Contributions to Political Economy (2012) 31, 67–76

ANOMALIES OF SPAIN’S ECONOMY

AND ECONOMIC POLICY-MAKING*

ROBERT M. FISHMAN
University of Notre Dame

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Spain’s economic difficulties underscore the dangers inherent in the Eurozone’s
current austerity regime but despite the ways in which the larger context has condi-
tioned and worsened Spanish difficulties, many of the country’s problems are home-
grown. Economic policy has suffered from an inability to identify and act on the
country’s genuine structural shortfalls and instead has repeatedly attempted to
address chronically high unemployment through labour market deregulation. This
strategy has not succeeded, but areas—such as the banking system, education and
vocational training, research and development, and the work-life balance—needing
policy attention have not been adequately addressed. The external imposition of
budgetary austerity threatens to simultaneously worsen the country’s cyclical and
structural problems—which are considerable.

The imposition of stringent budgetary austerity on a country with public debt cur-
rently below 70% of GDP, yet suffering from an unemployment rate of 23.6%,
offers the most dramatic evidence of the folly in Europe’s reigning austerity
regime—and its effective prohibition on policies providing counter-cyclical fiscal
stimulus. This point appears quite straightforward, especially in light of Spain’s
extraordinarily high private debt (Borrell & Missé, 2012: 46), most of it linked to a
collapsed property and construction bubble, and the growing strain on the country’s
banks induced by economic contraction. However, the lessons offered by the
Spanish case do not end there; some of them are rather more complex and typically
misunderstood. Structural problems, policy errors and misconceptions predated the
current crisis—although they were briefly masked by the magnitude of the bubble
and, as a result, the economy’s outperformance in the pre-crisis phase of Europe’s
common currency from 1999 through mid-2007.

* For helpful feedback on a draft of this essay I wish to thank Fernando Guirao, Peter Hall, Julia
López, Murray Milgate, and Sebastian Royo. I also thank David Everson for excellent research assistance.
The errors are my own.

Received: April 2012 Accepted: April 2012

# The Author 2012. Published by Oxford University Press on behalf of the Cambridge Political Economy
Society. All rights reserved
68 R. M. FISHMAN

Although strongly conditioned by the broader Eurozone crisis and monetary

union itself, Spain’s current economic troubles are to a substantial degree ‘home-
grown’, but not for the reasons most conventionally believed in scholarly and policy-
making circles. Granted, some elements of the Spanish economic record are matters
of easy consensus—for instance, the fact that the country was running a budgetary
surplus and had a very low public debt-to-GDP ratio prior to the onset of crisis in
2007—but certain chronic problems, and the need to address them, have received
inadequate attention, especially by policy-makers. Indeed, the underlying structural
inability of the country’s economy to generate an adequate level of employment was
temporarily hidden by the unsustainable bubble and the accompanying period of

