ago hundreds of thousands of unskilled Spaniards took up the jobs people no longer wanted in Belgium, France and Germany. Virtually all, and there were three million of them in total, eventually returned and the tables have now been turned. Spain currently absorbs far more immigrants than anywhere else in the European Union – some five million, from Eastern Europe, North Africa and Latin America’s Andean countries, have moved in since 2000 raising the population to nearly 45 million – and, remarkably, unemployment has fallen to eight per cent from more than 20 per cent a decade ago. One can tick all sorts of economic miracle boxes. One that has made many people sit up is the acquisitiveness of Spanish companies as they snap up businesses abroad, particularly in the United Kingdom. The one that Richard Ford would have liked is that Spain is poised to enjoy, in terms of kilometres of track per capita, the most extensive high speed train network in the world.

What seems to fascinate everyone, especially those who endure sluggish growth elsewhere in Europe, like the Italians (see chart), but also Spaniards themselves, is how all this prosperity came to pass. And there is just as much interest in how much longer it will all last. Is there a lot of partying still ahead or will the fiesta be over some time soon?

Right place

As to the first, my view is that Spain was in the right place, which was Southern Europe, at the right time, namely EU enlargement in the 1980’s and the creation of the eurozone in the following decade. I also believe that such fortuitous circumstances can be squandered if the people who are so propitiously situated fail to seize the windfall opportunity that is presented to them. Spaniards, however, grabbed their chances when General Francisco Franco, the sole totalitarian survivor of Western Europe’s low and shallow thirties decade, finally died in 1975. One of Franco’s legacies was a growing, educated middle class that aspired to increasing material comforts. Another was, more surprisingly, that his four decades of authoritarian rule following the 19361939 Civil War that crushed Spain’s short-lived republican experiment, forged a generational consensus between the young reformists of his régime headed by Adolfo Suarez, who was to become the political architect of the transition to democracy, and a new crop of western-minded opposition personalities, notably the socialist leader Felipe González.

Despite occasional interventionist and crony capitalism blips, Franco set in place a market economy that welcomed foreign investment and forged a solid trading relationship with the then Common Market; by the 1960’s strong growth was fuelled by the remittances of Spaniards who worked abroad and the spending of foreign tourists who holidayed in Spain. Exposed to such foreign influences, Spaniards outgrew the régime’s political straitjacket as per capita annual income rose to $6,000. Along with wealth came political consensus. This was rooted in the will to put Spain’s past behind it and to move forward into the heart of Europe under the aegis of King Juan Carlos, the grandson of Spain’s pre-republic monarch and Franco’s hand picked successor, who firmly backed the restoration of representative government and of long proscribed freedoms. Adolfo Suarez, who was chosen by King Juan Carlos to spearhead the transition, famously said that his brief was to make normal in politics” what was considered normal in the country at large”. Greece and Portugal, the other democracies that emerged in southern European during the 1970’s, were less fortunate in their leaders, in their circumstances and in their timing. So were the eastern European countries that shook off the Soviet yoke in the 1990’s.

Spain was to hugely benefit from membership of the by now European Economic Community. Following arduous negotiations, Spain joined the rich man’s club in 1986 four years after the socialist party, led by Felipe González, won a landslide election win with a modernising and emphatically non-interventionist agenda. European funds flowed into major infrastructure projects and bankrolled the overhaul of obsolete industries. As Spain re-tooled on the back of capital inflows, economic liberalisation released the pent up energies of its still low-cost manufacturing base. By the end of the decade Spanish corporations were moving forcefully into Latin America. It was a showcase catch-up story and the Barcelona Olympics in the summer of 1992 underlined that Spain’s difference” lay in its euphoric vibrancy; its everything is possible” optimism. That same year Madrid was linked by high speed train to Seville. The poor south, inland from the flashy Costas, would not be allowed to decouple from rich Spain and there would be time enough later to build such railways to the Basque Country and to Catalonia.

Spain was in the right place once again when it was time for the eurozone. By now, 1996, the centre right Popular Party, led by José María Aznar, was in power with nononsense balanced budget and deregulatory recipes and an acceleration of the privatisation programmes that had been initiated by the González governments. The result was a collapse in government debt (see chart). Spain was to gain handsomely from the eurozone’s currency stability and was to benefit spectacularly from the cheap credit that resulted from the European Central Bank’s expansionary monetary policy. Low interest rates failed to kick start the economies of France and Germany but they generated an incredible property surge in Spain, as they did in Ireland, and with it a massive increase in employment both for Spaniards and for an escalating number of immigrants. The new arrivals offset the threat of labour shortages and wage inflation and provided Spain with a flexible and mobile working force. A high proportion of immigrants went straight into the construction sector. Construction, growing at 6 per cent a year, drove the economy forward (investment in new housing represented as much as 8 per cent of GDP) and fast rising employment accounted for the mammoth’s share of Spain’s renewed push along the path of prosperity. Domestic banks and construction firms did exceptionally well and this helps to explain why Santander was able to buy Abbey and Ferrovial, one of Spain’s biggest builders, acquired BAA.

