[EDIT: Thanks to an astute comment from a reader of the blog, certain facts and context have been added to correct a mischaracterization of the Spanish economy and its parallels—rather, glaring lack thereof—with the Greek economy. Much thanks to zalacain.]
In 2010, when Greece was in the process of receiving its first—of three—international bailout packages, its fellow Mediterranean nation, Spain, was in some respects soon to face a similar option. Though Spain’s bailout came two years later in 2012, potentially totaling a sum approaching the €110 billion Greece received in 2010, the Iberian nation ultimately tapped into only about 40% of the available funds before its financial institutions were sufficiently recapitalized. (Now, Spain is even a net creditor to some of its European partners.) At the same time, Greece received its second hundred-billion-euro bailout package in 2012, the result of which is now a third round of debt.
From the beginning of their distinct bailout scenarios—however similar in their original conception—the two European Union member nations have charted widely divergent paths to the present-day, with one economy sinking further into crisis (Greece) and the other emerging as the fastest-growing economy in the eurozone.
What was so different for Spain compared to Greece?
A Matter of Dissimilar Economies
Unlike Greece, Spain wasn’t thrown into crisis because the country was already burdened by debt; rather, its economy tanked due to a bursting of greatly inflated housing and construction bubbles, no doubt spurred by the larger-scale trend of the same kind in the United States. An ambitious expansion in construction activity helped Spain ride high prior to the financial crisis of 2007-2008, but afterward, it feel into a deep recession (felt globally) that at one point dragged unemployment levels to 25%—nearly the same as Greece today.
Yet, the areas of overlap between the two countries’ subsequent reaction to their respective bailouts become fewer and farther between the more that superficial connections, like their shared geographic identity relative to Northern Europe, fall away.
A substantially different approach to austerity helped Spain in part avoid the same fate as Greece, steering clear of the snowballing trap of ever-more crippling debt. By implementing spending cuts and reforms to its economy, Spain succeeded in the gradual process of getting its finances in order once again. The success of these measures was made possible through the solid infrastructure and other robust elements of the Spanish economy that can be seen clearly today: its industrial productivity rivals Italy’s—surpasses Great Britain’s—and only Germany manufactures more cars in Europe.
These elements in the real economy were largely absent in the case of Greece. The Greeks likewise passed a litany of austerity measures through parliament, but quite conversely continued to secretly engage in deficit spending far beyond reasonable means in order to prop up an economy that lacked the same structural strength and integrity of Spain’s, instead relying heavily on the ebb and flow of travel, tourism, and hospitality, all of which dried up considerably after the onset of the crisis. All-important cross-border capital flows followed suit; while foreign investment has since recovered in Spain, Greece can hardly keep money from fleeing the country.
Moreover, the political currents in the two countries began to diverge, as if often the case when economic outcomes grow equally disparate for the people. While Spain voted a socialist government out of power in 2011, instead entrusting the center-right government of Mariano Rajoy, Greece replaced its governing coalition by voting the extreme-left Syriza party into power less than a year ago. Though the leftist Podemos party is still a sizable minority in the General Courts (the Spanish parliament), the current government is likely to remain in power after such favorable economic results during its time in office. Greece’s socialist administration, meanwhile, enjoys no such security even in the near-term as its governing coalition teeters on the constant threat of reshuffle.
As we enter the third quarter of 2015, Spain’s economy is shining bright as the most resilient on the continent. A gauge of services activity from Markit registered near a 9-year high while similar measures for the euro area as a whole fell marginally. Spain was one of the first EU members to exit recession (in 2013), has far outpaced the rest of Europe in GDP growth, and continues to absorb travel demand that has diverted from Greece: Tourism is actually at record levels. IMF estimates call for a 3.1% increase in Spanish GDP this year, twice the average rate for the other 19 eurozone nations.
While the ECB QE (money printing) program surely had something to do with the turnaround for the eurozone broadly, some point to the precipitous drop in oil prices as another advantage for Spain, as it imports 75% of its energy resources, roughly 50% more than the average among its European neighbors. This, however, is somewhat mitigated by the growth (both in domestic use and exports) of renewable energy solutions such as wind power. By and large, Spain could never have dug itself out of such a hole without smart fiscal policy and a sharp rebound in its underlying productivity.
Greek Prime Minister Alexis Tsipras (pictured) announced on Wednesday that negotiations with the country’s creditors are nearing a resolution, with the two sides hashing out how the most recent €86-billion bailout will be implemented. Whatever form the austerity measures attached to this third bailout take, the Greek government would be wise to take a page out of Spain’s playbook. Said playbook may as well be titled, “The Path Toward Productivity,” because no matter what changes it implements, Greece cannot recover without this goal in mind.