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outperformance in aggregate economic growth from 1999 through the middle of
2007. In what follows, I first examine underlying structural challenges and recurrent
features of policy-making. I then take up the implications of the imposition of fiscal
austerity in a country suffering from the collapse of a large bubble alongside a con-
stellation of pre-existing structural challenges.
Despite the confidence of prominent Spanish economists that the orthodox
market-oriented policy paradigm manifested by liberalization, deregulation, and
European integration was producing major advantage for the country (cf. Rojo,
2010), the economic record in the final quarter century prior to monetary union in
1999 was in fact rather mediocre. From 1974 to 1999 GDP, per capita adjusted for
purchasing power parity converged very little if at all toward the substantially higher
average for the EU-15.1 Unemployment was significantly higher than in otherwise
comparable countries for most of that period. Indeed, Spanish unemployment has
been a source of concern to scholars (Blanchard & Jimeno, 1995; Bover et al., 2000;
Esping-Andersen, 2000; Bermeo, 2001; Fishman, 2010; Reis, 2010) for some time.
In December 1998, the last month prior to the formal inauguration of the Euro as
the underlying electronic currency of the Eurozone (three years prior to the intro-
duction of Euro notes in 2002), and in a context of economic growth, the country
still suffered from an unemployment rate of 14.1% in official Eurostat statistics and
the labour force was a smaller proportion of the adult population than in the conti-
nent’s most successful societies. Eight and a half years later, in May 2007, after the
multiyear period of unsustainable above-trend growth tied to the construction
bubble, unemployment reached a low point of 7.9% prior to its rapid return to
1
Scholars have differed somewhat in their verdict on this point; alternative data sources and
methodologies generate somewhat different conclusions. Barreto et al. (2000: 372), with a primary basis
in Eurostat data, place Spanish private per capita consumption adjusted for purchasing power parity, at
77.0% of the average for the EU-15 in 1970 and at 79.2% in 1999. Relying on Spanish government data,
Carreras & Tafunell (2004: 503– 524) reach a conclusion more favourable to Spanish development for the
period. Writing in 2009, De la Fuente & Doménech (2010: 191) conclude that ‘in terms of relative
income per capita within the group of the most advanced countries, Spain is today in exactly the same
position it was in back in 1975: i.e. 20% points below the OECD average’. Our own calculation based on
OECD data shows a very small decline in Spain’s position relative to the average GDP per capita of the
EU-15 in the 25 years elapsed from 1974 to 1999. It should be emphasized that with the inauguration of
EMU in 1999 Spain began a period of economic outperformance linked to the real estate and
construction bubble.
 ANOMALIES OF SPAIN’S ECONOMY AND POLICY-MAKING 69

disturbing levels. Clearly something in the country’s political economy has inhibited
adequate job creation, perhaps helping to explain the sense in which bubble-induced
prosperity was seen as so welcome before it ended—leaving the country with
massive private debt.
Among mainstream scholars and policy-makers the predominant explanation for
Spain’s record-setting unemployment has focused on labour costs, labour market
regulations labelled as ‘rigid’, and—in some versions—the presumed strength of
labour unions, seen as an underlying determinant of these outcomes. This perspec-
tive is empirically inadequate on multiple grounds, to be discussed below, but it has
powerfully conditioned the thinking of policy-makers both in the centre-left Socialist

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Party (PSOE) and the conservative Partido Popular (PP) for most of the
post-Franco period. That is not to say that the two large parties are identical on all
matters of policy; on distributional issues, socio-cultural questions, education, and
other themes, programmatic contrasts have generated significant policy differences
(Boix, 1998; Huber & Stephens, 2012); but on matters of macro-economic policy
and the labour market the two parties have been remarkably similar. The overarch-
ing perspective shaping policy-making under both parties, and centred in the re-
search department of the Bank of Spain (Perez, 1997), has assumed that the key to
energizing job creation lies primarily in accentuating competition within the labour
market and containing labour costs—alongside an effort to guarantee price stability
and budgetary orthodoxy. Policy-makers have consistently emphasized the objective
of inflation control over job creation and have understood the latter goal as achiev-
able through competition-enhancing measures. This approach has led to wave after
wave of neo-liberal labour market reform, offering employers growing powers and
vastly reducing the regulation of dismissals, but this has failed to resolve the coun-
try’s persistently high unemployment. An anomaly of policy-making has been this
recurrent use of an unsuccessful strategy.
Comparisons among regions, and between the country as a whole and its peers,
raise serious questions about the predominant approach. Spain’s most employment-
rich region, the autonomous Basque Country where joblessness has consistently been
much lower than elsewhere, has the country’s strongest unions and the same labour
market regulations as other regions. Yet it differs from the rest of Spain on matters
largely overlooked by orthodox analysts. Contrasts with other countries raise equally
important questions about the causes of Spain’s outlier status in labour market per-
formance. Among the most distinguished proponents of the conventional view, some
scholars have acknowledged that their preferred explanations cannot fully account for
the magnitude of unemployment and the unfavourable contrast with neighbouring
Portugal where employment levels have substantially been more robust (Blanchard &
Jimeno, 1995), especially prior to European Monetary Union.
From a broader comparative and theoretical perspective, the effort to place the
blame for low employment levels on unions, labour market regulation and supposedly
elevated wage levels runs into some rather obvious difficulties: A great deal of litera-
ture and related empirical evidence make clear that robust labour markets are
70 R. M. FISHMAN

