On Sunday November 20, Spain elected a new conservative government. Garnering 44% of the vote, the Partido Popular was lavished by the d'Hondt electoral system with a comfortable absolute majority in the Congress of Deputies as well as the Senate. The participation of 72% of the voters must be said to be satisfactory under the dire economic circumstances. People knew a government of PP will take away even more of their treasured welfare state benefits – and even so, they voted for Mariano Rajoy.
According to the Constitution, the new government will not take office until four weeks after the elections, which is to say shortly before Christmas. The new Prime Minister, a somewhat reserved and taciturn man, is not an economist and - though several times a Minister - is untested in the top governmental position. It may have been typical of his cautious style that the several press apearances made on the day after the elections were handled by the secretary general of his party, not by himself.
According to observers, Rajoy's inability to speak English will not help him much in the coming fight to protect Spanish interests in the EU. That demanding leadership will have to be assumed by a strong Minister of Finance. One leading candidate for the post at this point may be the former Minister of Finance and former head of the IMF (2004-2007), Rodrigo Rato. Currently director of one of the struggling banks of Spain, Mr. Rato had a meeting with Rajoy the day after the election. Another candidate is Cristobal Montoro, also a former Minister of Finance and most recently economic spokesperson for his party. While the former obviously has the required language skills, media speculation is divided regarding the English ability of the latter. Other candidates are also rumored, but Rajoy evidently is determined to keep his selection process confidential.
The two “enemies” identified by Rajoy during his campaign were Spain's huge unemployment (22%) and the national debt problem. He is certainly right in pointing them out, but alleviating them is not going to be merely a matter of policy change. These problems are structural, embedded in the system of labor legislation and the de-facto federal system of government.*) Flexibility in the labor market is the key issue where employment is concerned. To get employers to hire, they must also be able to fire, and that is very difficult according to the law dating from the 1980s. The labor law was modified last year to make it less expensive for employers to fire employees, but it will still cost an employer prohibitive amounts in severance pay to adjust his firm to the much inferior market conditions of these crisis years. This is not obvious from a first reading of the rules. As pointed out in a recent IMF report,
The two “enemies” identified by Rajoy during his campaign were Spain's huge unemployment (22%) and the national debt problem. He is certainly right in pointing them out, but alleviating them is not going to be merely a matter of policy change. These problems are structural, embedded in the system of labor legislation and the de-facto federal system of government.*) Flexibility in the labor market is the key issue where employment is concerned. To get employers to hire, they must also be able to fire, and that is very difficult according to the law dating from the 1980s. The labor law was modified last year to make it less expensive for employers to fire employees, but it will still cost an employer prohibitive amounts in severance pay to adjust his firm to the much inferior market conditions of these crisis years. This is not obvious from a first reading of the rules. As pointed out in a recent IMF report,
“While Spain scores well on the length of notice periods and on procedures, it has among the highest severance payments and a very restrictive interpretation of fair dismissals ... . Severance payments typically depend on whether the dismissal is considered fair or unfair. But in Spain, due to the very restrictive interpretation of fair dismissals, about 90 percent of lay-offs of permanent workers are treated as unfair ... . In 70 percent of the cases, firms prefer to pay the higher severance payments upfront rather than going through a trial. The relevant severance payment is thus the one that applies to unfair dismissals. Severance payments are 20 days per year of service in case of fair dismissals and vary between 33 and 45 days per year of service for unfair dismissals ... . This is much higher than EU15 average severance payments ...” (IMF Working Paper. “The Spanish Labor Market in a Cross-Country Perspective.” Prepared by Florence Jaumotte. European Department. Authorized for distribution by James Daniel. January 2011, p 10.)
Excepting those who are apprentices or short term contract employees, people who are normally employed in Spain have a contract of indefinite duration, dismissible only with severance pay as described above. Draconian measures will be required to change this – but Rajoy now has at least the votes in parliament required to make the change, provided he can also rise above the storm of protest that is likely to follow.
Rajoy's second enemy was said to be the debt problem, but it is really the quasi-federal structure of Spain which is the most serious impediment to handling it. While public borrowing at the national level seems to be well under control, the autonomous regions that make up the country each have considerable freedom to make their own decisions about financing. Under the autonomies there are the provinces which also have the right to assume debt according to certain guidelines. That goes as well for the municipalities, which are not allowed to get indebted beyond 75% of the current year's budget. Checks on delinquent cases are apparently non-existent, or limited to notification by the Ministry of Finance that they have to put their house in order (to the extent they find out at all what is going on.) The upshot is that the level of public indebtedness in Spain appears to be a phenomenon beyond the knowledge, supervision or control of anybody. If Rajoy can change this he will have to take on the constitutional system that authorizes the budgetary freedom of the autonomous regions, most recently accepted by his predecessor Zapatero in the case of Catalunya in 2007. A long shot, but Spanish posterity should thank him if he succeeds.
In the interim, there are easier targets which could produce substantial improvements: public over-employment and excessive public spending. Consider the local public health system. Spain has a very generous policy of both free and subsidized medication – an obvious target in itself for cuts. But there is more here: only doctors employed in the local public health centers have the right to authorize prescriptions for this free medication. Private practitioners are perfectly legitimate, except they cannot authorize prescriptions for free medication. So if I need more expensive medication and want it free, I have to take my private doctor's prescription to the public health center and get it approved there, before going to the pharmacy. Two doctors doing the work of one. Then again, it turns out that the publicly employed doctor leaves his office at the public health center at 1 PM, because he or she has to attend to his/her private practice. A gold mine for these MDs - double salary every day.
Rajoy clearly has a job to do.
*) According to the 1978 Constitution Spain is a unitary state (article 1). The powers granted to the main territorial subdivisions (the Autonomous Communities) are, however, substantial and roughly comparable to those of federations like Germany or Canada.
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