Spain’s recovery is clouded by politics. Mariano Rajoy has achieved a lot in the two years that he has been prime minister. Growth has finally returned; even unemployment is falling. But as Spain enters a new electoral cycle, the appetite for reform is waning. What’s more, there is a big question mark about what will happen after the next election, which has to be held by March 2016.
Rajoy cannot claim the lion’s share of the credit for Spain’s economic turnaround. That belongs to Mario Draghi, president of the European Central Bank, whose “do whatever it takes” speech in mid-2012 marked the beginning of the end of the euro crisis.
However, Rajoy’s centre-right government has doggedly pursued reform. Most important, it has liberalised the labour market and cleaned up the banks. As a result, competitiveness has been restored and exports are booming.
Meanwhile, conditions in global financial markets have been benign. Investors no longer fear a breakup of the euro zone, but are scared of blowups in emerging markets. As a result, they have returned to peripheral euro zone markets such as Spain. Madrid’s 10-year bond yield is now only 3.2 percent – down from 4.2 percent at the start of the year and a far cry from the 7.6 percent in July 2012.
In the same way that Spain suffered from a vicious spiral during the downturn, it is now enjoying something of a virtuous cycle. Speculative capital is back. The government, for example, was able in February to offload a chunk of stock in Bankia <BKIA.MC>, a bank which until recently was a byword for everything wrong with Spanish finance.