Welcome Mr President

Fernando Fernández. Professor. IE Business School

9 March 2011

José Luís Rodríguez Zapatero has started to apply much-needed reforms, even if it is because he hasn’t much choice. But it is clear that reforms in Spain still have a long way to go.

José Luis Rodríguez Zapatero has finally seen the light and become a reformist. This week, he has taken three important steps: the agreement on pensions; a scheme for recapitalising the financial system; and the beginning of an agreement to extend the labour reform. Steps taken somewhat unsteadily and, in some cases, with some causes for concern, but on the whole they represent an approach to economic orthodoxy that will definitely be noticed. The much reviled vigilantes of the bonds market have fulfilled their function and avoided the economic suicide of the country.

Unemployment figures for the fourth quarter have brought us back to reality and explain the turnaround by the unions far more than whatever else they have managed to achieve with their negotiations. A deseasonalised unemployment rate of 22.5%, some four million seven hundred thousand unemployed workers, underlines the seriousness of a situation that is quite simply intolerable. Having completed the hopefully definitive abandonment of the small-minded ideological bias of the economic policy, there are two issues that need to be addressed: false expectations and adjustment fatigue. No one should expect Spain to recover high growth rates quickly; no one should expect unemployment to fall significantly this year; no one should think that the solvency of the public accounts is guaranteed; no one should think that the debt differentials will fall quickly. In the best-case scenario, the Spanish economy will grow this year around 0.5%. With that figure, all the above is particularly difficult and will require much perseverance from the government, from the various regional governments, and a great deal of discipline from the social agents.

Adjustment fatigue is a term coined in the 90s to refer to countries that had done their economic homework but failed to reap the reward. Dissatisfaction became social protest and the abandonment of orthodoxy. That is the danger of a government that needs immediate results. And they are not going to come. Because structural reforms take their time and because the measures that have been announced must be reformed again. Despite an effective cut in the average pension of 20%, the pension reform is insufficient because no automatic mechanisms for adjusting the pension to the population and to the financial health of the system have been introduced and because the government has not been brave enough to tell the population that there is no possibility of future pensions maintaining the reinvestment rate, the percentage between pension and salary on retirement, and it is therefore necessary to convince them of the advantages of private savings for the future and encourage complementary pensions. The scope of the financial reform is clearly insufficient, inappropriate as far as terms are concerned, excessively respectful of the status quo and those who are now responsible and deliberately naive regarding the existence of self-interested investors. But it is a step that will bring many others. All we know about the collective bargaining process is that the parties want to reach an agreement and that is at least something, because the labour situation is unbearable.

In short, perhaps because of conviction or to minimize electoral damage or because the Spanish economy has effectively been intervened, whatever the case, today we are a little further away from the edge. We have sent a clear message to investors, but they have also learned that the only way of making this government "work" is to take it to the limit. Let´s hope it does not have to happen again.


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