Spain in the EU: The Road to Economic Convergence

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Spain in the EU The Road to Economic Convergence

Mary Farrell

farrell/94237/crc

25/1/01

Spain in the EU

4:27 pm

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farrell/94237/crc

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4:27 pm

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Also by Mary Farrell EU AND WTO REGULATORY FRAMEWORKS: Complementarity or Competition?

farrell/94237/crc

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Spain in the EU The Road to Economic Convergence Mary Farrell Senior Lecturer University of North London

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© Mary Farrell 2001 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1P 0LP. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The author has asserted her right to be identified as the author of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2001 by PALGRAVE Houndmills, Basingstoke, Hampshire RG21 6XS and 175 Fifth Avenue, New York, N. Y. 10010 Companies and representatives throughout the world PALGRAVE is the new global academic imprint of St. Martin’s Press LLC Scholarly and Reference Division and Palgrave Publishers Ltd (formerly Macmillan Press Ltd). ISBN 0–333–74963–4 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Farrell, Mary, 1956– Spain in the EU : the road to economic convergence / Mary Farrell. p. cm. Includes bibliographical references and index. ISBN 0–333–74963–4 1. European Union—Spain. 2. Spain—Economic conditions—1975– I. Title. HC240.25.S7 F37 2000 338.946—dc21 00–053064 10 10

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Printed and bound in Great Britain by Antony Rowe Ltd, Chippenham, Wiltshire

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Fue grande el alma castellana cuando se abrió a los cuatro vientos y se derramó por el mundo; luego cerró sus valvas y aún no hemos despertado…. ¿Está todo moribundo? No, el porvenir de la sociedad española espera dentro de nuestra sociedad histórica, en la intrahistoria, en el pueblo desconocido, y no surgirá potente hasta que lo despierten vientos y ventarrones del ambiente europeo. Miguel De Unamuno, En torno al casticismo

Contents List of Tables

x

List of Figures

xi

List of Appendixes

xii

List of Abbreviations

xiii

Introduction and Acknowledgements

xv

1

From EC to EMU: the Challenges for Spanish Convergence European integration – the promised beneﬁts The Maastricht Treaty and convergence Real convergence and cohesion Challenges for Spain

1 3 6 14 16

2

The Europeanisation of the Spanish Economy The productive system Sectoral shift Concentration and ﬁrm size Foreign direct investment FDI – origins and sectoral distribution The impact of FDI Trade ﬂows and European integration Liberalisation effects Trade ﬂows – geographic and sectoral changes Balance of payments and the trade deﬁcit Conclusion

20 21 22 25 28 28 31 33 34 35 40 42

3

The Labour Market, Unemployment and Divergence Why is unemployment so high? Labour market proﬁle Principal labour market features Features of unemployment Policy and labour market reform

46 47 57 58 60 62

vii

viii Contents

European integration and employment policy Conclusion Convergence and cohesion

68 71 74

4

Towards Monetary Union – and Beyond Monetary policy – the early years ERM entry and its aftermath Towards monetary union Convergence programmes and ﬁscal policy EMU – the challenges for Spain Spain and EMU – the cost and beneﬁts Conclusion

78 79 83 87 89 92 93 94

5

The Public Sector and European Integration Origins and problems of deﬁcit spending The emerging public sector European integration and the public sector The challenge of reform Tackling public sector reform The pension sector Regional government and ﬁnancial autonomy Privatisation and the public sector Spain and EU ﬁnancial ﬂows Conclusion

95 96 97 102 102 105 105 108 116 119 120

6

Regional Diversity and Convergence Regional development proﬁle Regional growth – facts and trends Inter-regional convergence Regional convergence with the EU Regional conditions and convergence Regional policy and European integration Spanish regional policy The EU and the regions Conclusion

123 124 124 128 131 132 137 138 141 145

7

Spain in the EU: 2000 and Beyond Convergence – past problems and current issues Real convergence – an assessment

152 153 158

Contents ix

Bright future or bleak prospects? The future EU – implications for convergence Conclusion

164 168 172

Appendixes

175

Notes

199

Bibliography

206

Index

213

List of Tables 1.1 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 3.1 4.1 5.1 5.2 5.3 6.1 6.2 6.3 6.4 7.1 7.2

Convergence in the EU, 1998 Sectoral contribution to GDP Structure of employment, 1980–96 Sectoral contribution to employment, Spain and EU Mergers and acquisitions in the EU, 1990–98 Foreign direct investment in Spain, 1970–93 Geographical origins of Spanish FDI Member state share of intra-EU FDI inﬂows and their importance relative to GDP, 1992–97 Evolution of the external sector, 1986–97 Employment classiﬁcation, 1997 Inﬂation trends, 1986–98 Evolution of deﬁcit and debt, 1975–98 Decentralisation of the public sector EU–Spain ﬁnancial ﬂows, 1992–99 Output and incomes in the regions, 1997 Macroeconomic impact of the Structural Funds Regional distribution of Structural/Cohesion Funds Average regional income, 1998 Stability and Convergence Programmes, 1999–2002 Developments of Spanish public ﬁnances, 1993–2000

x

13 22 23 25 27 29 30 33 40 59 89 100 110 119 130 142 143 145 154 155

List of Figures 5.1 6.1

The Toledo Pact: principles for reform Typology of regional growth, 1985–95

xi

107 127

List of Appendixes 1 2 3 4 5 6 7a 7b 7c 8a 8b 9 10 11 12 13 14 15 16

The Spanish public sector, 1975–95 Financial ﬂows between Spain and EU, 1986–97 Spanish regional unemployment, 1998 Spain – key employment indicators Structural and Cohesion Funds receipts, 1992–99 European Union macro-structural features: similarity and diversity Regional Indicators – economy Regional Indicators – labour market Regional Indicators – demography and education Spanish and European Regional Policy, 1983–96 Total regional funds, 1983–96 Member states share of EU operating expenditure GDP growth in the Cohesion countries, 1986–99 EC trade liberalisation index, 1985–93 Spain–EU trading relations, 1985–98 Convergence in public spending, 1986–97 Convergence in government debt, 1986–97 Macroeconomic indicators: output, employment, and labour costs Council Opinion on Spanish Stability Programme, 1998–2002

xii

175 176 177 178 181 182 184 185 187 188 189 190 191 192 193 194 195 196 197

List of Abbreviations AEAT ALP CAP CCOO CEC CES CiU EC ECB ECOFIN EMI EMU ERDF ERM ESF EU FCI FDI GDP GDFC GNP ICF INI INH INEM IRPF LET LOFCA M&A NAIRU RCA R&D

Agencia Estatal de Administración Tributaria Activos liquidos en manos del público Common Agricultural Policy Comisiones Obreras Commission of the European Communities Consejo Económico y Social Convergència i Unió European Community European Central Bank Economic and Finance Ministers European Monetary Institute European Monetary Union European Regional Development Fund Exchange Rate Mechanism European Social Fund European Union Fondo de Compensación Interterritorial Foreign Direct Investment Gross Domestic Product Gross Domestic Fixed Capital Gross National Product Inter-territorial Compensation Fund Instituto Nacional de Industria Instituto Nacional de Hidrocarbos Instituto Nacional de Empleo Impuestos sobre la renta de personas físicas Ley del Estatuto de los Trabajadores Ley Orgánica de Financiación de las Comunidades Autónomas Mergers and Acquisitions Non-accelerating inﬂationary rate of unemployment Revealed Comparative Advantage Research and Development

xiii

List of Abbreviations xiv

SEA SEPI SME UGT VAT

Single European Market Sociedad Estatal de Participaciones Industriales Small and Medium sized Enterprises Unión General de Trabajadores Value Added Tax

Introduction and Acknowledgements The purpose of this book is to offer an account of how Spain developed within the context of its membership of the European Union up to the time when it joined with ten of the other member states to become a founding member of European monetary union on 1 January 1999, just 13 years after accession to the European Community. The book’s focus is on the economic development and internationalisation of Spanish industry, the labour market with its ever-present challenge to reduce an unemployment rate that continually topped European levels, the regional development and diversity among the autonomous communities that were newly created by the 1978 Spanish Constitution, and the continual and often contradictory challenges to the public sector and economic policy generally. The basic framework of the modern democratic state that emerged in the aftermath of Francoism was set out in the new Constitution, and its practical realisation subsequently pursued as the authorities sought to create a public sector comparable in size and structure to that already well-established in the other European states. Membership of the European Community was anticipated to bring beneﬁts to the country on a number of fronts: the modernisation of the economic system and greater access by the national industry to the larger European market; modernisation of the political and institutional system, using the European model of democracy as the basis for the creation and consolidation of the new national democracy; and the opportunity to integrate Spain within international society, thereby giving recognition to the legitimacy of the new democracy. Moreover, the promised beneﬁts were expected to raise the standard of living for the country as a whole in a gradual convergence to the European Community level of welfare. In essence, these varied outcomes suggested the requirement of a complex convergence of the economic, political and regional system within Spain in order to achieve levels of development comparable to the European average. As the chapters that follow show, the gap between the actual level of Spanish economic development in the ﬁrst half of the 1980s and that in the other advanced member states was quite signiﬁcant. With xv

xvi Introduction and Acknowledgements

extremely high levels of inﬂation and an uncompetitive national industry long accustomed to government protection behind high tariff barriers, it was clear that convergence towards the European average could not be regarded as an automatic outcome liable to follow on from the mere fact of accession. Instead, closing the economic gap would require key strategic decisions to be made by the national authorities, and the implementation of a number of political options both before and after the entry date of membership. Striving for convergence was never going to be easy, given the enormous difference in per capita income levels, the diversity of both intraregional and inter-regional development, the persistent problems of inﬂation and unemployment that remained features of the Spanish economy long after the other European economies had recovered from economic crisis and structural changes to resume economic growth in the mid-1980s. Indeed, the enormity of the challenge became even more apparent in the years following accession and particularly as the European Union itself moved towards deeper levels of integration, from the Single Market programme to European monetary union. The chapters that follow will consider how Spain met these two challenges as it continued to seek closer economic convergence with its European partners. The proposed monetary union seemed, in fact, to complicate matters considerably by introducing speciﬁc targets to be met by any country seeking to become a member of the euro-zone – the convergence criteria set down in the Maastricht Treaty on inﬂation, public sector deﬁcits and national debt, interest rates and exchange rate stability certainly posed a new set of challenges for Spain. In practice, the nature of convergence changed, and it was no longer a question of how and when Spanish per capita income levels would rise to the level in other advanced member states. The goalposts had changed, and the national political authorities had to meet certain additional requirements in order to qualify for the next stage of European integration with the promise, but not the certainty of further economic progress. In the wake of the Maastricht Treaty, convergence was now deﬁned in terms of certain macro-economic variables and required therefore that the government take much tighter control of the public ﬁnances, adopt a more neo-liberal market-oriented economic policy, and make strenuous efforts to reduce the size of the public sector even before the latter had grown to levels comparable with those of other European democracies. This book offers an account of the path followed by Spain in its search for economic modernisation and progress on the one hand, and

