Why does Spain not fear any other country?

Spain's economy fears Brexit more than the elections

According to Brussels, the Spanish state has done too little against debt during the recent boom years. The weaker economy is now likely to make budget consolidation even more difficult.

Spain's economy boomed for almost six years and grew significantly faster than the EU average. But now the upswing could slowly run out of breath. In its latest economic report, the Bank of Spain warns of a number of risks for the Spanish economy, above all of an unregulated Brexit and the messy situation in Catalonia. This is not good news for the incumbent Spanish Prime Minister Pedro Sánchez, who called his compatriots to the polls on Sunday because he was unable to form a majority government after his election victory in April. Before the April elections, the socialist Sánchez had frightened the employers with demands for tax increases, but was unable to agree on a coalition with the left-wing protest party Unidas Podemos (UP). No wonder that John de Zulueta, president of the Spanish business association Círculo de Empresarios, now sees the new elections as the lesser evil.

Empty pension funds

De Zulueta is hoping that Sánchez, who is also the favorite in Sunday's elections, will seek an alliance with the center parties this time around. The President of the Spanish Chamber of Commerce, José Luis Bonet, sees it similarly. Although the Spanish economy has survived the many months without a government relatively well, it is now time to tackle the necessary reforms, he told the daily El País. At the top of the list is a pension reform. There will soon be a gap in Spain's pension fund, even though the retirement age was gradually raised to 67 years ago. In the meantime, € 9.5 billion has to be paid out to pensioners every month, but the income from social security has long been insufficient because of the increasingly precarious employment contracts and the aging of the population. An emergency fund set up before the crisis is expected to have shrunk to € 1.5 billion by the end of the year. The new government will have to find a solution to finance the pensions by next year at the latest.

All too lax budget consolidation

Taking on more debt is hardly an option, because the Spanish central bank already sees the high national debt as a considerable risk for the economy and banks. Last year, new debt in Spain was 2.5% of gross domestic product (GDP), making the country the second-highest deficit rate in the euro zone. And the national debt, equivalent to 98.9% of GDP, is 13 percentage points above the average for the euro zone. Brussels has already criticized the fact that Spain had done too little during the economic boom in recent years to get its budget deficit under control. The weaker economy is now likely to make budget consolidation even more difficult. Spain is currently recording its lowest growth since the end of the economic crisis in 2014. For the next few months, the Bank of Spain is expecting the consumption mood of the Spanish to deteriorate, because significantly fewer jobs are being created at the moment. The only sector that is currently still booming is tourism. There, however, an abrupt Brexit could have negative consequences, because Great Britain is currently still the most important market for Spain's tourism industry.

Over 80 million tourists visit Spain every year, one in five of them is British. Now it is feared that many of these customers could stay at home after a chaotic Brexit or head for cheaper destinations. The Bank of Spain estimates that the uncontrolled Brexit will slow Spanish economic growth by 0.7% over the next five years. In addition to the tourism industry, the Spanish credit institutions, above all Santander, are at risk because they control around 16% of the British banking market and thus play an even greater role than the American banks (15.9%).

The Catalonia crisis is a threat to the economy

In its autumn economic report, the central bank has again classified the Catalonia crisis as a risk factor for the Spanish economy because of the ongoing unrest in Barcelona. With a population of 7.6 million, Catalonia is the second largest region in Spain. In terms of gross domestic product, however, the northern Spanish region ranks first, with per capita income at € 30,769, well above the national average. With the elimination of Catalonia, Spain would lose 20% of its economic output. The central bank is still not getting involved in arithmetic games. However, the situation is not as dramatic as it was in 2017, she said. At that time, even before the non-constitutional referendum on a split from Spain, many custody accounts had been withdrawn from the credit institutions in Catalonia.