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Long-Suffering Spain Stumbles Forward in Road to Recovery
The Washington Diplomat / July 2014

By Larry Luxner

If Spain’s Ramón Gil-Casares was hoping for an early World Cup victory in Brazil to lift his country’s sagging spirits, the ambassador certainly didn’t get his wish.

On June 13 — the second day of the month-long FIFA tournament — Spain’s top diplomat in the United States stared at his TV screen in shock as the Netherlands crushed the Spanish national soccer team 5-1. Six days later, Chile defeated Spain 2-0, eliminating the team from further play.

The two losses together constituted the most humiliating defeat ever suffered by a reigning World Cup champion and marked Spain’s worst performance in 64 years, souring the mood even further in a country already beset by a stagnant economy, massive unemployment and the abdication of an increasingly unpopular king mired in scandal.

On the surface, it seems things can’t get any more toxic in a nation whose energy, creativity and passion once inspired optimism throughout Europe. Spain’s jobless rate stands at 25.6 percent, the second-highest in the 28-nation European Union, behind only Greece (at 27.1 percent) and five times higher than Austria’s 5.0 percent, according to Eurostat.

Even worse, youth unemployment hit a staggering 57.7 percent last November — meaning nearly two out of three Spaniards under the age of 25 were without work — before falling to “only” 50 percent as of mid-May.

Nearly 6 million people throughout Spain remain jobless, with the government expecting unemployment to remain above 20 percent until at least 2017. Meanwhile, economists worry about deflation — a situation that makes it harder and more expensive for debtors to pay back their loans.

And to top it all off, Spanish voters elected 54 representatives to the European Parliament in late May, but the country’s two main parties — which had been taking turns in power since 1977 — failed to garner even 50 percent of the vote, marking their poorest performance in Spain’s democratic history.

“Virtually all of the institutions that brought about the country’s late 20th-century renewal have been discredited,” James Badcock wrote in Foreign Policy last month. “Political parties, labor unions, big business and the judiciary have all felt the tide of public opinion turn against them. Corruption and abuse of authority are perceived as standard practice among the country’s elites.”

In a recent interview, Gil-Casares didn’t try to paper over Spain’s problems. Yet he did argue that the worst of the crisis has finally passed in this once-proud nation of 47 million — and that the current government of Prime Minister Mariano Rajoy is to thank for cleaning up the mess.

“Not only are things not as dire as a year ago, but we’re technically out of recession,” the gregarious ambassador told The Washington Diplomat over coffee at his seventh-floor office fronting Pennsylvania Avenue. Gil-Casares noted that Spain’s economy edged up by 0.1 percent in the last quarter of 2013 — the first positive sign after nine consecutive quarters of a shrinking GDP — followed by a 0.4 percent increase in the first quarter of 2014. That means the economy is now growing faster than at any time since Spain imploded from the real estate bust of 2008.

Based on those numbers, Madrid has revised its forecast for GDP growth this year upward to 1.2 percent (from 0.7 percent) and 1.8 percent for 2015 (from 1.2 percent).

“Employment, albeit in small quantities, is growing,” Gil-Casares said. “In May, there was an increase of 50,000 jobs. We’re on the right path. The measures and reforms taken by the government are starting to yield results. Investments are coming back.”

Spain, which two years ago was forced to seek a bailout from the European Union for its troubled banks, isn’t the only country in Europe witnessing a tepid recovery. But the word “recovery” is almost an insult to the millions of people still out of work in countries like Greece and Spain, where several years ago a grassroots movement called the indignados (“outraged”) took over public squares around the country to protest the government’s handling of the economic crisis.

Regardless, the good news may not even last, given the slowdown of the Spanish export sector — triggered by a strong euro, which drives up prices for Spain’s goods overseas — and continuing problems in the construction industry, which has lost nearly 1.8 million jobs since 2008. The true health of balance sheets at Spain’s banks also remains to be seen.

Gil-Casares, 60, has had a long and distinguished diplomatic career. Born in Madrid in 1953, he was the son of a Franco-era diplomat and a childhood friend of former Spanish Prime Minister José María Aznar, who was a classmate of his at Madrid’s Colegio Santa María del Pilar. He earned an undergraduate degree in philosophy and law at the Complutense University of Madrid in 1982 — the same year he joined Spain’s Foreign Service and was sent at the age of 28 to Equatorial Guinea, Africa’s only Spanish-speaking country.

He returned to Malabo, the capital, years later as the second-in-command at the embassy and head of Spain’s aid program there. The diplomat was also posted to the Philippines, Uruguay and New York before being named ambassador to South Africa and later to Sudan.

“I had the honor of witnessing the birth of the newest state while in Juba, and became the first ambassador of Spain to South Sudan,” said Gil-Casares, who also served as secretary of state for foreign affairs for two years in Aznar’s administration.

But the economy is now his main focus, and Gil-Casares, who arrived here in 2012, is fairly blunt about how Spain tumbled into its current nightmare.