possible in contexts of labour strength and wages higher than those prevailing in
Spain. The empirical evidence on the employment effects of labour market regula-
tions offering certain employment guarantees (Esping-Andersen, 2000) is far less
clear than theorized in neo-liberal accounts. Spanish employers have been able to
legally hire workers on a temporary basis and have done so to a greater extent than
in otherwise comparable countries, thus generating a wide range of undesirable out-
comes (Polavieja, 2003; López López, 2008) without producing an acceptable level
of aggregate employment. By 1998, the last year prior to the inauguration of EMU,
nearly a third of all Spanish workers held temporary contracts but unemployment
remained above 14%. The empirical evidence undercuts efforts to attribute Spain’s

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labour market difficulties to the legal regulation of dismissals for non-temporary
contracts (Fishman, 2010).
Equally questionable is the effort to attribute ongoing economic difficulties to
labour strength. From a Spanish perspective, much evidence is relevant: Union
membership has been relatively low in the post-Franco years (Jordana, 1996),
economy-wide bargaining and wage restraint have been embraced by labour on
various occasions (Royo, 2002; Hamann, 2012) albeit somewhat sporadically, while
labour mobilizations have frequently articulated relatively sophisticated and globally
oriented analyses—and proposed remedies—rather than pursuing the dead-end of
defensive localism (Fishman, 2004). Moreover, cross-national comparisons and the
study of within-country variation show that strong unions are often associated with
heightened productivity and positive aggregate performance in the economy. But
Spain has been a laggard in productivity growth—a point universally acknowledged
and taken as troubling by mainstream economists (Estrada et al., 2010; Galı́, 2010).
The anomaly in Spanish growth from 1999 to 2007 was not that it took place in a
country with active unions and certain labour market regulations—two conditions that
have proved compatible with robust economic performance in other contexts—but that
it took place without any substantial increase in productivity. The magnitude of the
bubble that permitted above-trend growth in these circumstances was quite astonishing:
new housing starts reached a peak level higher than the sum of annual starts in the
three largest Eurozone economies: Germany, France and Italy (Estrada et al., 2010:
113). What, then, accounts for the persistent weakness of both job creation (except
during the unsustainable bubble period) and of productivity enhancements?
An adequate answer to that question requires us to look beyond the variables
emphasized by the narrow version of economic analysis which assumes that market
freedoms and incentives can resolve all problems. The sociological approach to such
questions has emphasized the multiply ‘embedded’ nature of economic activity
(Swedberg, 2003: 36 –37), understanding it to be shaped both by the policies and
by the legal structures identified by Polanyi (1944) and the network structures speci-
fied by Granovetter (1985). Such a broadening of the search for structural roots of
Spain’s economic difficulties proves useful.
The country’s finance sector, which has been criticized for being oligopolistic and
poorly suited to the needs of the rest of the economy (Perez, 1997) has been linked
 ANOMALIES OF SPAIN’S ECONOMY AND POLICY-MAKING 71

to endemically poor labour market performance through the mediating mechanism

of restricted lending to small and medium enterprises (SMEs), thus undercutting
the ability of such firms to increase employment or invest in innovation (Fishman,
2010: 293–299). Data from the 1990s, prior to monetary union, show Spanish
SMEs to be far more reliant on internally generated cash than the average level for
such enterprises in other European Union member states. External financing for
SMEs from the large private banks or the semi-public savings banks has been
scarce. When interest rates dropped and lending accelerated greatly as a result of
monetary union in 1999, the savings bank (cajas de ahorro) system channelled the
new credits disproportionally to construction and property developers as well as

