Financial Times

Oligarchy at the Core of Spain's Scandals

Spain has achieved a remarkable level of modernisation since its transition to democracy. Yet today it is immersed in a crisis exposing the weakness of its political and economic structures. Contrary to widespread belief, the problem is not a dynamic business sector stifled by corrupt politicians but rather a corporatist economic and political establishment blocking the nation’s creative energy. It is this that lies at the heart of the corruption scandals afflicting the country’s institutions, allegations of which have in recent days reached the very top of the Partido Popular government.

Nowhere is this more acute than in an absence of competition in many sectors of the economy, where a few large corporations often benefit from barriers to entry with government acquiescence. It was this and the corresponding high profit margins – rather than excessively high salaries, as widely perceived – that made Spain uncompetitive during its last growth cycle from 1996 to 2007. The rate of increase in real wages did not exceed that of productivity. Profit margins fuelled inflation. And in response collective bargaining by workers led to increased salaries.

This absence of competition is both cause and consequence of the economy’s lack of dynamism. The private sector is blighted by scant innovation; insufficient investment in human capital, and research and development; fiscal irresponsibility, among the rich and big corporations; and weak corporate governance.

The cost of this connivance of public and private elites is becoming clear in the political system, where parties are increasingly disconnected from the electorate and delegitimised by corruption. This oligarchy is not limited to business and politics. It includes senior members of trade unions, who defend a labour system that leaves millions of young people with miserable working conditions, if they are lucky enough to secure a job; and a mainstream media dependent on advertising revenues from large banks and corporations. It also affects the civil service, which is resistant to reform – a spirit that permeates the political system (all cabinet ministers but one are career civil servants, as are three-quarters of MPs).

There is a degree of collective responsibility in Spain’s predicament – public opinion often turned a blind eye to excesses and corruption in the good times and failed to make its leaders accountable. Self-serving elites exist in all countries, while institutionalised public-private relations are a trait of continental capitalism. But in Spain this enmeshing is often opaque and illicit; and the blocking of opportunities is systemic, preventing hard-working businesses and professionals from competing on a level playing field.

This poses serious questions about how Spain addresses its main economic challenge: poor growth prospects. Its growth model, characterised by low productivity and excessive concentration in low-value-added tasks, has collapsed. In an increasingly competitive global marketplace, it must find new niches. The answer is to boost innovation by unleashing the potential of the country’s highly educated young people. Yet the corporatist blockage obstructs this democratisation of innovation.

Many would be forgiven for disregarding the advances of the past three decades as a mirage. Yet the country has made real strides, from middle-income dictatorship to vibrant democracy. It has made mistakes, but so have others. Its predicament is in part the result of a bubble inflated by low eurozone interest rates set to pay for Germany’s reunification and recession, which Madrid supported heartily in contrast to France or the UK. Europe should give Spain a vote of confidence in its ability to reform, for it has done so before. It has been a loyal European citizen and can still contribute much. But the EU must keep imposing much-needed structural reforms in the country, acting as external enforcer against its corporatist elite.

The Spanish working and middle-class majority, as elsewhere in Europe, are losing patience with a system they believe is rigged against them and increases economic and social insecurity. The mechanisms that channelled the interests of this majority into policy (regulation, unions, truly representative political parties) have been eroded. This combination of anger and lack of representation is toxic and could yet lead to the break-up of the euro through populist politics. Europe can prevent this by transcending national interests and pursuing policies that can return not only Spain but also the rest of the periphery to economic health.

And in Spain it must do so, not through ineffective handouts or futile austerity, but by enforcing true liberalisation and modernisation that breaks the vested interests of an elite that dominates Spanish economic life.