Introduction and Acknowledgements xvii

on the other its desire to be a committed member of the European Union. Over the entire period, the country has beneﬁted from this membership, and the national support and enthusiasm for European integration never wavered even during the worst periods of economic recession such as was witnessed in the early 1990s. Indeed, the pace of economic growth was only really established one year after monetary union, although the national authorities were already committed by the end of the 1980s to doing whatever was necessary to qualify for entry to the single currency. The structure of the book was decided in part by the need to consider the convergence criteria established in the Maastricht Treaty, and therefore the chapters that follow consider how the Spanish authorities sought to meet the criteria. Other aspects of the national economic and political system, however, which were not included in the Maastricht Treaty, also need to be considered in the pursuit of convergence. Unemployment was regarded as one of the most difﬁcult of the challenges facing the national authorities, and one that could derail successful efforts in other areas. Eventually, unemployment levels began to fall so that by mid-2000 the Spanish government was able to announce that the country needed to import labour to meet certain sectoral needs. Regional disparities continued to exist, although certain regions had made impressive strides forward to cap the European average per capita income levels. In fact, a mere 18 months after qualifying for monetary union, a Financial Times survey of Spain opened its report with the description of the country as ‘optimistic, assertive, successful’ (FT, 13 June 2000). I would like to conclude this introduction by expressing my sincere thanks to a number of people whose help and support enabled this book to be written more or less on schedule. Firstly, the grant of a sabbatical from the University of North London freed up some time to concentrate upon the research and writing, and I am grateful to friends and colleagues in the School of Area and Language Studies for continued practical and moral support. I would also like to thank a number of people in both the UK and Spain for various assistance in the completion of this work: Agustín García Laso in the University of Salamanca provided some invaluable advice on Spanish language sources in the area as well as being a well-informed expert on the Spanish economy; Charo Parra Neches had both an impressive knowledge of Spanish history and the ability to bring it to life in the most fascinating manner, as well as possessing detailed knowledge of the best tapas bars in Madrid; Paz Campos provided an objective, and often

xviii Introduction and Acknowledgements

entertaining, insight into contemporary Spanish political and social developments; thanks to Jorge Aragón Medina, in the Consejo Económico y Social, for his pertinent observations and wide-ranging opinions on Spain in the European Union; and to Helen Watson for her timely interventions, enquiries, and mostly for long-standing friendship. Finally, my heartfelt thanks to two people whose editorial, technical and professional skills ensured that this book eventually saw the light of day: David Jones and Sabine Wolff. Any errors remain my sole responsibility. MARY FARRELL

1 From EC to EMU: the Challenges for Spanish Convergence

Spain is the problem and Europe is the solution. (José Ortega y Gasset)1 Without any doubt, the year 1998 will go down in the economic history of our country as the year of our entry to EMU. This event is comparable in importance to the Stabilisation Plan of 1959 or to Spain’s accession to the then EC in 1986. (Rodrigo Rato, Minister for Economy and Finance)2 In January 1986, Spain and Portugal were admitted to the European Community (EC), in the third enlargement of the community established under the Treaty of Rome.3 For Spain, accession to the EC ended 24 years of the entry negotiations which succeeded the initial application for membership made under the Franco regime. 4 It also marked a deepening of the economic relations between Spain and the EC, taking a step forward beyond the association agreement which the two had signed in 1970 under the Luxembourg Accord when a common market in agricultural and industrial goods was agreed (Harrison, 1993). Each successive advance made by the EU since 1986 has taken Spain further along the path of European integration, offering the promise of national economic and political development at each stage. And at each advance, Spain was forced to consider how the national policies might conform to the EU acquis communautaire, and how the economy could adapt and compete within the enlarged European economy. The immediate follow-up to accession was two-fold. Firstly, Spain had to dismantle the protectionist measures that had shielded Spanish industry from international competition over many decades. 1

2 Spain in the EU

The removal of tariff barriers was part of the conditions of accession, and Spain was granted seven years to bring the national tariff structure into line with that of the European Community. It was a reasonable expectation that trade liberalisation would therefore impose adjustment costs on national industry generally, and that the readjustment costs would fall disproportionately across the economy. Nonetheless, the Spanish authorities were very strongly committed to total liberalisation, even though the conditions of entry were regarded by some as harsh (Harrison, 1993).5 As a consequence, the national authorities embarked on the long and arduous process of removing a system of tariff protection, some of which dated back to the 1930s. Intermingling with the accession conditions was the liberalisation programme introduced throughout the European Community as a consequence of the Single European Act (SEA). The Single Market Programme imposed a whole new set of liberalisation requirements, with almost 300 measures covering the free movement of goods, services, capital and labour. All the member states were expected to comply by removing physical, technical and ﬁscal barriers to the ‘four freedoms’, according to the timetable set down by the European Commission. The timetable, moreover, anticipated that the Single Market would be in place by the end of December 1992. Spain was therefore obliged to pursue both sets of liberalisation requirements simultaneously, those relating to accession and the Single Market Programme. Between the years 1986–98, economic policy-making was conducted in the context of EC/EU membership.6 Generally, advances in European integration were embraced enthusiastically by the Spanish government, and only slightly less so by the broad sweep of society. In 1989, the monetary authorities announced the entry of the peseta into the Exchange Rate Mechanism (ERM) of the European Monetary System, opting for the 6 per cent ﬂuctuation band rather than the narrower 2 per cent band. During the ERM crisis in 1992/93, large speculative movements forced the peseta out of the system but it rejoined in a matter of months, when the ﬂuctuation band was widened to 15 per cent for all members. The decision to join the ERM marked, in effect, the government’s early commitment to European monetary union, and its desire to take Spain into such a union at the ﬁrst available opportunity. Monetary union offered a much sought-after opportunity, the goal of price stability. Inﬂation had dogged the Spanish economy since the economic crisis of the 1970s, and continued as a prominent feature of the newly-established democracy during the 1980s, when the other

From EC to EMU: Challenges for Convergence 3

European economies ﬁnally began to show some signs of bringing inﬂation under control. Many analysts considered the national economy to be inﬂation-prone, and believed that only external discipline could keep the inﬂationary tendencies at bay (Alcaide, 1995). In a small way, this attitude and the set of expectations directed towards European monetary union mirrored broader expectations about the beneﬁts of European integration that drove the country to membership in the ﬁrst place, and which continued to fuel the Euro-enthusiasm of the 1980s and 1990s.

European integration – the promised beneﬁts Three principal beneﬁts of European integration may be identiﬁed: legitimacy of the new democracy; modernisation of the political and economic system; and economic welfare. Standing on the threshold of the ﬁrst decade of democracy, European integration offered the promise of political stability, and acceptance among the international community. Membership of the European Union offered the ﬁnal proof of the legitimacy of Spain’s ﬂedgling democracy, since only countries with a stable democracy were admitted to the community. The three members admitted in 1986, Spain, Portugal, and Greece, had all ﬁnally ended long periods of authoritarian rule, making them eligible to participate in European integration. For Spain, acceptance into the EU marked the seal of approval for the political changes effected in the wake of Francoism. Moreover, accession to the EU implied the belief in the continued stability of the national political system. As the decade of the 1980s came to a close, these expectations were fully met, conﬁrming Spain as a mature democracy. The second promised beneﬁt lay in the potential which membership of the EU offered for modernisation of both the political and the economic system. At one level, the EU represented a set of values, linked to European social democracy, which could be incorporated into the national political system. Europe, and the EU in particular, represented everything that was modern and progressive. European integration was the vehicle of change for the new Spanish political elite, epitomised in the Socialist government and by the bureaucrats within the public sector. It offered a means by which the machinery of the new political system could develop, the model for the formulation of new policies, and a whole new agenda of objectives across the political and economic spectrum, all revolving around the modernisation of the economy and the political institutions.

4 Spain in the EU

The EU model, frequently represented as the EU average, was the benchmark against which to judge the progress towards, and the success of, modernisation. This is increasingly evident in the recent studies of the impact of European integration (Martín, 1997; Sevilla, 1997). Whole areas of policy became ‘europeanised’ in both content and structure, even those policy areas for which no EU-level policy existed. In areas where EU-level policy did exist, the national political elite found it easy to emulate the entire policy-making framework that operated at the supranational level, when all that was required in practice in terms of a national response was limited participation. In the case of technology policy, for example, the national government devised a multi-annual programme of support for the technological system, with a wealth of initiatives to encourage innovation and business-led research, that was very closely modelled on the EU Framework Programme. The example of technology policy also highlights how EU policy-making offered the opportunity for policy innovation and became the model for policy in areas where limited initiatives existed at the national level. The Spanish public sector was, in the 1970s, one of the smallest in Europe. In 1975, it accounted for around 25 per cent of Gross Domestic Product (GDP) compared to a European average of 40 per cent. From the beginning of the 1980s, there was a steady increase in public spending to establish a public sector commensurate with that appropriate to a European social democratic state. Democracy had unleashed many social demands and pent-up expectations, which the public sector sought to accommodate. Almost immediately, the public sector had opportunities to respond to these demands and expectations, for the economic crisis of the 1970s and the consequent rise in unemployment provided the basis for higher levels of spending on unemployment beneﬁts and subsidies. Related areas, such as health care and pensions, also began to cause an expansion in the public sector spending programme. If public spending rose towards European levels, common sense demanded that tax receipts to ﬁnance the spending should also rise. Otherwise, the public deﬁcit and national debt have to carry the burden of higher government spending. In the event, this is what happened in Spain by the mid-1980s since the ﬁscal system had limited success in the catch-up process. The changing structure of the public sector would also pose problems in the modernisation process, most prominently in the regionalisation of the state and the ﬁnancing arrangements for the regions. It was almost two decades after the approval

From EC to EMU: Challenges for Convergence 5

of the 1978 Constitution, which set up the system of regional autonomous communities and decentralised government, before ﬁrm arrangements were established to give the regions ﬁnancial autonomy and ﬁscal responsibility. Until that point, the majority of the regions depended almost entirely on the receipts from the central government to ﬁnance the decentralised responsibilities. Increasingly, ﬁnancial ﬂows under the EU Structural and Cohesion Funds began to make a prominent contribution to regional ﬁnances. European integration was also expected to contribute to the modernisation of the economic system, although not without some adjustment costs. The traditional economic theory of integration predicted trade creation and diversion effects, as consumers switched to low-cost producers and suppliers (Viner, 1950). As these effects spread, some sectors would gain and others lose, with the consequent impact on output and employment. However, in the longer term the increased competition was expected to produce welfare and efﬁciency gains, with new patterns of trade ﬂows (Mayes, 1978; Sapir, 1992). Spain anticipated the need for the economic sector to modernise in the face of the increased competition which its hitherto highly-protected sectors would face against the more advanced sectors in other European economies. In order to prepare for the intensiﬁed competition, the government introduced the Law of Reconversion and Reindustrialisation in 1984, launching a programme of modernisation of the largely traditional manufacturing sector (Salmon, 1991). A White Paper published by the Spanish government in 1983 set out the strategy for modernisation, basing it upon a two-pronged attack, on productivity and on the promotion of investment and technological innovation in those activities which showed good potential for the future. From 1984, the modernisation plan was focused on cost cutting, reinvestment and mergers, and building up new markets. It is noteworthy that this impetus came directly from the government at the time, and although it would later prove costly in terms of job losses, the initial approach adopted by the government was a consensual one, building up support for the government programme across the sectors. The stance taken by the authorities was one which sought to spread the view that modernisation was a necessary prerequisite to European integration. Popular support for European integration was linked to expected beneﬁts surrounding improved economic welfare. European integration promised the opportunity for Spain to catch up with the rest of Europe, principally to the advanced member states that included

6 Spain in the EU

France, Germany and Britain. Employment levels, inﬂation rates and per capita income levels in the EU set benchmarks for the Spanish economic indicators to reach. In the years since accession, one of the key targets for the Spanish government was that per capita income should rise to the European Union average. Although there has been a slow, steady movement towards the EU average (Appendix 10), national per capita income remained stubbornly below 80 per cent of the EU average. The failure of the indicator to move beyond this level has dogged the political debate over the impact of integration, and convergence of the per capita income remains a central objective in the government’s Convergence Programmes. It also emerged as an important unifying issue, linking the aspirations of economic interests and social groups. Faster economic growth was expected to bring opportunities for job creation, and the chance to cut the higher than average unemployment rates. Greater prosperity would mean higher incomes and improved standards of living, bringing greater economic and social cohesion both within Spain and between Spain and the European Union. Economic integration offered the possibility to reduce the disparities in regional development, in income levels, in productive and technological capability. Integration through trade would give Spanish industry opportunities for expansion in an enlarged market, and national consumers would have a greater range and quality of goods from which to choose. The three broad sets of beneﬁts outlined here coalesced in overwhelming support for European integration, with the Spanish government acting as the principal driving force in the whole process. From accession, throughout the various stages of EU development that followed, the government was the main agent of change in the ‘europeanisation’ of the national institutional system. It embarked on the liberalisation of the tariff system, granted autonomy to the central bank in 1994 as part of its concerted policy on price stability, and early in the term of membership decided that Spain would follow the path of monetary union. All other economic policies were increasingly coordinated with this broad aim in mind.