Fiesta forever?

More than luck, Spain’s ability to grasp such successive opportunities and to benefit from them would appear to show a sense of purpose among an essentially serious (for all the clichés) people and a degree of competence that was not thought to be part of a Spaniard’s DNA. But can it all last?

Boom and bust boxes can also be ticked. One is that Spain’s current account deficit is larger than any other country save that of the US (see chart). It weighed in last year at a giddy €107 billion and represented nearly 9 per cent of Spain’s GDP. Another has to do with the double edged delivery of the construction sector. House prices have risen faster than anywhere in Europe, with the exception of the UK and Ireland, over the past 10 years (see chart) and, mostly because of this, household debt has doubled. Will not the bust be dramatic when the property boom ends? The soft versus hard landing debate is underway: it is no longer about if the property boom ends, it is about when. The warning lights are eyecatching. The downside of economic growth based on construction and newly arrived immigrants is that productivity and competitiveness suffer as investment in technology and in skills is crowded out. Spain, which has no natural resources to speak of, is vulnerable to cheaper wage producers both in Asia and in Eastern Europe. In the meantime as the eurozone recovers, monetary policy will inexorably be tightened. Where will the credit crunch leave the domestic house buyer, both the Spaniard and the immigrant? There has been a rush to take up 40 year mortgages, an instrument that is quite new to Spain. Where will it leave the big corporate borrowers and their highly leveraged acquisitions? Where, indeed, will it leave the banks?

The bust scenario is almost certainly overworked if only because sudden and sharp downturns no longer figure on the global script but the doomsayers don’t just talk about changing economic cycles that may be more or less smooth. They point out that a leap forward into modernity does not come free and that the gigantic catch-up effort has ridden rough-shod over the household furniture. A drastic collapse in the birth rate that set in 30 years ago and substantially increased life expectancy means that Spain will face a bigger demographic shock by midcentury than anywhere else in the EU. Education meanwhile represents a serious deficit that bodes ill for the future: the failure rate on reaching high school age is double the EU average. The rapid breakdown of traditional family values and structures in Spain probably goes a long way towards explaining drug abuse and rampant alcoholism among the young. Integrating an immigrant population that almost overnight has grown to represent 10 per cent of the total census and includes a very high Muslim head count, clearly presents another whole set of challenges that politicians have so far been slow to address. A separate chapter concerns climate change, wasteful water usage and the threat of desertification in the centre and south of the country.

Such issues are not addressed with the urgency they deserve because the purposeful and consensual politics that underpinned so much of Spain’s progress have degenerated into polarised and mostly dead end debates ever since the Socialist party unexpectedly regained power on March 14 2004 under Jose Luís Rodríguez Zapatero three days after bombs placed by Islamic terrorists killed 192 on early morning Madrid commuter trains. Dependent on minority nationalist parties for a working parliamentary majority, the government has encouraged greater home rule in Catalonia and embarked on highly controversial stop-go peace negotiations with the Basque terrorist group ETA. Transatlantic relations with the US, which were strong under González and particularly so during the Aznar years, deteriorated sharply following the new government’s immediate decision to unilaterally pull Spanish troops out of Iraq, and Spain, which was adept at punching above its weight in the EU, is no longer a significant European player. Government interventionism, which, under the banner of economic patriotism” was blatant during the long drawn takeover of Endesa, Spain’s biggest power group, has dented the image of an open market economy and an array of initiatives such as same sex marriages, an end to religious teaching in schools and a so-called Historical Memory Law that highlights the doomed anti-fascist struggle of the Civil War 70 years ago have proved very divisive. All this has provoked a strident response from the Popular Party on the lines that the unity of Spain is at risk and that its international standing and credit worthiness, as well as its social cohesion, are severely damaged.

So does the band keep playing and will the fiesta continue? Probably yes because 13 years of uninterrupted economic expansion has engendered a clutch of world class companies as well as miles and miles of high speed railway tracks in a country that is now anything but hermetic”. But the rhythm will not be so frenetic and some of the effervescence will be gone. The outcome of general elections in March 2008 will dictate just how much slower the band plays and also the all round party mood.

Tom Burns Marañón is a director of Eurocofin, a Madrid Corporate Communications firm, and a frequent contributor to the Spanish media. He was formerly a Spanish correspondent for the Financial Times, Newsweek and The Washington Post.