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private mortgages—thus fuelling the growing bubble instead of underpinning growth
in sustainable sectors and in productivity. Finance sector lending practices have con-
tributed to major anomalies in the Spanish economy.
The recently published critique of the savings banks by a veteran insider, Antoni
Serra Ramoneda, who served as president of the Caixa Catalunya for 20 years, sheds
great light on the operation of this now crisis-ridden sector which is laden with
massive post-bubble debt (Serra Ramoneda, 2011). Attributing the phenomenon to
traditional practice and mentalities, Serra Ramoneda notes the chronic reticence of
the savings banks to lend to SMEs outside the property and construction sector jux-
taposed against their sustained commitment to facilitating mortgage debt used for
the purchase of homes. He identifies one crucial exception to this general rule,
namely that of the Basque savings banks which have centred their lending on the
needs of SMEs—many of them in that region’s dynamic industrial sector. The key
to this crucial pattern of lending in the region with Spain’s lowest unemployment
rate appears rooted in the political commitments and strategies of parties and policy-
makers in that context. The Basque savings banks have been controlled by elected
authorities to a greater extent than their counterparts in the rest of Spain (Serra
Ramoneda, 2011: 147), and yet they have been more financially successful than
their non-Basque peer institutions. Moreover, the main Basque savings banks—each
of them based in a different one of the three Basque provinces—were subject to a fi-
nancial penalty for allegedly uncompetitive practices due to their concentration of
almost all activity within their home province (Serra Ramoneda, 2011: 151). Spain’s
finance system worked best where it followed politically defined objectives oriented
toward aggregate economic performance and where the principle of market competi-
tion among financial entities was subordinated to a shared commitment to serve the
needs of the local productive economy.
The story of the finance system and of the Basque Country’s success suggests the
importance of a broader theme in the analysis of large-scale economic variation
within the Eurozone. In an argument rooted in his larger theorization of differences
among capitalist economies, Peter Hall has attributed much of the divergence
between more and less successful Eurozone economies to the contrasting institution-
al logics of coordinated market economies, such as Germany, in northern Europe
and economies lacking effective coordination mechanisms in southern Europe. In
72 R. M. FISHMAN

his analysis, applying the varieties of capitalism framework to the Eurocrisis, the in-
stitutional structure of the more successful cases has provided them with competitive
advantages rooted in their ability to control costs while funnelling resources and col-
lective efforts into productive innovation and skill enhancement (Hall, 2011). Hall’s
argument is highly relevant to the Basque case: The contribution of the politically
influenced Basque savings banks to industrial development and innovation in that
successful region offers evidence of effective public – private coordination and of its
benefits. Sebastian Royo’s analysis of Varieties of Capitalism in Spain (2008) shows
that in a broader sense the Basque Country has been characterized by ongoing
efforts at economic policy coordination involving regional government authorities