The Maastricht Treaty and convergence In many ways, the aspirations and expectations directed towards the European Union were for convergence with the EU. Although there was no explicit reference to convergence until the Maastricht Treaty

From EC to EMU: Challenges for Convergence 7

speciﬁcally referred to the convergence requirements as a condition of entry to monetary union, nonetheless Spain sought both political and economic convergence from its accession to the European Union. There were several prominent disparities clearly evident from a comparison of such economic indicators as per capita income, unemployment, employment and inﬂation. In 1985, the Spanish per capita income stood at around 69 per cent of the EU average; while the EU unemployment rate was 9.9 per cent, Spain had 21.6 per cent unemployment; the EU employment rate was 59.8 per cent, and the Spanish rate was 44.1 per cent (CEC, 1999a). The Spanish inﬂation rate was close to 9 per cent, just over double the rate for the European Union. Clearly, there was much catching-up to be done in the years after membership. The economic boom that occurred during the years 1987–91 did not bring about the convergence with the EU that had been so eagerly anticipated. Instead, at the start of the 1990s, many of the economic disparities referred to previously continued to exist. However, by then the issue of convergence was at the top of the EU agenda in two areas. Firstly, the Maastricht Treaty had established the necessary conditions for eligibility to monetary union – the so-called convergence criteria. 7 Secondly, although less prominent, the doubling of the Structural Funds in 1988 followed by the introduction of the Cohesion Fund in 1994 provided the European Union with practical instruments to achieve one of the fundamental objectives set out in the Single European Act – namely, the reduction of economic and social disparities between richer and poorer regions. In the case of the ﬁrst objective, at issue was the achievement of nominal convergence. In the second, the intention was to bring about real convergence. First, we consider the issue of nominal convergence, and the requirements which Spain had to face in order to qualify for monetary union. Then, issues surrounding real convergence are examined, before moving on to consider the nature of the challenges facing Spain. The Maastricht Treaty set out four convergence criteria which prospective members had to meet: 1. 2.

Price stability: an average inﬂation rate not exceeding by more than 1.5 per cent that of the three best-performing member states. Government budgetary position: an annual public sector deﬁcit not exceeding 3 per cent of GDP, and a public debt not exceeding 60 per cent of GDP.

8 Spain in the EU

3.

4.

Currency stability: through membership of the narrow band of the Exchange Rate Mechanism (which allowed ﬂuctuations of less than 2.5 per cent around the central rate) for at least two years, with no devaluations. Interest rates: an average nominal long-term interest rate not exceeding by more than 2 per cent that of the three bestperforming member states.

The Treaty also set out the timetable for monetary union and the introduction of the single currency. Stage II was set for January 1994, when the European Monetary Institute was established with the aim both of carrying out the necessary tasks to see the project through to completion, and of monitoring the national governments’ compliance with the criteria. Stage III was, according to the Treaty, to commence in one of two ways: either on 1 January 1997, if a majority of states met the convergence criteria; or, on 1 January 1999, between the member states that met the criteria (Hix, 1999). In the event, the single currency was launched on the latter date, with 11 member states participating in monetary union. The Maastricht Treaty included detail on the framework for the conduct of monetary policy under the proposed monetary union. This included an independent European Central Bank, whose primary objective was the goal of price stability, with responsibility for implementing monetary policy, holding and managing the ofﬁcial reserves of the member states, and conducting foreign exchange operations. Effectively, monetary policy would be set by the ECB for the whole of the monetary union. Member states within the union would no longer be able to set monetary policy to suit particular domestic conditions, and the interest rate was ‘given’ by the European Central Bank. National governments would give up one of the central instruments of macro-economic management, monetary policy, in return for the promise of greater stability within the wider arena of the single currency zone. They would also give up the use of the exchange rate, traditionally used by governments (including the Spanish government) to cover a temporary loss in competitiveness. The route to monetary union proved to be a tortuous one, with the EU undergoing a currency crisis in the wake of speculative attacks on the ERM over the period 1992/93 which threatened to derail the whole project (Dinan, 1999). But, apart from the political disputes surrounding the project, certain fundamental objections were raised that questioned the suitability of monetary union for nation states. These stem

From EC to EMU: Challenges for Convergence 9

from theoretical work on monetary union developed by the economist Robert Mundell, concerning optimum currency areas (Mundell, 1961). These objections are examined here, since they have implications for the Spanish case and for national economic conditions. Mundell examined the case for monetary union between sovereign states, with independent monetary policies, individual exchange rates, and the general freedom to conduct macro-economic policy according to national needs and preferences. As an independent state, outside the monetary union, the government has the freedom to use monetary policy, and speciﬁcally the exchange rate, to correct disequilibria due to so-called asymmetric shocks. Where the economic cycles of states (whether recessions or booms) do not coincide, governments are free to use different macro-economic policies appropriate to the recessionary or expansionary conditions prevailing. Under monetary union, however, one macro-economic policy applies throughout the zone, disregarding any diversity of economic conditions. Thus a government loses one of the principal instruments of macro-economic management. The issue then is whether there are other mechanisms of adjustment that can operate to correct economic disequilibria associated with recession or economic boom. There are other possibilities – particularly in terms of factor mobility or ﬁscal transfers. If the unemployed labour in the country (or region) undergoing a recession can move to another country where jobs are available, and/or capital can move from areas where it is underemployed to areas where demand for capital is high, then prices adjust to deal with the asymmetric shock. An alternative process operates through the use of ﬁscal transfers, from the growing region (ﬁnanced by higher taxes) to the region experiencing recession and weak demand. Similarly, a budget deﬁcit could be operated so as to expand demand in the state experiencing recession. In the light of these observations, monetary union among independent states is workable provided that alternative adjustment mechanisms exist to correct fundamental disequilibria associated with asymmetric shocks, given that members have given up one of the primary instruments of monetary policy. Where such mechanisms do operate the possibility then exists to create a monetary union. Moreover, if countries have broadly similar productive systems, labour and capital markets and macro-economic conditions, then their economies are less likely to have diverging economic cycles and to experience asymmetric shocks. A group of such countries may form an optimum currency area in which monetary union offers

10 Spain in the EU

greater beneﬁts in terms of macro-economic stability than the costs associated with the loss of an independent monetary policy. The traditional view put forward by Mundell was based upon the exchange rate being used for stabilisation purposes, in the event of frequent asymmetric shocks and/or the other adjustment mechanisms mentioned above not being very effective. More recent theoretical developments recognised that monetary policy can be used for other purposes, including redistribution, which could actually produce destabilising effects in the economy. And starting from this position, proponents of European monetary union have emphasised the contribution which monetary union could make to maintaining discipline and macro-economic stability. Indeed, the ﬁnal design of monetary union – with the convergence criteria, an independent central bank and the centrality of price stability – was speciﬁcally intended to ensure budgetary discipline and promote stability. Early proponents also emphasised the link between completing the Single Market and monetary integration, claiming that monetary union was essential to market integration (Padoa-Schioppa, 1987). Looked at objectively, the economic logic, and at times the political logic, of the monetary union strategy seemed unfounded. Although it was presented, in part, as necessary to the furtherance of economic integration, some commentators argued that it would only really work on an ex post basis, once a high degree of trade integration had been achieved (Krugman, 1990). There was little empirical evidence to suggest that the EU constituted an optimal currency area (De Grauwe and Vanhaverbeke, 1993). Europe had very low levels of labour mobility across the region, and even within individual countries there was limited mobility. Furthermore, it had become apparent by the beginning of the 1990s that even in the traditional labour exporting countries, among which was included Spain, labour mobility had ceased. We will see later on that Spain was clearly facing a situation of stagnation as far as inter-regional migration was concerned, and that the emigration levels of the 1960s and 1970s had all but disappeared. Consequently, labour mobility was not likely to provide a mechanism of adjustment for the countries involved in the monetary union. Signiﬁcant differences continued to exist in the productive systems and economic conditions throughout the member states of the European Union. Although there was a deﬁnable core group of states, there was equally a large periphery group and continued divergence in the economic cycles of the member states. Yet, the monetary union strategy moved forward with the support of the member states, few of

From EC to EMU: Challenges for Convergence 11

whom showed any desire to be excluded from the plan. On the basis of the design presented in the Maastricht Treaty, monetary union would impose stringent conditions upon all the member states, and leave all of them without the option of a ﬁscal policy to correct internal disequilibria in the event of an asymmetric shock. Moreover, the conditions became even more stringent when the member states agreed to the Stability and Growth Pact at the Dublin summit in December 1996. Under the Pact, the member states agreed to aim for a reduction in the public deﬁcit below 3 per cent, so as to maintain the budgetary discipline within the monetary union; there was also a provision for the imposition of ﬁnes on any government breaching the budget deﬁcit limit. As a result of this agreement, governments would be restricted in the extent to which they could use ﬁscal policy to deal with temporary economic disequilibria. Given the obvious operational and political difﬁculties of the monetary union plan, it seemed that other reasons convinced the national governments of the merits of such a strategy. One of the overriding concerns of each and every national government since the 1980s had been the promotion of price stability. Moreover, this became the goal which superseded all other economic goals. Price stability was essential to secure long-term economic growth. The prevailing wisdom, supported by the dominant contemporary economic theory, was that expansionary monetary policies to raise employment merely increased inﬂation and raised inﬂationary expectations. In addition, the ﬁnancial markets responded to inﬂationary tendencies by capital ﬂight, thus driving down the exchange rate, which then prompted further inﬂation and balance of payments deﬁcits. Hence, the root of the contemporary economy’s problems lay in the inability to maintain price stability. The 1980s saw an emerging neo-liberal consensus among governments around the need to promote and maintain price stability. Germany’s success in this regard, with an independent central bank committed to price stability, convinced the other governments that there was a viable model which could perform the same task at the European level (McNamara, 1999). All of the national governments had adopted similar policies, restrictive monetary policies generally accompanied by tight ﬁscal policies, in the pursuit of macroeconomic stability (Crafts and Toniolo, 1996). The Socialist-led government in Spain also adopted neo-liberal economic policies over the course of the 1980s and 1990s (Albarracín et al., 1993). However, the consensus around the most appropriate type of policies failed to

12 Spain in the EU

result in similar results being produced across the member states. After more than a decade of policy convergence, there seemed little evidence of a convergence in policy outcomes (McNamara, 1999). And in the face of intensiﬁed international competition, open borders and global capital markets, the search for price stability became even more urgent. Out of this set of circumstances, the national governments found a common consensus for the creation of monetary union. The design for monetary union, set out in the Maastricht Treaty, reﬂected a pragmatic blend of existing arrangements and practices, knowledge about what might work and what might not, supplemented by a set of contrived rules intended to force the convergence of economic systems that had so far failed to accomplish this. It was generally accepted that an independent central bank should be a fundamental part of the system, necessary to bringing about low inﬂation and with no apparent ‘real cost’ (Alesina and Summers, 1993). Moreover, enshrining the independence of the central bank in the legislation, and establishing its responsibility for price stability within the legislative framework, gave further credibility and legitimacy to the institution and its purpose, removing the institution from political inﬂuence and the temptation to generate surprise inﬂation in order to make a short-term reduction in unemployment (Barro and Gordon, 1983). The convergence criteria referred to above sought to bring about a concerted and coherent co-ordination of macro-economic policies, with budgetary discipline and strict ﬁscal policies that would become institutionalised in the domestic policy process. In a very real sense, the inclusion of the convergence criteria constituted the most explicit endorsement by the European Union of the neo-liberal economic policies and economic orthodoxy that had become entrenched in the 1980s. Through these convergence criteria, the EU aimed to bring about a convergence in the economies of the member states, to fashion a convergence in the economic and productive systems that would minimise the risk of asymmetric shocks from diverging economic cycles. Certainly, some success may be discerned in this strategy, as Table 1.1 demonstrates. However, there is a missing link in the process. The convergence which is shown in Table 1.1 relates essentially to nominal indicators, the result of political decisions taken by the national governments in the domestic policy process. All of the governments strived hard in the years leading up to the moment of the ﬁnal decision on eligibility in

From EC to EMU: Challenges for Convergence 13 Table 1.1

Convergence in the EU, 1998 Convergence indicators

Member state

GDP

Inﬂation

Interest

Deﬁcit*

Debt*

Un.

