With the global economy in slow gear, many economists now speak of a “secular stagnation” or even “hysteresis.” The latter is the notion that a big shock can permanently damage an economy’s ability to grow. The jobless stop looking for work. Technical skills are lost. Just four years ago, Spain was given this diagnosis, along with Portugal, Ireland, and Greece. Their names gave rise to the term “PIGS,” or countries that needed to be fed bailouts from their partners in the 19-nation eurozone.
Spain has chosen to ignore this verdict of lasting harm from the eurozone’s deep financial crisis and recession. Last month it was declared to have the highest economic growth in Europe. Unemployment remains high at 22 percent, but the rate is down from 26 percent and dipping fast. Industries are roaring back. Tourism has hit a record high.
While Spain never had debt levels like those of Greece, its success in reforming its economy should serve as an example for Athens, which is now on its third bailout. Spain’s comeback may also help defeat the predictions of hysteresis in other countries.
How did Spain recover so fast? As one of Europe’s largest economies and only one generation from the Franco dictatorship, Spain has embraced the European Union even more, raising exports and taking the advice of EU leaders on reforms. It improved tax collection, cut spending, loosened labor laws, and lowered wages and corporate taxes. Banks have made progress in shedding nonperforming loans, especially in the once-bloated housing market. The country was also helped by lower energy prices, a devalued euro, and easy money from the European Central Bank.
These measures have put renewed flexibility and competitiveness into Spanish companies. This year, the economy is expected to grow 3.1 to 3.3 percent. In addition, Spain has set a goal to be a world leader in clean energy technology.
The political discipline to reform was not easy. The center-right government of Prime Minister Mariano Rajoy may face tough opposition in parliamentary elections this fall. Youth unemployment remains stubbornly high at about 50 percent, creating demands for stronger fiscal stimulus.
Ireland and Portugal, too, have performed better than many economists expected. Spain’s stellar performance can be Greece’s North Star. Not believing the naysayers is half the battle.