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and a wide range of economically relevant actors outside the state (Royo, 2008:
145 – 179). This successful coordination strategy has involved various dimensions of
industrial policy including research and development, skill development and the
crafting of self-sustaining clusters of firms that contribute to one another’s success.
Spain’s most successful region in the new economic environment has differed from
the rest of Spain on variables passed over by the conventional economic analysis that
conceives of enhanced market competition as the solution to all problems.
Granted, the Basque Country has also benefitted from favourable tax treatment
linked to its autonomy statute (López et al., 2004), but that fiscal advantage should
only favour the region’s export-oriented industrial model to the extent that financing
for firms’ innovations and other coordination mechanisms are operative. Lacking an
effective industrial policy and vibrant local institutions favourable to investment and
productivity enhancement, the Basque Country’s tax advantage would have found
its way into a consumption boom or, worse still, a real estate bubble—exactly the
reverse of what happened. Indeed, in this region where savings banks preferred to
lend funds to SMEs instead of home purchasers, the bubble economy which
plagued most of Spain was largely avoided. The Basques’ use of their autonomous
institutions to promote industrial productivity and vitality highlights the significance
of this policy arena for economic success.
The structural problems bedevilling the Spanish economy appear to be concen-
trated in two significant constellations—one related to the ability of firms to innov-
ate, improve productivity and invest in sustainable growth, and the other linked to a
theme emphasized in Esping-Andersen’s (1999) analysis of the basis for high em-
ployment equilibria in post-industrial economies, namely the incorporation of
women into the labour force (for data on Spain cf. Fishman, 2010) and the exter-
nalization of care-giving and other familialistic tasks to the paid service economy.
Success and transformation in these two terrains can be promoted by institutional
design and practice but it also requires significant public expenditure—for job train-
ing, research and development, and social services facilitating work–family compati-
bility, among other areas of importance. Thus to overcome its endemic structural
problems Spain needs to invest wisely in its future in ways that would provide both
short-term stimulus and long-term competitive advantage.
 ANOMALIES OF SPAIN’S ECONOMY AND POLICY-MAKING 73

Unfortunately, the reigning European austerity regime effectively closes off the
possibility for such an approach, thus making it terribly difficult for Spanish public
authorities to effectively address the economy’s genuine structural challenges. Prior
to the spread of the Eurocrisis from Greece to other states on the periphery of the
common currency area in 2010, then Prime Minister Zapatero and his PSOE gov-
ernment were engaged in a limited effort to reverse economic contraction through
counter-cyclical fiscal policy added to earlier (if restrained) attempts to address the
work–family structural challenge by providing state-financed support for care-giving
and for the expenses of new parents. In May 2010, under strong external pressure to
apply austerity measures to an economy needing just the reverse, the Zapatero gov-

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ernment changed course and initiated a series of significant reductions in public
expenditures. This new policy environment encouraged the PSOE government to
embrace the only structural diagnosis for the country’s problems which appeared to
carry a low public price-tag, namely the view that ‘flexibilizing’ labour market
reforms could foment job creation. An approach which had already failed to gener-
ate robust employment in past applications was again pursued. The PP government
elected in November 2011 has continued to enact budgetary cutbacks coupled with
labour market ‘flexibilization’; unemployment is increasing rapidly.
Spain’s post-2007 economic contraction, and the strong case it provided for
robust fiscal stimulus, could have offered the basis for carefully designed new expen-
ditures and policy reforms configured to address the country’s structural problems
in areas such as research and innovation, productivity and public support for the
work–family balance. Instead, just the reverse has happened. The one-size fits all
approach to policy in the Eurozone has compelled Spanish governments to curtail
expenditures and they have done so in ways that undermine the country’s prospects
for overcoming structural difficulties. The anomaly of Spanish policy-making at
present is that it runs the risk of simultaneously aggravating cyclical and structural
problems. The latest round of budget cutbacks in 2012 has substantially reduced
spending on active labour market policies, research and development, education and
public support for dependency. The evolution of the Spanish case resonates with the
theoretical argument that, in the absence of adequate fiscal stimulus, economic con-
traction can generate growing long-term structural problems leading to a prolonga-
tion of low employment levels (Dutt & Ros, 2007).
A new rationale for neo-liberal labour market reform has been advanced in the
current Eurozone context in which participating states cannot devalue national cur-
rencies. A reduction in labour market guarantees, it has been argued, will increase
wage competition among workers thus lowering average labour costs in a way that
approximates the external competitive advantage afforded by currency devaluation.
One of Spain’s most distinguished economists has made such an argument (Galı́,
2010: 143). The avenue of ‘internal devaluation’—with a deflationary decline in
wages and prices—obviously would increase the external competitiveness of the
economy but in addition to its other grave difficulties, in the Spanish case this strat-
egy holds the special danger of making the country’s over-sized private debt
74 R. M. FISHMAN

permanently uncollectable. Nonetheless, policy elites have placed great emphasis on

the strategy of labour market ‘de-regulation’.
The Eurocrisis has worsened pre-existing policy-making tendencies in this
country-case. Why has the Spanish policy-making community been so keen on
market-centric approaches that have curtailed labour contract regulation without
generating robust employment? Despite the presence of continuing social pressures
from below for a different policy approach and abundant evidence for the existence
of structural problems unrelated to alleged ‘labour strength’, the political system has
tended to ‘screen out’ the voices of socially disadvantaged sectors to a greater extent
than otherwise comparable polities such as Portugal (Fishman, 2011). Spain’s resili-