Current a/c bal.*

Austria Belgium Finland France Germany Holland Ireland Italy Luxembourg Portugal Spain Euro zone Denmark Greece Sweden UK EU-15

3.3 2.9 5.3 3.2 2.8 3.7 11.9 1.4 5.7 4.0 3.8 3.0 2.7 3.7 2.9 2.3 2.9

0.8 0.9 1.4 0.7 0.6 1.8 2.1 2.0 1.0 2.2 1.8 1.4 1.3 4.5 1.0 1.5 1.5

4.6 4.6 4.7 4.5 4.5 4.5 4.7 4.8 4.6 4.4 4.7 – 4.6 – 4.9 5.4 –

2.1 1.3 –1.0 2.9 2.1 0.9 –2.3 2.7 –2.1 2.3 1.8 2.1 –0.8 2.4 –2.0 –0.6 1.5

63.1 117.3 49.6 58.5 61.0 67.7 52.1 118.7 6.7 57.8 65.6 73.4 58.1 106.5 75.2 49.4 69.7

4.4 8.8 11.4 11.9 9.4 4.0 7.8 12.2 2.8 4.9 18.8 10.9 3.1 9.6 8.2 6.3 10.0

–1.8 4.3 5.9 3.0 -0.1 6.5 3.6 2.1 18.7 –2.3 –0.2 1.7 –1.2 –2.6 1.1 –0.3 1.2

*percentage of GDP. Source: CEC (1999) March 1999.

1998 to meet the criteria that would bring their budget deﬁcits and national debt in particular down to the limits set by the Maastricht Treaty. The process, however, reﬂected few of the conditions in the real economy. To what extent has there been a convergence in the economic and productive systems of the member states that now form part of the single currency zone? To what extent has the European Union become an optimum currency area? None of these questions can be clearly answered by simply looking at the convergence table. We are left with little insight into the extent of real, economic convergence within the currency zone. In this sense, the design of monetary union offered a form of contrived convergence. However, real convergence was not left out of the picture entirely. The implicit, and later explicit, view was that national governments would themselves establish the conditions for real convergence through structural reforms, making markets (especially labour markets) more ﬂexible. Without the option of ﬁscal policy, adjustment would therefore fall on labour markets and on their ﬂexibility.

14 Spain in the EU

Real convergence and cohesion One of the principal aspirations driving the Spanish application for membership of the European Union was to secure economic convergence. This aspiration remained central to Spanish political and economic interests as the country entered into monetary union, in the recognition that almost 15 years of European integration had stopped short of delivering the anticipated economic and social cohesion with the rest of Europe. Moreover, the proponents of monetary union stressed that real convergence could not take place without nominal convergence, and that in fact the former was very much conditional on the latter. The logic of this connection between nominal and real convergence came from the concern with macro-economic stability, and its link with economic growth. Price stability was the ﬁrst step to economic growth and any policies that set off inﬂationary tendencies reduced the growth potential, and hence the possibility for job creation, higher investment and trade, all of which ultimately cut the chances of real convergence. However, the causal relationships may not operate along the lines suggested above. Instead, it is quite possible that there may be a conﬂict between nominal and real convergence. It may indeed be the case that the emphasis on nominal convergence, and on cutting public spending, prohibits the attainment of real convergence. The literature on convergence is very much divided on the extent to which convergence, in the sense of a reduction in the economic and social disparities, is taking place. Two distinct growth models may be identiﬁed: those which favour convergence and those which predict divergence. The convergence school use neo-classical growth theories, with assumptions of perfect competition, capital and labour mobility, and no obstacles to international trade, to predict that the formation of a single market will promote efﬁciency and equity within the single market. In any given region/country that has a plentiful supply of capital and limited supply of labour, returns to the plentiful factor (capital) will fall, and they will rise for the scarce factor (labour). Capital will therefore move to where it is in relatively scarce supply and hence where the return is higher, while labour will ﬂow inwards attracted by the high return. This movement produces convergence in per capita income levels across regions/countries (Abramovitz, 1986; Baumol, 1986; Mankiw et al., 1992). However, when allowance is made in the single market for the existence of economies of scale and of external economies, differences in

From EC to EMU: Challenges for Convergence 15

productive factors, in productivity levels and technological capability and diffusion systems, then it becomes more difﬁcult to predict convergence. Countries (and regions) at an advanced stage of development, with higher levels of technological capability, with agglomeration and other economies, may be able to maintain and even improve their position relative to other countries. Advanced countries or regions can attract investment, technology and capital, producing a concentration of resources and of economic activity, which operates a virtuous spiral of growth for the region concerned and, pulling resources from less advanced regions, produces divergence between regions. The divergence models suggest a distinctly different long-term trend and predict a process of cumulative causation, where the initial conditions prevailing in a region/country determine the future path of development (Myrdal, 1957). After an initial period of development, it is possible for agglomeration economies to operate – leading to a spiral of growth, or for knowledge and technological diffusion mechanisms to contribute to external economies – facilitating the growth process. Regions with poor initial conditions – such as a lack of physical infrastructure, limited productive capacity or peripheral location – may not be able to attract the initial investment to begin the process of development, nor the attributes to allow agglomeration or other economies to emerge. Theoretical work on endogenous growth emphasises the contribution of human capital and technological development in developing increasing returns to scale (Lucas, 1988; Romer, 1994). These factors attracted increasing interest throughout the 1990s; from this emerged the widespread belief among both policymakers and growth theorists that economic growth is increasingly dependent upon the stock and quality of a country’s human capital, as well as upon technological capability, innovation and diffusion mechanisms. With an intensiﬁcation of international competition, a country’s ability to compete, to grow and prosper, is dependent on the capacity to adapt to this competition. The ability to adapt, in turn, is determined by the human capital and the technological development of the economic system. Similarly, the degree of economic convergence (or divergence) is affected by the human capital and technological capital of the country or region. The European Commission’s 6th Periodic Report of the Regions places clear emphasis on these factors as determinants of economic growth and convergence (CEC, 1999b).

16 Spain in the EU

At this point we can return to the suggestion made earlier, to the real possibility for conﬂict between nominal convergence and real convergence. If, as is generally accepted, economic growth is affected by the stock of human and technological capital, then continued growth is dependent upon continued, or increased, investment in both human and technological capital. In the case of less-developed countries and regions, with relatively lower levels of human and technological capital, convergence is very much dependent upon faster rates of accumulation of both factors. Traditionally, investment in these factors was largely ﬁnanced by the public sector spending programme. In Spain, the state retains the dominant role in education and training, the basis for human capital formation. The state also retains the lead role in ﬁnancing research and development, and in the conduct of technological activities, and has failed to shift technological development to the private sector to the extent that other European economies have done. Furthermore, the Spanish economy is dominated by small- and medium-sized ﬁrms, with limited resources for technological development. Under the Maastricht Treaty convergence criteria, states are obliged to cut public deﬁcits, and even to aim for balanced budgets under the Growth and Stability Pact. Yet, precisely at the point when governments are under pressure to cut public spending, economic convergence demands increases in public investment to develop the quality and stock of human and technological capital. This conﬂict between nominal and real convergence places many member states, and Spain in particular, in a very difﬁcult situation – facing demands for convergence, while balancing commitments under the Maastricht Treaty. The dilemma for the government under monetary union remains the same as that prior to entry to the single currency when it was faced with the decision of cutting public spending in order to qualify for membership.

Challenges for Spain Spain succeeded in meeting the convergence criteria set out in the Maastricht Treaty, qualifying for entry to the single currency on 1 January 1999 with ten other member states. One of the questions which this book will address is the extent to which the country has experienced real convergence and cohesion over the period since accession to the European Union. The question is important for several reasons. Firstly, real convergence indicates the extent of the catching-

From EC to EMU: Challenges for Convergence 17

up that has occurred in the economic area with the rest of Europe, in terms of economic development, expansion of trading relations and the structure of trade patterns, and in terms of the stock and ﬂow of foreign direct investment. It measures the structural changes in the industrial sectors and in the labour market and also, importantly for Spain, the extent to which these changes have employment potential and job-creating opportunities. Secondly, real convergence marks the political and economic maturity of the country, deﬁning its position at the centre of European integration, and shaping its participation in the international political economy. Real convergence means more than a convergence in per capita income levels towards the European Union average. While rising income levels reﬂect increased prosperity, this does not by itself suggest the long-term capacity for growth. Recent contributions to growth theory emphasise the fundamental role played by factors such as human and technical capital, which determine the capability and adaptability of the economy under conditions of growing international competition and increased mobility of capital. It is important not to be deﬂected by rising per capita income levels alone, particularly where these are in part the result of European and/or national redistribution policies, something that has been the case in Spain. Thirdly, real convergence determines, and will continue to determine, the ability of Spain to balance its commitments under European integration, and particularly under monetary integration, with the national political commitments of a state and its evolving decentralised system of regional government. As noted above, there is a strong potential for conﬂict between the achievement of nominal and real convergence, yet, equally, it is vital for Spain to develop and maintain its productive and technical capacity, to nurture the system of decentralised government while retaining control over budget deﬁcits and national debt, and to witness the emergence of inter-regional as well as intra-regional economic and social cohesion. National unity and European integration are the focal points to which current and future real convergence and cohesion are directed. The achievement of nominal convergence does not, in itself, ensure the attainment of real convergence. In a very real sense, nominal convergence was predicated (1) on the actions and decisions of political institutions; (2) on the initiatives taken by the individual national governments to reduce the public sector spending programmes and public deﬁcits; (3) on granting independence to central banks; and (4) on the pursuit of particular monetary policies. Underpinning the individual

18 Spain in the EU

set of actions of these independent national governments was a broad consensus to establish a single currency. Real convergence, on the other hand, has been largely relegated to the initiatives, decisions and actions taken by millions of individuals in the market. However, economic space is less co-ordinated and more competitive; it does not lend itself so easily to co-ordination, nor indeed have the neo-liberal European governments been willing to pursue the kind of co-ordination in the pursuit of real convergence that was agreed to in the case of nominal convergence. What is quite clear, however, is that real convergence is very far from being a mechanical process. And the experience of many countries, including that of Spain, is that real convergence is very much a longterm phenomenon. Furthermore, while economic growth is itself a necessary condition to raising income and prosperity levels, and to reducing disparities in economic and social conditions, there is no convincing evidence that economic growth alone is a sufﬁcient condition for the reduction of inequality. Instead, one of the conclusions to be drawn from this study of the Spanish experience of European integration is that real convergence depends on a crucial blend of economics and politics. In Spain, it demands a major investment push, particularly in research and development, in the stock and quality of human capital, and in the physical, technical and communications infrastructure. Most of all, balancing national commitments under monetary union with the demands by national and regional interests requires the establishment of a stable and long-lasting consensus among the different levels of government regarding common interests and objectives, and identiﬁcation of the responsibilities at each level together with a recognition of the need to compromise. This book examines the experience of Spain since its accession to the European Union, reviewing the impact of European integration on the real economy and on the national political economy and identifying the extent of convergence or divergence from the EU. Inevitably, there are certain limitations on a work of this length which force a curtailment of the subjects under examination, and also restrict the depth of some of the areas covered. The work does not, for example, consider the enormous changes wrought upon Spanish society since the mid1980s, the urbanisation of society, and the changes in family structure, yet these have obvious impact upon the labour market and indeed upon the political economy (de Miguel, 1997). Nor does the book look at the ‘europeanisation’ of the national administrative system or of the legal system (Cazorla, 1997). Again, the changing nature of both

