Spain’s Ongoing Decade of Self-Delusion

As one economist recently put it, in just a single decade Spain has gone from semi-rural backwater to Europe’s fourth largest economy, and back again. That’s not entirely true – Spain is still a wealthy country. But if it doesn’t get a handle on its economic spiral soon, there is a danger that it could return to levels of poverty not seen in at least a generation.

The decade we’re talking about is more like a decade and a half, really. In the late 1990’s, Spain was joining the euro zone and getting its hands on extremely cheap loans from the European Central Bank, and billions of dollars in development funds from Brussels. Nearly overnight the country experienced a return to riches it hadn’t seen since its “golden century” of colonialism, 400 years earlier.

But just as during the colonial period, the wealth pouring in poured right out again. It was wasted on highly visible and short-sighted, even borderline-insane projects. In projects that made Spain feel rich, without creating any solid economic base on which to actually stay rich.

For those who still don’t know the story of Spain’s modern gold rush, it was all about speculating in construction. Knocking up apartments, houses, shopping centers, hotels, airports, more airports, high-speed train lines, more airports, bull rings and museums and more apartments and houses. For years the value of each new building built soared ever higher. Investors made mints. Many a local politician got rich too, walking off with a “maletin,” or briefcase stuffed with euros in return for building permits.

By the end of 2007 things had gotten so out of whack that almost no middle class Spaniards could afford to buy a modest, two bedroom apartment. Then the whole thing collapsed. Banks, the cheerleading financiers of the debacle, are now sinking under the weight of hundreds of billions of dollars in bad building loans and mortgage defaults.

As the crisis deepened the official line out of Madrid was simple: there was no crisis. Then Prime Minister Jose Luis Rodriguez Zapatero, a socialist made popular by his progressive social agenda, seemed lost when it came to economics. His solution was to deny the problem. To remain optimistic and hope that Spain would bounce back before it ate through its budget surplus and had to start slashing spending on things like healthcare and education.

Zapatero’s stance was his undoing. As unemployment crept over 15% he preferred to talk about the “brotes verdes,” or green shoots, emerging from the shaken economy – signs that a turn around was at hand. Unemployment hit 20%. By the time Zapatero used the “C – word” in public it was too late. The Crisis swept him from power like a tsunami.

It’s fair to say that the country’s new Prime Minister, Mariano Rajoy, has been initially blunt about Spain’s outlook. He’s laid out the bleak numbers time and again, always sure to blame his predecessors for his lousy inheritance. But now, after six months in power, he seems to be succumbing to the same false optimism that hurts the country’s credibility at home and abroad. Spain’s self-delusion continues.

On Sunday Rajoy gave nothing less than a triumphant speech, after having to accept what could be a 125 billion dollar bank bailout from “the Troika,” that trio of international institutions synonymous with humiliation and loss of sovereignty. (The Troika = the International Monetary Fund, the European Central Bank and the European Union).

Rajoy called the rescue a “line of credit” that came without strings. Not everyone can pull that off, he boasted. Almost immediately German and EU officials swatted his claims out of the sky. The Troika, they said, would indeed control how Spain’s loan is spent, and under what conditions. In other words, Spain is no different than Greece, Portugal and Ireland, the first three countries to seek bailouts.

So just a day after Rajoy claimed he’d won a victory for the euro currency and the euro zone, he ends up looking an awful lot like his predecessor, Mr. Green Shoots. And the markets have not been fooled. Spain’s borrowing costs are at near record highs today.

None of this might seem overly surprising, given that we’re talking about politicians, whose principal goal is to look as good as possible in order to stay in power. But recently I went to interview a prominent Spanish economist for a related story, and I encountered the same stubborn – quixotic? – optimism.

A bit of back story. Three or four years ago I interviewed this same economist after police in Spain had “rescued” hundreds of Chinese immigrants from local sweatshops. The next day those workers protested at the police station – against the police. Spaniards were baffled. The economist said to me that they shouldn’t be. He said that unless Europe adapted to China’s labor rules – 16 hour work days for Dickensian wages – the continent was doomed to a slow, painful decline from which it would not recover. That was what global competition is all about.

When I went back recently I was expecting the same line. Instead, he surprised me by insisting over and over that Europe, and Spain, specifically, were perfectly competitive already. But what about what you said last time we met, I asked more than once. Spain is perfectly competitive, he said. He cited as an example a car factory that exports to China. Wasn’t that arguing the exception, I asked? No, he insisted.

Despite his apparent about-face, I still might not have raised an eyebrow but for his parting comment, off record. As I was leaving his office he winked an eye and smiled sadly and said, “What we really need right now are more optimistic reporters.”

And I thought, this is a measure of how scared Spaniards must really be. So scared that not only politicians but the country’s brightest, most critical thinkers are rallying to save their country. So scared that they’re willing to resort to what strikes me as a sort of Hail Mary optimism, designed to reduce panic in the lending markets, even if it means spinning reality a little. Putting on a face for the public that you wouldn’t wear at home.

I may have read the economist wrong. I hope so. Because he scared me too.