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How to Gauge Spain's Scandal

Interviewee: Alfredo Pastor, Professor of Economics, IESE
Interviewer: Christopher Alessi
February 12, 2013

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Spanish Prime Minister Mariano Rajoy published his tax returns this past weekend amid allegations that he had been receiving annual cash payments from an illegal slush fund run by his center-right Partido Popular. The news drove up Spanish borrowing costs, while potentially undermining the ability of Rajoy's government to implement painful economic reforms needed to combat Spain's ongoing debt crisis. The scandal will likely have a "limited" effect on Spain's long-term economic outlook, argues Alfredo Pastor, an economics professor at Spain's IESE business school. But, Pastor concedes, "We are creating an impression of uncertainty," and "foreign investment is hesitating a lot."

Could you give an overview of the political situation in Spain, as well as the scandal that is beginning to engulf Prime Minister Mariano Rajoy?

We have a conservative government with an absolute majority. The Catalans have begun asking to reduce their net contribution to the central budget, and that has developed into asking for a referendum to see whether it would be possible to reform the constitution in such a way that Catalonia would for some become independent, and for some have a different relationship with the rest of Spain. That is the political situation. And now we have this episode of these corruption scandals that [are] engulfing the Partido Popular, the party in power.

The heart of this whole business seems to be the financing of political parties. To the extent that some of this financing is illegal, it gives rise to all kinds of small and big corruption. In the last week or so, [there have been allegations that] the former treasurer of the Partido Popular illegally made payments to a dozen important people in the party, including the current head of the government.

What's at stake?

The government will remain determined to implement [economic reforms], and I think that [the scandal will have] little effect. On the other hand, of course, we are creating an impression of uncertainty, and foreign investment is hesitating a lot. There are transactions and financing that have stopped until [it is clear] what is going to happen to Spain. In my view, this is exaggerated because the current scandal of corruption is notorious, but on the other hand is very limited. Most people are just going about their business as usual. But this is the immediate effect and it is an effect that you can see.

We are in a bad economic situation--to see these things happening in the middle of high unemployment, and so on, is something that the population is not going to take peacefully for very long.

In my view, the prime minister would resign if it became very clear that he, in fact, received illegal money; he has said very specifically that he has not. But again, this is going to be a limited crisis. I don't see any reason why things should go beyond that. On the other hand, if the process is not resolved quickly, people [will be] very upset. We are in a bad economic situation--to see these things happening, in the middle of high unemployment and so on, is something that the population is not going to take peacefully for very long.

What are the potential implications of this situation for the rest of the eurozone?

The main effects [of the scandal] that I see are either social unrest or a drying up of foreign investment.

The implications would be very small. None of this would threaten either the survival of the euro or the provisions for the strengthening of the financial sector. Any political scandal would have little short-term influence. The main effects [of the scandal] that I see are either social unrest or a drying up of foreign investment.

At this moment, Spain is part of the problem [in the eurozone]. The current scandal may, at the most, delay our recovery. I don't see any major complications, except that this will delay our recovery as a growing, solid partner. Of course, our role within the European Union is naturally diminished since we are now in the position of asking for help all the time.

How important is a quick Spanish recovery for both the global and U.S. economies?

Not very much, since Spain is a relatively minor player in world trade. What is important is that the Spanish economy stabilizes, so that a deeper recession is not seen as threatening the stability of the entire eurozone.

Domestic demand is going to be severely repressed because of financial constraints, and because of high unemployment and still a high level of household debt. So one of the main engines of recovery should be exports.

Can you sum up the policy responses that the current government has taken?

We have had the beginning of what is going to be a long process of labor reform. And that has gone quite well; the proof is that the unions are dead against it. Of course, you cannot expect a process of labor reform to create employment in the short run. Unemployment has continued growing. Most of the reforms that have taken place are reasonable. We have gone through a period of severe budget restrictions, but, of course, we had a very high deficit. And we need to reduce our level of expenditures. In that respect, the easiest parts have been undertaken--cuts in health care, education, and public investment. The long-term measures, which include reform of the administration, have not been taken up yet.

I tend to believe that we underestimate the solidity of our country. Our economy is in bad shape, but it is still a solid economy. And our society is also a solid society. We have reasonable institutions, and those institutions will continue to function. We will be able to digest these scandals without major trouble.