From EC to EMU: Challenges for Convergence 19

systems owe much to the impact of European integration, and in turn these have become the conduits for the implementation of European legislation and policy at the national level. The choice of areas chosen for examination was based on the frame of reference implied by the Maastricht Treaty convergence criteria, as well as traditional integration outcomes such as trade and investment, with the labour market standing out as the glaring example of divergence at the moment of Spain’s entry to the single currency. Chapter 2 examines the internationalisation of the Spanish economy and the rapid change in the structure of trading relations that followed accession. These changes took place against the background of structural shifts emerging in the early 1980s, and already underway since the 1970s in the other major European economies (Dicken, 1998; Ruigrok and Van Tulder, 1995; de la Mothe, 1996). One of the most important effects of European integration was the opening up of Spanish trade, and the growing interdependence with the other member states of the EU. Chapter 3 looks at some of the reasons for continued high unemployment in Spain, and the responses of national government, and discusses the potential of the labour market to adjust to the demands of European integration. Chapter 4 examines the evolution of monetary policy to bring about price stability and Spain’s eventual eligibility for monetary union. Chapter 5 charts the development of the public sector during the 1980s and 1990s and evaluates the government’s response to the emerging public sector deﬁcit, the privatisation programme and structural reform proposals, and the new ﬁnancing arrangements for the regions. Chapter 6 examines the regional disparities in Spain, and the role of both national and EU regional policy in economic and social cohesion. Chapter 7 begins with a review of the issues facing Spain in the EU, looking at the government’s Stability Programme and the effort to meet the demands of monetary union, and concludes with a consideration of the challenges to convergence from future developments in European integration.

2 The Europeanisation of the Spanish Economy

One of the great challenges facing the Spanish economic system in the 1980s was to adapt to the pressures and demands of integration. Accession to the European Union offered improved opportunities for expansion, proﬁtability and greater investment possibilities. However, actually realising these opportunities would depend on making fundamental changes at several levels – the individual ﬁrm, the sectoral level and the policy level – in order not merely to survive the more intense competitive pressures within the enlarged market, but also to be in a position to exploit the potential offered by integration. It was clear that modernisation of the economic system was the ﬁrst point of departure in adapting to the greater competition associated with membership of the European Community, and this required not only changes to the structure of industries and ﬁrms but a complete reorientation of attitudes and expectations among the economic actors and the government, both long accustomed to protectionism and interventionism. This chapter examines how the economic system faced the new environment brought about by membership of the European Union and identiﬁes the gradual internationalisation of the Spanish economy. It begins by providing a snapshot of the economic system at the beginning of the 1980s, focusing on the strengths and weaknesses of the sector, and goes on to examine the gradual modernisation that took place together with the role played by the Spanish government in this process. Prominent among the internationalising forces has been foreign direct investment, both European and nonEuropean. An indicator of convergence is the degree of openness in the period since accession to the EU, with a signiﬁcant shift in trade 20

The Europeanisation of the Spanish Economy 21

ﬂows and a particularly strong bias of both imports and exports towards other European Union member states. However, not all of the economic sectors beneﬁted from European integration, with traditional areas of industry losing out to competition from other parts of the EU, and also from Eastern European ﬁrms. Nor was European integration initially able to beneﬁt Spanish labour, and the persistent above-average levels of unemployment point to the divergence with the rest of Europe that still remains. Labour mobility remains extremely low, in comparison to the levels of mobility attained in the product market. Divergence can also be identiﬁed in the structure, composition and characteristics of Spanish industry as compared to the EU average, and this difference becomes apparent in the composition of trade ﬂows.

The productive system The Spanish productive system has, like its counterparts in the other member states, undergone structural changes over the past couple of decades that are not solely related to European integration. Economic systems have been engaged in a process of transformation, adapting to the globalisation of economic activities and to changing demand patterns that began to emerge from the early 1970s (Dicken, 1998). In order to meet these pressures, ﬁrms and industries developed new organisational forms and diverse strategies regarding the location and conduct of activities, with alliances and mergers becoming particularly popular strategies. Key to survival within the post-Fordist production system was the capacity of ﬁrms and industries to adapt, to incorporate new technology, to develop new markets and economies of scale, and to maintain control over costs in more competitive markets with ever tighter proﬁt margins (Amin and Dietrich, 1991). Within the European Union, industries and ﬁrms differed substantially in their capacity to adapt to the pressures of structural change. In the Spanish case, the productive system had signiﬁcant difﬁculties in adapting to the evolving global market because of inherent structural features associated with the blend of traditional manufacturing industry and a predominance of small ﬁrms with low levels of technological intensity. These difﬁculties were compounded by the additional competitive pressures consequent upon accession to the European Community and the additional liberalisation measures associated with the Single Market Programme.

22 Spain in the EU

Sectoral shift Since the 1970s, the economy underwent a decline in the manufacturing system, with an expansion of the services sector in both output and employment terms. It was not a smooth transition, reﬂecting instead rather speciﬁc changes and trends linked to broader economic cyclical and global change. Spanish manufacturing output experienced signiﬁcant expansion between 1964 and 1974, while the share of national output from the agricultural sector began to decline. After 1974, the economic crisis brought an irreversible decline and the manufacturing sector lost ground, and together with the construction sector showed a much weaker capacity to contribute to the growth of national output (Buesa and Molero, 1998). From then onwards the services sector expanded its output, moving to become the dominant contributor to national output by the time Spain joined the European Union. In 1986, Spain accounted for 8.6 per cent of the EU 12 GDP, while the national per capita GDP represented 72.1 per cent of the community average. On a sectoral basis, agriculture contributed to 7 per cent of national output, with industry and construction accounting for 37 per cent while 56 per cent came from the services sector (Vinals, 1992, p. 18). Like the other European economies, the country witnessed a tertiarisation of the economic system, with a decline in agriculture and manufacturing (Table 2.1). However, even with the expansion of the services sector and its contribution to output and employment, the sector never achieved the productivity levels of manufacturing at the height of the latter’s growth. This sectoral shift was reﬂected in the changing distribution of employment among the different sectors. Historically, the agricultural sector played a very important part in the economic system, acting as a major source of employment and income for a considerable proportion

Table 2.1

1975 1985 1995 1996

Sectoral contribution to GDP (%, 1986 constant prices) Agriculture

Industry

Construction

Services

6.7 6.7 3.9 4.7

30.8 30.4 29.8 29.5

9.4 6.7 7.9 7.6

53.0 56.1 58.2 58.2

Source: Sevilla (1997), p. 24.

The Europeanisation of the Spanish Economy 23

of the population. However, in the period of economic growth that occurred during the 1960s and 1970s, labour migrated to the industrial sector in search of higher incomes and guaranteed employment, providing the expanding manufacturing sector with an available pool of low-cost labour. Between 1977 and 1997, the number employed in the agricultural sector as a proportion of total employed fell from 22 per cent to just under 9 per cent. In the industrial sector, the total employed fell from 27 per cent to just over 20 per cent over the same period (Table 2.2). Two contrasting periods of economic development were noteworthy within this 20-year scenario: the early 1980s which witnessed a strong decline in industrial employment, partly as a result of the government’s policy of industrial reconversion directed at the traditional manufacturing sectors; and, secondly, the early 1990s recession, when in 1993 industrial employment fell by 10 per cent in a single year (Todaria, 1998, p. 18). The construction sector maintained a much more stable pattern of employment throughout the same time period – moving with the economic cycles from a high of 10 per cent in 1977, falling to 7 per cent in 1985 before moving upwards in the second half of the 1980s as the Spanish economy embarked on the post-accession

Table 2.2

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996

Structure of employment 1980–96 (% of total employed) Agriculture

Industry

Construction

Services

19.2 18.5 18.2 18.1 17.7 17.4 15.5 14.5 13.8 12.5 11.4 10.3 9.7 10.1 9.8 9.2 8.7

29.4 24.8 24.3 24.4 24.1 23.4 23.5 23.1 22.8 22.7 22.8 22.0 21.8 21.5 21.1 20.7 20.2

8.6 8.2 8.1 7.8 7.3 7.0 7.4 7.8 8.3 8.9 9.3 9.7 9.3 9.2 9.0 9.4 9.5

47.3 48.5 49.4 49.8 50.9 52.2 53.7 54.6 55.2 55.8 56.6 58.0 59.2 59.2 61.1 60.7 61.6

Source: Iranzo et al. (1997), p. 76.

24 Spain in the EU

economic boom and going into decline again in 1993. By 1997, the number employed in the construction sector hovered around the 10 per cent level once more. Employment in the services sector proved more resistant to the economic crisis of the 1970s than did manufacturing. This was in large part due to the expansion of the public sector, where many new jobs were created to counter the effect of job losses in the private services sector. With the recovery of the private sector in the 1980s and the economic boom that followed the accession to the European Union, the private sector was once again able to surpass the public sector as a dynamic contributor to job creation. However, when the economic downturn of the early 1990s caused a contraction of demand and of job creation, the public sector was unable to compensate for the fall in dynamism by absorbing labour in the way it had done in the early 1980s. Nevertheless, the services sector was less affected by job losses in this particular recession than the rest of the economy. Advanced industrialised economies generally tend towards this type of sectoral pattern, so to some extent the Spanish experience reﬂects the process of economic development which the country has undergone over the past few decades. Of more direct interest is whether this structural change marks a convergence towards the sectoral divisions in the core states in the European Union. Comparative analyses suggest that certain differences continued to exist, and that by 1996 the total member employed in the Spanish industrial and services sectors was lower than the EU average (Martín, 1997). Towards the end of the 1990s, however, the evidence suggests a strong degree of convergence with the rest of Europe in terms of industrial employment, but less so for the services sector. The EU share of employment in industry was 29.5 per cent in 1998, compared to the Spanish share of 30.4 per cent; in services, the EU share was 65.7 per cent, and for Spain 61.7 per cent. The agricultural sector in Spain still accounted for a higher share of total employed than the EU average for the sector, 7.9 per cent compared to the EU average of 4.8 per cent (CEC, 1999a). Comparing the sectoral contribution to job creation over the decade since Spain joined the EU, Martín found that although the services sector made the greatest contribution to employment, it was still unable to match the EU sectoral average over the same period. Table 2.3 suggests that although Spain was undergoing similar structural changes to the rest of Europe, the effect of structural change had little positive impact on employment, even in the more obviously buoyant services sector. The Spanish agricultural sector lost fewer

The Europeanisation of the Spanish Economy 25 Table 2.3

Sectoral contribution to employment Spain

EU

1996/95

1996/86

1996/95

1996/86

–8.2 10.0 4.3 93.9 63.2 30.7

–31.7 –2.2 15.1 118.8 75.6 43.2

–33.9 –16.0 –4.2 154.1 108.4 45.7

–58.9 –67.0 7.0 218.9 178.0 40.9

Agriculture Industry Construction Services tradeable non-tradeable Source: Martín (1997), p. 55.

workers, as a percentage of the total employed in the sector, than did the EU agricultural sector as a whole. The services sector provided the boost to employment in the decade after accession – but not enough to absorb all the unemployed, and certainly not to the same extent as in the EU area as a whole. This situation will be examined further in chapter three, in the discussion of employment and labour market change – but at this point it is worth noting the much reduced capability of all productive sectors in Spain to match the EU average in terms of creating employment. When Spain joined the single currency in January 1999, having met all the nominal convergence criteria set out in the Maastricht Treaty, unemployment remained one of the economic indicators that failed to show any degree of convergence towards the EU average.