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ent neo-liberal economic policy paradigm is emblematic of broader features of the
country’s post-Franco political system which, despite the evident success of demo-
cratic transition (Linz and Stepan, 1996; Gunther et al., 2004) has failed to ad-
equately address a wide array of social challenges of which stubbornly high
unemployment is but one.
Austerity closes off opportunities to address the country’s genuine structural chal-
lenges, but it also quite obviously holds additional dangers for Spain: Given the high
level of private debt, much of it not payable under current circumstances, the eco-
nomic contraction deepened by fiscal austerity threatens to worsen the already serious
problems of the country’s financial institutions. In the worst case, austerity now could
generate a substantial increase in the medium-term cost of putting the country’s
banks and savings institutions on a sound footing. Spain appears doubly condemned
to a worsening economic plight. Externally imposed austerity subjects the country to
a pro-cyclical policy accentuating economic contraction and undermining the resource
base needed to address those structural challenges which cannot be ameliorated
without new public expenditure. At the same time, the political system suffers from
an endemic asymmetry in its receptivity to social pressures from divergent economic
interests and—as a result—to a longstanding tendency to blame economic difficulty
on wage levels and worker rights instead of unmet structural shortfalls such as those
identified here. The Eurocrisis and prior dynamics induced by monetary union have
conditioned and worsened Spain’s economic travails but did not create them.
In this rather grim scenario, the ongoing vitality of both cultural life and a great
deal of private consumption may appear remarkable but that resilience is easily
explained by a point implicit in the arguments advanced here: The economy’s out-
performance during the 1999 –2007 period generated a very real increase in living
standards for most Spaniards. The cushion provided by that run-up in living stan-
dards has somewhat softened the impact of crisis for many Spaniards thus far—
despite the despair of those without job prospects—but an acceleration of the
current contraction could quickly reduce that inherited advantage.
Spain’s problems, the result of interwoven structural and cyclical challenges com-
pounded by the current European taboo on Keynesian stimulus, have been magni-
fied by policy-makers’ predominant mindset to successfully diagnose and address
the country’s economic challenges. Even though the loss of monetary policy
 ANOMALIES OF SPAIN’S ECONOMY AND POLICY-MAKING 75

autonomy clearly first contributed to the bubble economy of 1999 –2007 and then
closed off several avenues of crisis response which would have otherwise been theor-
etically open, there is no assurance that Spanish authorities would have responded
to crisis with effective stimulus in the counter-factual case of national monetary in-
dependence. As this essay has emphasized, economic policy has tended to misiden-
tify the underlying causes of chronically high unemployment. The structural
problems afflicting the Spanish economy cannot be resolved by simply increasing de-
regulation in the labour market and elsewhere, as policy-makers have mistakenly
assumed. Institutional design and practice in the finance sector, research and devel-
opment, job training and other crucial terrains require attention—and new public

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spending—that has not been provided. This constellation of woes now threatens to
create growing ramifications for the evolution of the broader Eurocrisis. And therein
lays a possible avenue for improvement. The danger of a deeper economic and fi-
nancial mess in this relatively large economy may yet lead to a revision of the think-
ing underpinning the Eurozone’s austerity regime. If that happens, the prospects for
Spain—and the rest of the Eurozone—will look far brighter than at present.

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doi:10.1093/cpe/bzs009
Advance Access Publication May 15, 2012