“During the years of our prosperity, we had been following a very flexible policy designed by the European Central Bank,” he explained. “Interest rates were very low, so there was a lot of liquidity in the banks. That led to very cheap loans for everybody. Construction was booming; anybody could get a mortgage. All of a sudden, the crisis erupted in the U.S., and because of globalization, it came to Europe, and people had debt up to their ears.”

From 1997 to 2007, the year the real estate bubble burst, construction accounted for an astounding 12 percent of Spain’s GDP. More houses, condominiums and office buildings went up in Spain than in Britain, France and Germany combined.

“On the private side, many people became indebted to the banks and couldn’t afford it anymore because jobs were not there,” Gil-Casares said. “People got fired and small construction companies had to close. People could not face the loans they had. We had 51 banks at the time, and many of them disappeared. We had to go through a restructuring of the banking sector. The main banks were able to survive the crisis and weather the storm.”

The ambassador argues that irresponsible policies of the past are to blame for what his countrymen are going through today.

“It was because of a poorly designed economic policy. The previous government [of socialist José Luís Rodríguez Zapatero, who served from 2004 to 2011] didn’t see it coming,” he said. “They denied the existence of the crisis, giving nice messages for the people to hear — and the situation went from bad to worse.”

However, critics of Zapatero’s successor, social conservative Mariano Rajoy, accuse him of economic shock therapy, imposing harsh austerity measures that have compounded a vicious cycle of unemployment, spending cuts and tax increases. A corruption scandal involving secret cash payments to senior party officials also shook confidence in Rajoy’s administration.

But Gil-Casares says his boss deserves credit for tackling Spain’s underlying economic problems head on and gradually luring back investors.

“You can imagine the strict measures our government had to take,” the ambassador said. “This was absolutely the opposite recipe that was followed here during your crisis, but we didn’t control monetary policy. If we did, maybe we would have followed your advice. But our monetary policy was in the hands of the European Central Bank.”

In mid-January, Spain finally completed the €41 billion ($56 billion) eurozone bailout program that Rajoy had sought in June 2012.

“We will start to create jobs, albeit few and slowly,” Gil-Casares said. “But it is also a fact that we’re out of the recession. We reduced the deficit and spending at regional levels and came up with a constitutional requirement to have a balanced budget. And we came up with laws to reform the administration and make it thinner. Government employment has dropped, and reforms have been done. We made banks concentrate on requirements of liquidity that they didn’t have before.”

Gil-Casares says his main priority is “to try to convince our American friends” that Spain is on the right track.

“People here were asking if we would be next after Ireland, Portugal and Greece to ask for a bailout. We were knocking on the doors of the administration, think tanks and newspapers, explaining to them the situation and how those messages were going to yield results in the end. We were received with a certain degree of skepticism. But as the situation started to improve and people were hearing the news from investors, we went from being a case study of how things went wrong to a country that offered possibilities for investment,” he told The Diplomat.

Indeed, despite anemic growth that hasn’t trickled down to most Spaniards, the country is no longer a pariah to global investors and yields on bonds have been substantially reduced. Ironically, the very industry that precipitated Spain’s crash is now a potential bright spot in its economic recovery. In fact, there’s no greater investment bargain in Spain right now than real estate. With property prices down as much as 50 percent, reports Jenny Anderson of the New York Times, Spain has become a magnet for global bargain hunters.

“British Airways flights to Madrid are packed with London-based real estate executives,” Anderson wrote. “The hedge fund Baupost is buying shopping centers, Goldman Sachs and Blackstone are buying apartments in Madrid, and Paulson & Company and George Soros’s fund are anchor investors in a publicly listed Spanish real estate investment vehicle.”

Last year, about €5 billion worth of real estate transactions took place, according to consulting firm CBRE Spain — more than double the previous year, said the Times.

Still, the housing market remains fragile and the investment frenzy has only fueled fears of another bubble. The recovery is also coming a little too late for the millions of homeowners facing foreclosure and financial ruin. It doesn’t help that Spain has the EU’s highest rate of home ownership, 85 percent, thanks to decades-long aggressive governmental promotion of home ownership and borrowing.

“Eviction and foreclosure now threatens anyone who was duped by the government’s irresponsible lending, unfair mortgage contracts, dodgy behavior, and lack of oversight during the booming economic years,” reported the Latin Post on June 13.

A May 27 report by Human Rights Watch titled “Shattered Dreams: Impact of Spain’s Housing Crisis on Vulnerable Groups,” says that “immigrants, female victims of economic abuse, and children are the most affected by the crumbling economy, and most likely to default on mortgage payments and be ejected from their homes.”

Gil-Casares doesn’t deny the impact the crisis has had on certain segments of society, including foreign-born Spaniards, who flocked to the country during the economic boom and make up 10 percent of the population. The largest group of immigrants, nearly 400,000 people, come from Great Britain — but the ones who have been hurt the most are from Latin America, mainly Ecuadoreans, Peruvians, Dominicans and Bolivians.

“During the years of economic prosperity, in which we grew 3 to 5 percent a year and unemployment dropped from 22 to 8 percent, about 600,000 immigrants arrived from Latin America and Africa,” Gil-Casares said. “Many of them became Spanish, and when the real estate and construction bubble exploded, they’re the ones who suffered.”