Concentration and ﬁrm size The overwhelming majority of businesses in Spain comprises small- or medium-sized enterprises, and they represent the largest providers of jobs as well as contributing around 65 per cent of the country’s GNP (Sáez González, 1998). Given the inﬂuential role of the small- and medium-sized ﬁrms in the national economy, both in employment and output terms, a key consideration was the capacity of an industrial sector to gain and retain market access in a greatly enhanced competitive situation. After 1986, the challenge was to retain position in the domestic market and, for the more ambitious ﬁrms, to secure a share of the European market – a challenge which was all the more formidable taking into consideration the size structure of indigenous industry. Spanish ﬁrms did not, on the whole, adapt to the changed circum-

26 Spain in the EU

stances of competition in the enlarged market by internal growth or through mergers.1 Instead, it was left to the multinational ﬁrms and foreign direct investment following EU accession to avail itself of the Single Market opportunities, and thus change Spain’s commercial relations with the European Union. To a large extent, the domestic industrial sector had been weakened by the economic crisis and structural change – losing some 12 000 ﬁrms over the period 1978–90, principally in low and mediumintensive areas of manufacturing (Buesa and Molero, 1998, p. 76). While the high-tech area of manufacturing actually increased its numbers, this was not adequate to compensate for the net loss of some 400 000 jobs between 1978–90. One result of these changes was an industrial proﬁle which favoured the small-scale enterprise over the large, so that those enterprises that employed over 500 workers accounted for less than a quarter of the total employed. These small-scale enterprises were ill-suited to competition in the larger European market. This conclusion is supported by the results contained in the Single Market Review, published by the European Commission in 1997, which reported relatively lower levels of concentration in a number of Spanish industrial sectors, including pharmaceuticals, brewing, retailing and insurance (CEC, 1997a, Subseries V vol. 4). The speciﬁc nature of the Spanish domestic industrial structure therefore seemed illprepared for the demands of European integration, and especially unsuited to securing economies of scale and agglomeration, either within the national market or in the wider European market. Some effort was made to overcome the structural limitations of size by engaging in mergers so as to create the necessary base for economies of scale. However, in many sectors, the volume of mergers and alliances did not match the level reached in the largest member states. There were two broad waves of merger activity within the European Union throughout the decade that followed Spanish accession. The ﬁrst one occurred in the period 1986 to 1990 when merger activity reached its highest point, adapting to the demands from membership of the European Union and the implementation of the Single Market. The second phase followed the entry into force of the EU’s Merger Regulation in September 1990, when the volume of merger activity declined over the period to 1997.2 Merger activity within Spain lagged behind that taking place in other countries, and especially in terms of the ﬁnancial scope and market reach of such operations. In more recent years and with the advent of monetary union, the pace of merger activity began to quicken, particularly in the ﬁnancial sector.

The Europeanisation of the Spanish Economy 27

In the banking sector, where large-scale operations were considered essential within the context of a liberalised European capital market, the ﬁrst merger between domestic banks took place immediately prior to Spain’s entry into monetary union. Much of the merger activity in the ﬁrst period was essentially directed towards a consolidation of economic activities by national ﬁrms, with the remainder taking place between national and other European ﬁrms. In the second period, the volume of national mergers rose, with a slight fall-off in mergers between domestic and European ﬁrms. During both waves of merger activity, Spanish ﬁrms were more often the sellers rather than the purchasers of the acquired enterprise (Table 2.4). The domestic mergers and acquisitions strategies within Spain were intended to prepare national ﬁrms for competition in the enlarged European market. However, there was no rapid response from a productive system that was both dominated by small-scale enterprise and had a tradition of protectionism and limited competition in the national market. So gradual was the emergence of merger activity among national ﬁrms compared to the other member states, that the opportunities for expansion and the potential for scale economies had not been exhausted when Spain entered monetary union in January 1999. In so far as integration brought about a reallocation of resources within the Spanish productive system, this reallocation was much more the outcome of strategic decisions by non-Spanish ﬁrms, especially multinationals, than by the indigenous sectors. From 1986, Spain Table 2.4 Mergers and acquisitions in the EU 1990–98 (number of operations as % of total EU M&A)

Domestic

Germany Spain France Italy UK Rest EU-15 Total

1990–95

1995–98

National ﬁrm as:

National ﬁrm as:

operations

Seller

Buyer

(% GDP)

Seller

Buyer

23.0 2.6 14.8 6.2 30.8 22.6

25.5 8.1 13.8 6.9 17.5 28.2

14.4 1.5 18.5 4.3 26.5 34.8

24.7 7.3 17.5 16.2 14.3 20.0

20.8 5.6 14.4 7.5 22.6 29.1

14.3 1.7 14.6 3.2 28.4 37.8

100

100

100

100

100

Source: for 1990–95, Fernández-Otheo (1998), p. 158; for 1995–98, CEC, 1999c.

100

28 Spain in the EU

was the recipient of increasing levels of foreign direct investment, with a boom in inward investment for the remainder of the decade which made a substantial contribution to the ﬁxed capital formation of the national economy.

Foreign direct investment Spain was a target of foreign direct investment long before entering the European Community. During a previous phase of liberalisation, launched with the Stabilisation Plan introduced in 1959, the authorities identiﬁed the opening of the economy as a route to economic development. In the decades that followed, investment inﬂows to the emerging tourism sector escalated, in part encouraged by the government strategic development plans for the sector (Fuentes Quintana, 1984). However, it was not until the greater economic liberalisation of the 1980s, when Spain became a member of the European Union, that foreign direct investment ﬂows made a noticeable impact on the capital investment and GDP of the country. The inward investment ﬂows of the 1980s and 1990s differed from previous foreign direct investment in terms of the volume of such ﬂows, the overwhelming orientation of exports towards the European market, and, increasingly, in the sectoral focus as well as the type of investments undertaken. Up to the mid-1990s, the inward direct investment ﬂows substantially exceeded Spanish foreign direct investment abroad. However, from the mid-1990s, there was a clear reversal of this trend, with a net outﬂow of $6.7 billion in 1998. Nevertheless, compared to the net investment outﬂows from France ($10.9), Italy ($14.4), Germany ($66.8) and the UK, which had the largest outﬂow of all the OECD member states with $51.4 billion, the Spanish net investment position occupies a much lower ranking.3 It does, however, have the potential to make a serious impact on the country’s balance of payments, an issue which will be considered later in this chapter.

FDI – origins and sectoral distribution Accession to the EC brought an escalation of foreign direct investment into the country. The amount of inward direct investment in the Spanish economy in 1970 was 15 500 million pesetas, increasing to 67 600 million pesetas in 1980 – an impressive amount given the economic crisis of the 1970s with the consequent slowing down of economic activity and investment ﬂows. From 1980 onwards, the

The Europeanisation of the Spanish Economy 29

inﬂows began to increase and to show a remarkable volume of investment activity in the second half of the decade when the value of investment increased ﬁve-fold over the preceding ﬁve-year period. Between 1990 and 1996, investment ﬂows continued at a slower pace, with a much higher proportion of ﬂows taking the form of portfolio investment. This structural change in investment patterns mirrored the structural changes in the Spanish economy identiﬁed earlier in the chapter. Both manufacturing and services sectors were targets, although ﬂows were particularly evident in the ﬁnancial sectors, followed by substantial ﬂows of speculative capital. Most signiﬁcant, however, is the impact made by these investment inﬂows to the investment component of national income. Table 2.5 shows just how striking was the impact on the total national economy, particularly in the second half of the 1980s when direct investment inﬂows reached a peak. The boom in investment and in consumer spending at this time signalled the optimism sparked off by European integration and contributed to economic growth rates that were above the European average. Spain’s accession to the European Community was undoubtedly a reason for much of the new investment inﬂows. Furthermore, a comparison of the geographical sources of these investment ﬂows tends to support this view. As Table 2.6 shows, the geographic origin of investment inﬂows is principally European, and overwhelmingly from the core states of Germany, France, the UK and Holland. From the end of the 1980s, there was a rise in the levels of reinvestment (investment in

Table 2.5

Foreign direct investment in Spain 1970–93 (selected years) Direct Investment (thousand million pesetas)

1970 1975 1980 1984 1986 1988 1990 1992 1993

net

gross

15.5 16.8 67.6 156.1 284.2 521.1 1073.1 737.2 877.4

17.5 23.3 94.1 176.9 321.2 691.3 1257.2 1051.2 1388.4

Source: Hernando (1995).

% GNP (net investment.)

% GDFC (net investment.)

0.59 0.28 0.45 0.61 0.88 1.30 2.14 1.25 1.44

5.32 2.56 5.50 8.73 11.53 14.03 23.86 16.58 22.09

30 Spain in the EU Table 2.6

Changes in geographical origins of Spanish FDI, % of total

OECD EU-15 France Germany UK Holland Italy Other OECD USA Japan Reinvestment Non-OECD

1960–79

1980–85

1986–90

1991–94

94.6 38.7 6.8 12.1 8.7 4.3 1.7 55.9 33.4 0.5 3.0 2.4

76.2 41.8 9.6 10.7 7.7 7.1 2.0 34.2 17.9 3.6 12.1 11.8

72.9 60.0 14.8 7.9 9.5 18.0 4.0 12.9 4.0 2.3 22.5 4.6

74.2 63.3 13.5 7.2 6.9 25.9 3.6 10.9 6.3 1.4 22.6 3.2

Source: CEC (1997) Single Market Review, Subseries IV: Impact on Trade and Investment, vol. 2: Trade Patterns Inside the Single Market, p. 160.

existing companies using foreign capital), a trend which continued up to the mid-1990s. On a sectoral basis, manufacturing industry attracted most of the incoming investment up to 1986, with a high concentration in chemicals, machinery and electrical goods, transport equipment, food and non-metallic minerals. After 1986, the share of investment going to services rose, most notably in the ﬁnancial and commercial services, as the effects of the full liberalisation of capital took hold, with the dual outcomes of capital liberalisation to meet the terms of EU accession and of the Single Market Programme. Between 1986 and 1990, investment ﬂowed into average-growth and high-demand sectors, principally motor vehicles, chemicals, agri-foodstuffs and paper. In the early 1990s, manufacturing regained the larger share of foreign direct investment, but the onset of monetary union and Spain’s entry to the single currency re-established a strong pattern of investment in the services sector. Spanish foreign direct investment ﬂows to other countries of the EU in the period 1986–96 went predominantly to Portugal, France, Holland and the UK – although in the case of Holland much of this investment may have gone to holding companies to avail itself of the more favourable ﬁscal situation in the Netherlands. By contrast to inward investment ﬂows, Spanish direct investment abroad was concentrated in sectors such as telecommunications, banking, commercial

The Europeanisation of the Spanish Economy 31

services and holding companies. However, in the three years prior to Spanish entry to monetary union, the largest increase in outward investment ﬂows was in the Latin American market, rather than the EU area.

The impact of FDI Since the 1970s, the burgeoning theoretical literature on foreign direct investment has offered a rich source for the analysis and description of causal factors, investment patterns and the implications for home and host countries’ economies, their labour markets, balance of payments, technological capability and growth prospects (Buckley and Casson, 1976; Cantwell, 1991; Dunning, 1993). Globalisation played a major role in increasing the volume of foreign direct investment, promoting greater complexity of investment patterns and deepening the scope of international integration of the recipient countries. Moreover, at a global level, the ﬂows of direct investment grew faster than either national output or foreign trade over the period of the 1970s and 1980s. Although there was a slowdown in investment ﬂows during the 1990s these investment ﬂows represent an important contribution to the output and employment levels of the host countries, as is well evidenced by the continued competition among national governments to attract inward investment by offering ever-more favourable ﬁscal conditions and/or capital subsidy programmes. Undoubtedly, in the Spanish case, the investment was triggered by location advantages concerning market access as well as by low wages, giving multinational enterprises the chance to locate facilities in Spain and take advantage of the economies of scale that production for the larger European market entailed (Caves, 1992). Furthermore, the foreign direct investment was a complement to rather than a substitute for trade, unlike some of the earlier investment ﬂows by US multinationals to Europe in the 1950s and 1960s. Moreover, the proﬁtability and potential return to capital was high in a country that was possessed of a plentiful supply of cheap labour and a comparatively scare supply of capital. These conditions were particularly favourable in the ﬁrst half of the 1980s and continued to exist in the 1990s, albeit somewhat modiﬁed by the economic growth and inﬂation of the late 1980s. Investment trends tend to have a strongly cyclical impetus, rising with the economic upswing and falling with the downturn in demand and economic activity. The Spanish experience was no exception – high inﬂows during the economic boom of 1986–89 followed by

32 Spain in the EU

decline in the recessionary years 1991–93, when most of Europe experienced recession. The theoretical literature on foreign direct investment, particularly the eclectic approach favoured by Dunning (1993), is useful, not only to explain why a country might attract foreign investment, but also to warn how it could lose out to other locations. Dunning suggested that a fusion of ownership advantages (possession of particular technologies, brands, managerial expertise), internalisation advantages (where the existence of market imperfections makes it more proﬁtable to carry out certain activities within the organisation rather than to acquire them through the market), and location advantages (the particular advantages, such as low-cost labour, favourable government investment and tax policies) combine to attract multinationals to a particular location instead of to an alternative site. Equally, if a country such as Spain loses these advantages, then foreign direct investment is likely to move to a more favourable location. This is precisely the situation that Spain faced over the 1990s, as multinationals begin to invest in Eastern European countries, many of which are applicants for membership to the European Union with eventual future access to the EU market therefore guaranteed. While the beneﬁts to the host country have not always been the subject of consensus in the literature, the competition to attract foreign investment continues. There is some agreement that Spanish FDI contributed to the economic transformation that occurred within the country since its accession to the European Union. In its review of the Single Market Programme, the European Commission warmly endorsed the contribution of the foreign direct investment to Spain, particularly to the quality level of human skills, technological advances and the productivity of ﬁrms receiving the investment.4 What is less clear is the extent to which such positive beneﬁts to the subsidiaries of foreign multinationals had spillover effects for local ﬁrms and industries. The study released by the European Commission concluded that although local branches of multinational ﬁrms exported most of the output produced, and engaged in business transactions with local ﬁrms, many continued to source the inputs of the production process through a multinational’s own internal market. The overall impact of foreign direct investment lay in the broad integration effects through trade ﬂows, rather than more directly on the domestic economic system. Although not the largest recipient country for direct investment ﬂows, Spain did receive a signiﬁcant share of total‘ intra-EU FDI ﬂows over the period 1992–97 (Table 2.7).

The Europeanisation of the Spanish Economy 33 Table 2.7 Member state share of intra-EU FDI inﬂows and their importance relative to GDP, 1992–97 Member state B DK D EL E F IRL I NL A P FIN S UK EU-15

Share of total FDI inﬂows % 13.7 1.7 12.3 0.6 7.0 12.1 2.9 6.9 16.7 2.2 1.7 1.0 4.9 16.4 100

Importance of FDI inﬂows to GDP % 3.5 0.7 0.4 0.4 0.9 0.6 3.2 0.4 3.1 0.7 1.2 0.6 1.4 1.0 0.8

Key: B – Belgium; DK – Denmark; D – Germany; EL – Greece; E – Spain; F – France; IRL – Ireland; I – Italy; NL – Holland; A – Austria; P – Portugal; FIN – Finland; S – Sweden. Source: CEC (1999) European Economy, Supplement A, no. 1, January 1999.

Trade ﬂows and European integration The foreign direct investment inﬂows did more than just increase the total investment component in national income. In addition, the activities of the multinational enterprises helped to integrate the economic sector into the European Union through the increased trading relations between Spain and the rest of Europe. Accession to the EC required the elimination of tariff and non-tariff barriers on trade between Spain and the other member states, and the adoption of the common external tariff. As the latter was much lower than the level of tariff protection that prevailed prior to Spain joining the EC, the country’s decision to enter the European regional trading bloc effectively represented a signiﬁcant move in the direction of liberalisation even on trade with third countries. Moreover, the trade creation effects far outweighed the trade diversion effects, although there was a shift away from some of the country’s traditional markets which has not been reversed despite recent trends in Spanish investment to Latin America. In this section, the growth of the external sector is examined

34 Spain in the EU

as well as the shift in Spain’s trade position vis-à-vis the European Union. Very rapidly, there emerged a trade deﬁcit with the European Union, which continued as imports rapidly overtook Spanish exports to the rest of the European partners. A deﬁcit in a country’s balance of payments can be explained in several ways. It may be due to an excess of national demand over domestic productive capability, or by an insufﬁcient level of national saving to ﬁnance the gross capital formation. Or it may be due to the lack of competitiveness in the national economic system, and the inability of domestic producers to match the quality, technological intensity or price competitiveness of goods and services offered by producers elsewhere. In the Spanish case, the deterioration in the external position can be understood by reference to all of the above explanations, but it is the lack of competitiveness which has attracted the greatest amount of discussion, perhaps because it is often seen as an intractable problem. In addition to these general factors, Spain has one of the highest income elasticities, so that in periods of economic growth and buoyant domestic demand the trade position exhibits a notable deterioration, as it did in the second half of the 1980s.

Liberalisation effects Following its entry into the European Union in 1986, Spain was granted a seven-year period of transition in order to adapt its tariff structure on community imports to the EU model; it was, however, required to adopt the Community’s common external tariff on extra-community imports straight away. The length of the transition period thus meant that it was not until 1 January 1993 that Spain fully adopted the EU commercial policy in its entirety (Buisan and Gordo, 1997). However, by the end of the transition period, the liberalisation programme of the Single European Market was also coming into effect so that, between 1986 and 1993, a dual process of liberalisation was effectively developing in Spain. Thus it is difﬁcult to distinguish the effects on liberalisation and trade ﬂows due to the Single Market Programme from those brought about by the commitments made in the treaty of accession (CEC, 1997a). What is undisputed, nonetheless, is the extent to which the Spanish economy has moved away from protectionism to embrace liberalisation and trade with the European economy (Appendix 11). One measure of this shift towards liberalisation is that provided by the sum of exports and imports as a percentage of GDP – the openness

The Europeanisation of the Spanish Economy 35

coefﬁcient. In 1986, the coefﬁcient stood at 37.5, increasing to 64.89 in 1996, measured in constant prices. Ten years prior to Spain’s accession to the European Community, the openness coefﬁcient stood at 27, and in the decade that followed some effort was made to raise the level of economic interaction between Spain and its European neighbours. However, the well-intentioned efforts of the political and business community were thwarted to some extent by unfavourable conditions at home and abroad. At home, the Spanish political community concentrated most of its efforts on consolidating the democratic political system so that other issues were accorded a secondary position in the order of priorities. Elsewhere in Europe, the economic crisis and stagﬂation of the 1970s and early 1980s produced recessionary conditions that were somewhat inimical to the growth of trade over that period. By the mid-1980s, economic prospects had recovered, coinciding with other developments that contributed to greater optimism – in Spain it was the entry into the European Community that gave rise to this optimism, and in Europe generally the renewed vigour associated with the proposed Single Market Programme generated a very positive environment and greater levels of investment and economic activity. Liberalisation of trading relations in the mid-1980s marked the country’s ﬁnal abandonment of the protectionism and isolation that had existed for most of the twentieth century (Buisan and Gordo, 1997). Trade liberalisation made the Spanish economy much more interdependent with the rest of the world, and particularly the European Union, than it had been before. Both the volume of exports and imports rose rapidly, and inﬂows of foreign direct investment far exceeded levels that occurred since the adoption of the Stabilisation Plan in 1959.5 Two further outcomes followed on from this second period of extensive liberalisation – a change in the geographic and sectoral structures of the trade ﬂows between Spain and the other member states of the European Union, and an increase in the country’s trade deﬁcit with the rest of the EU.

Trade ﬂows – geographic and sectoral changes In 1985, 39 per cent of Spanish imports came from the European Union while 54 per cent of total exports went to the community. In the years that followed, trade with the European Union increased steadily, so that by the end of 1998, Spain sent 71 per cent of the total exports to the EU, and received 66 per cent of total imports from the

36 Spain in the EU

region.6 The increasing Spanish dependency on the European economy is further evidenced by the extent to which the volume of exports can ﬁnance (i.e. cover) import volumes – the so-called cover rate. In 1985 the cover rate was 118.8, falling each year subsequently to a level of 69.6 in 1989 before gradually recovering to 91.0 in 1997 (Appendix 12). Both export and import volumes move in accordance with cyclical trends and trade patterns have tended to show the extreme volatility of the Spanish economy where recessions and recovery have been more exaggerated than that for the European Union as a whole. The most spectacular shifts in the trade ﬂows occurred in the ﬁrst four years of EU membership before evening out somewhat in the 1990s – but retaining a trade deﬁcit throughout the entire period. In effect, the impact of integration was most evident in the increase of Spanish imports and a shift in the geographic patterns of trade. Between 1986 and 1996, exports to the EU increased at the expense of sales to the United States, which fell from 9.2 per cent to 4.2 per cent of total exports. The decline of exports to the US was also due to the overvaluation of the peseta against the dollar and greater instability of the Spanish currency against the US currency compared to other ERM currencies. The United States also lost ground as the source of Spanish imports, as did Japan and Latin America. Within this broad pattern of trade with EU partner states, ﬁve states dominate as the principal trading partners – France, Germany, the United Kingdom, Italy and Portugal (Martín, 1997). This group alone accounts for 60.3 per cent of total exports, and in fact almost half of the total exports going to the group of ﬁve countries comes from two sectors – food and automobiles. The sectoral composition of trade ﬂows also changed to reﬂect changing national demand patterns, structural change within the country, and deﬁciencies in the national productive capability which prompted an increase in imports. There was a strong growth in exports, particularly from sectors with strong demand, especially cars, equipment and component parts. Exports of consumer goods declined due to the competitiveness gap, while imports rose in response to the consumer boom. A characteristic feature of the structure of Spanish exports at the time of accession was the specialisation in goods of low and medium technology intensity, with very few exports of a high technology nature. Imports, on the other hand, tended to be in sectors with high technology and dynamic demand. The Spanish productive system had little capability in the production of goods that required advanced and complex technology, thereby creating a high level of import depend-

The Europeanisation of the Spanish Economy 37

ency for these types of goods. In this regard, Spain lagged behind the other advanced countries of the European Union, with their more mature technological systems, greater levels of R&D spending, higher numbers of researchers and more innovative production systems. European integration had another somewhat unanticipated effect on the sectoral comparative advantage as trade ﬂows increased over the period. Traditional trade theory suggested that trade patterns could be explained by differences in relative costs of production among trading partners – as determined by differences in labour productivity and the quantity and quality of capital (the Heckscher-Ohlin model). More recent theoretical contributions to trade and integration theory emphasise technological and human capital as sources of comparative advantage and hence determinants of trade patterns. Countries trade on the basis of the possession of such resources, exporting goods and services based upon the national comparative advantage and importing goods and services in sectors where there is a national comparative disadvantage. Trade tends to intensify the comparative advantages of the trading countries, with each state specialising and availing itself of economies of scale in the larger market. Specialisation based upon the country’s comparative advantage will produce, according to the traditional theory of economic integration, an increase in demand for the plentiful and therefore cheap factors, thereby pushing up the price until eventually the cost and price differences between countries are eliminated. With the removal of trade barriers and of restrictions on factor mobility under economic integration, integration theory proposes a reallocation of factors to achieve greater efﬁciency and also greater equity – something that is reﬂected in the volume and pattern of trade (Viner, 1950). The ﬁnal outcome of integration is distinct patterns of production and increasing volumes of trade among the members of the regional integration agreement, with greater mobility of factors eventually eliminating price and income disparities. In short, the traditional theory of integration, strongly grounded upon the assumptions of the neo-classical theory of international trade, predicts convergence in the income and living standards of the area. However, it also recognises that not all sectors beneﬁt equally, given that adjustment costs may fall disproportionately on sectors and regions that exhibit high levels of comparative disadvantage. The conclusion offered by the traditional theory is that integration brings about convergence between the countries, but there is also the possibility of divergence between sectors and regions given the assumption of factor (either labour or capital) mobility.