In the midst of it all, Spain has begun welcoming back the descendants of another group who suffered: an estimated 200,000 Sephardic Jews who were expelled from Spain in 1492 by Queen Isabella and King Ferdinand during the Inquisition. Under legislation approved earlier this year, the Spanish government will grant citizenship to those Jews who can prove their lineage, though they don’t necessarily have to move to Spain or even give up citizenship of the country in which they live.

But critics, including some religious leaders in Israel, have called the citizenship program a scheme to attract Jewish investment at a time when the country is in dire economic straits.

Gil-Casares says that’s not true.

“This is part of a bigger awareness of our Jewish past, and of the richness of Sephardic culture that we have forgotten over many centuries,” he said. “The fact of the matter is, we’re not granting citizenship to a single nationality but to a whole group for historical reasons. It has nothing to do with the crisis.”

But the outcome of the latest EU parliamentary elections clearly had everything to do with the crisis. The ruling center-right People’s Party won only 26.1 percent of the votes while the opposition Socialist Workers’ Party got 23 percent — the worst showing by Spain’s two dominant political parties in nearly 40 years.

The big surprise was Podemos (We Can), an anti-establishment party that had been formed only four months earlier by 35-year-old university lecturer and disgruntled socialist Pablo Iglesias. Podemos took five seats and 8 percent of the total vote.

“This massive loss of support reflects the rapid rise of smaller parties that portray the two main players as being similarly corrupt, beholden to money and unable to effectively deal with the economic crisis,” the Guardian newspaper opined. “Despite the fragmentation of the vote, however, no anti-European or xenophobe party has made any headway in Spain, in contrast with other countries such as France, Britain or Greece.”

Even though Podemos has worked to broaden its appeal, Gil-Casares calls the upstart party “an extreme-left” movement and “media phenomenon” that came out of nowhere. He claims that the blow to Spain’s two-party system is the result of voter ignorance and frustration with politics as usual.

“We have not managed to get the European Union close to the citizen, in the sense that the average citizen doesn’t understand the EU very well. It’s complicated to explain,” he said. “And in moments of crisis, there’s always the temptation to say the fault is in Brussels. So in these elections, what people do is react in nationalistic terms. They vote against their governments.”

Yet Spanish citizens have also begun souring on the monarchy, which not long ago consistently ranked among the country’s most respected institutions.

On June 2, King Juan Carlos — who had reigned since 1975 and shepherded the country’s transition from dictatorship to democracy — announced he would abdicate in favor of his son, Prince Felipe, following a series of scandals and mishaps that have plagued the 76-year-old ruler for the past three years. The king’s son-in-law had been investigated for fraud and as a result, he and his wife, Princess Cristina, were shut out of official royal engagements. Anti-monarchy sentiment increased when the king himself admitted that he had taken an expensive elephant-hunting trip to Botswana at a time when millions of Spaniards were standing on unemployment lines.

As such, Felipe’s ascension to the throne comes amidst a hostile environment for Spain’s royal family and growing demands by leftists for a referendum on the future of the monarchy itself.

“People are looking at the new king as a sign that things will start to change,” said Gil-Casares. “Felipe was a Washingtonian in the sense that he studied at Georgetown University for three years. He’s 46 and a sign of generational change. We think it’s going to be good.”

Palace intrigue aside, Gil-Casares said he’s focusing on luring potential U.S. investors to Spain while highlighting his country’s long relationship with the United States and its obvious advantage in reaching the nation’s huge Spanish-speaking market.

“When I meet with American investors, I tell them, ‘Listen, you’re going to a country that because of our past prosperity probably has one of the best infrastructures in Europe. The cost of living has gone down because of the crisis, and the productivity of our workers has increased because of labor reforms.’”

The ambassador said 800 U.S. firms now operate in Spain, where they employ 150,000 people. Total U.S. investment in his country stands at roughly $47 billion.

The push toward investing abroad is in fact a transatlantic phenomenon.

“One of the consequences of this crisis is that many Spanish firms are looking abroad for opportunities they don’t find at home anymore,” Gil-Casares said. “In the late 1990s, we started to invest in Latin America, but all of a sudden, the big companies have turned to the United States.”

In 2011, total Spanish investment in the United States stood at €48 billion, up from €42.8 billion in 2010 and €13.6 billion in 2007, the year the crisis hit. That investment is concentrated mainly in Florida, California, Texas, New York and other states with large Spanish-speaking populations.

“Our main objective as an embassy is to raise awareness of the traditional links between Spain and the United States. Even before this country became a country, the first European who set foot on the mainland was Juan Ponce de León. And the first city was St. Augustine [Florida], settled by Spaniards in 1565.”

The ambassador predicted that ultimately, this country’s fast-growing Hispanic population could be a real “game-changer” for Spain.

“According to all forecasts, the Hispanic minority will become much more important in the future. By 2050, white non-Hispanics will form 47 percent of the U.S. population, and Hispanics will be 29 percent,” he said. “This benefits Spain, because we think we have a much better product than is understood in this country. We encourage Hispanic leaders to profit from the opportunity our country might bring them.”

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