38 Spain in the EU

Specialisation in production on the basis of comparative advantage suggests a pattern of inter-industry trade among countries, which increases in intensity with greater differences in the structures of production of the trading partners. Neo-classical trade theory seemed eminently appropriate to explaining the emerging patterns of the postwar international trading system, and the empirical evidence accorded quite closely to the predictions of the theory. However, more recent evidence of the actual trading patterns within the European Union does not conform so closely to the theoretical predictions. Instead, there is an ever-increasing volume of intra-industry trade, taking place among countries with broadly similar income levels, patterns of demand and production systems. Much of the emerging trade ﬂows between Spain and the other EU member states also conform to the intra-industry pattern (CEC, 1997a). New theories of international trade that have attempted to explain this trend can offer some insight into the Spanish trading patterns under EU membership. Introducing modiﬁcations to the traditional theory, with its assumptions of perfect competition, the new trade theory recognises the existence of economies of scale and imperfect competition (Krugman, 1990a). Under this competitive reality of economic integration, producers seek proﬁtability and market share by differentiation among broadly similar and competing products Both trade and integration theory propose consumer beneﬁts and rising incomes under conditions of economic growth, which follow on from greater trade, itself a corollary of economic integration. Therefore, consumers will seek greater quality and more differentiated products as their incomes increase. These conditions, on the supply and the demand side, combine to produce greater levels of intra-industry trade. The implications from the trade and integration theory just outlined point to increased economic welfare and a real convergence in incomes. However, the outcomes are very much based upon (1) certain conditions; and (2) assumptions of the theory continuing to prevail. Central to these is the existence of competition and of an effective system of regulation. If we drop the assumption of similar technological standards and similar levels of technical progress, the outcomes are also less certain. For countries with lower levels of development and technological resources, with limited capacity to produce quality products competitively, international trade and economic integration are likely to produce shifts in demand in favour of imported products. The consequences of this shift in demand patterns, which is likely to continue as income levels rise, will fall with greater weight on the

The Europeanisation of the Spanish Economy 39

non-competitive sectors. For the latter, adjustment costs remain high in terms of output and income, and consequently in unemployment levels. Divergence, rather than convergence, may follow from the trading patterns that emerge under economic integration for member countries with lower initial levels of development. Consumers in the better-off countries are not going to increase their demand for lower quality products, while domestic consumers prefer to purchase imported products. Consequently, the likelihood is for poorer countries to lose ground, and the richer countries to move further ahead. The foregoing remarks suggest that there is no deﬁnitive conclusion regarding the beneﬁts from economic integration – that different countries and different regions may experience distinct adjustment costs and beneﬁts. This note of caution underlines the necessity to examine carefully the nature of the adjustment in the Spanish productive system as a result of the economic integration and trade ﬂows that emerged in the period since accession. One way to do so is by an examination of the index of revealed comparative advantage (RCA).7 In 1986, the sectors which held a revealed comparative advantage included certain output from the agriculture sector, principally horticulture and fruit, construction, transport, cars and manufactured consumer goods. Ten years later, most of these sectors retained comparative advantage, with the notable exceptions of textiles and clothing, paper, printing and publishing. Other sectors also saw a worsening of the RCA on a smaller level, especially leather goods and the manufacture of metal articles. Certain sectors experienced an improvement in the RCA, including motor vehicles and parts, and electrical machinery (CEC 1997a, subseries VI: vol. 3). The European Commission report on the Single Market suggested that there was a noticeable decrease in the competitiveness of products manufactured in Spain, which the RCA indices conﬁrmed, and the conclusion was supported by the ﬁndings on trade creation contained in the same study. In the sectors which displayed a fall in the RCA index, the inﬂow of imports contained a relative weighting of goods with a medium technology level. Overall, the vehicles sector was identiﬁed as the leading export sector of Spanish industry, with about 25 per cent of total exports, and also the sale of manufactured goods with a high technology content. In general, the trade patterns have moved away from traditional specialisations to sectors with more dynamic demand, especially chemicals, equipment and automobiles. It can be seen as a shift away from low-skilled, labour-intensive production in favour of sectors intensive

40 Spain in the EU

in high-skilled labour and with greater product differentiation. In this respect and combined with greater intra-industry trade, Spanish trading patterns have moved some way towards the trading patterns of the advanced member states in the EU (Hernando, 1997). However, some differences remain as an indication that for the Spanish external sector convergence with the leading member states has yet to develop. Exports of high technology-intensive sectors is still below the average for that in the most advanced countries (Buisan and Gordo, 1997, p. 58). Imports have tended to include a large percentage of goods with high technology intensity compared to other advanced member states, especially in areas such as chemicals, pharmaceuticals and industrial equipment – the latter being of signiﬁcance for industrial investment. During the 1980s, this orientation of imports towards high technology goods intensiﬁed, and after accession to the EU the dependency on imported technology continued.

Balance of payments and the trade deﬁcit Trade liberalisation brought competition, and highlighted the lack of competitiveness in European trade of the domestic sectors. The result for Spain was a trade deﬁcit, which became particularly acute during 1989–92. As Table 2.8 shows, the trade deﬁcit hovered around 6 per cent of GDP between 1989 and 1991, pushing the balance of payments deﬁcit over 3 per cent of GDP over a four-year period. These were the years in which the post-accession boom dominated, fuelled by buoyant consumer demand and high levels of investment. The strong consumer demand had an undoubted impact upon import levels. However, an additional contributing factor was to be found in the monetary policy

Table 2.8 % GDP) Sector

Evolution of the external sector 1986–1997 (balances measured as

1986

Trade balance –2.8 Tourism balance 4.5 Goods and services 2.0 Investment income –0.9 Transfers 0.5 Current + Capital a/c 1.7 Source: Hernando (1997), p. 150.

1988

1990

1992

1994

1996

1997

–5.2 4.1 –1.3 –1.0 1.3 –1.1

–5.9 2.9 –3.5 –0.7 0.9 –3.4

–5.2 2.9 –3.1 –1.0 1.0 –3.1

–3.0 3.6 0.0 –1.7 0.8 –0.9

–2.6 3.9 0.9 –1.0 1.5 1.4

–2.1 4.3 1.7 –1.1 1.0 2.0

The Europeanisation of the Spanish Economy 41

conducted by the Spanish authorities in the second half of the 1980s, when the over-valued peseta allowed the country to import price deﬂation, while export competitiveness continued to fall. After the successive devaluations of the peseta in the months following the ERM crisis of 1992, the trade deﬁcit was reduced but not eliminated by the time Spain entered the euro zone in January 1999. In services, the tourism industry retained its positive inﬂuence on the external balance although it remains constantly subject to the cyclical movements in the international economy. Comparisons of the external position, both prior to accession and subsequently as a member of the European Union, show quite clearly that European integration brought about an immediate deterioration in the balance of payments, speciﬁcally through the trade deﬁcit (Buisan and Gordo, 1997). Foreign direct investment inﬂows were not large enough to maintain a balance of payments surplus in the closing years of the 1980s and early 1990s. The contradictions inherent in the external sector had to be faced eventually, and this occurred in the aftermath of the ERM crisis. Three devaluations followed in rapid succession. Table 2.8, above, shows the gradual improvement in the trade balance and the balance of payments. However, the adjustments to the external sector that followed were not in any way the result of deliberate government policy. Rather, government was a passive actor, forced to react by the speculation in the national currency as the international ﬁnancial capital markets recorded their scepticism towards the over-valued exchange rate of the peseta within the Exchange Rate Mechanism, and their doubts about competitiveness or the government’s ability to keep the notoriously inﬂation-prone economy under control. So far, the discussion surrounding the ‘europeanising’ forces has concentrated upon the role played by foreign direct investment and that of trade. One ﬁnal factor which this section will consider is that of European Union ﬁnancial ﬂows to Spain (detailed in Appendix 2). Although these receipts are considered later, in Chapter 6, it is worthwhile to mention them here also, since Spain has become one of the principal beneﬁciaries of ﬁnancial ﬂows under the EU budget. At a summit meeting held in Edinburgh in December 1992, the European Council agreed to the establishment of the Cohesion Fund to help the four poorest members – Spain, Portugal, Greece and Ireland – to attain a level of convergence with the advanced member states, and thereby assist them to qualify for monetary union. Apart from these intended objectives, EU funds have helped to create a surplus in Spain’s current account of the balance of payments.

42 Spain in the EU

The inﬂow of EU funds increased steadily over the period since 1992, and doubled in 1995 from the level received the preceding year. The overall effect was to send the balance of payments into surplus in that year and to maintain that position up to the time of entry to the single currency area. Although net receipts from the European Union amount to approximately 2 per cent of GDP, these ﬁnancial ﬂows have played a signiﬁcant and growing contribution to the health of Spanish national ﬁnances and the external sector in particular. As far as the distribution of EU budgetary spending is concerned, Spain received a higher share of operating expenditure (15.8 per cent) than its share of EU GDP (6.6 per cent) (Begg and Grimwade, 1998). Between 1992 and 1999, EU ﬂows to Spain trebled in size and there was no doubting the importance of such ﬂows at a time when the national government was cutting the public spending programme so as to meet the Maastricht convergence criteria.

Conclusion Several key processes operated to contribute to the europeanisation of the Spanish economy over the decades of the 1980s and 1990s. In this chapter, three processes have received particular attention – investment ﬂows, trade ﬂows and the net ﬁnancial receipts from the European Union. After accession to the European Union in 1986, Spain witnessed enormous volume increases in all three areas. European integration also contributed to levels of economic growth above the European average, marking a turnaround from the stagnation and decline that featured throughout the 1970s. Spain approached the European Union in the 1980s fuelled with high expectations regarding membership, the political beneﬁts to be secured from acceptance into international society, and the economic beneﬁts that would accrue through the imposed modernisation of the industrial and economic system. But apart from minor attempts at structural change in the early 1980s through the government programme of Rationalisation and Restructuring, the changes wrought to the domestic economy and the external sector were largely the product of external forces, with government, and indeed much of the domestic economy, playing a passive role or reacting to events as they unfolded. How do we assess the broader effects of the investment ﬂows and trade relations that emerged with European integration. Undoubtedly, foreign direct investment had immediate and positive effects on employment, but not to the extent of bringing a substantial reduction

The Europeanisation of the Spanish Economy 43

in unemployment. Inward investment made a real and signiﬁcant impact on the investment component of national income, thereby contributing to economic growth and to trading relations (Bajo and Sosvilla, 1996). A large part of this investment originated from other member states, rather than from outside the EU, producing output for the wider European market and thereby boosting Spanish exports and the trade position. However, multinationals also tend to engage in internal market transactions and import from other subsidiaries abroad, with often limited positive spillover effects for the local economy. Value-added activities, such as research and development, may be conducted by the parent company in the home country, leaving the less valuable activities to be carried out by the peripherally-located branches. Spanish inward investment exerted a complex and often contradictory inﬂuence on the host economy. However, there is no overwhelming evidence that the multinationals exerted a strong impact either on the level of research and development undertaken in the private sector or on the technological intensity of the economic sector in general. Instead, investment was made in a small number of sectors with a high technology intensity and strong demand. Foreign investment did bring greater competition to the domestic market, with important learning effects for local ﬁrms and the recognition of the need to adapt to the standards and prices set in the international market – and, eventually, less reluctance to pursue foreign markets. Investment inﬂows also served to ﬁnance the current deﬁcit, making up for deﬁciencies in domestic savings levels (Mella Marquez, 1995). But, Spain now faces renewed competition from other investment locations, particularly Eastern Europe which is able to offer similar advantages to those of Spain in the 1980s. Concerning trade ﬂows, the results were much less ambiguous. A long process of liberalisation that some commentators suggest began in 1959 (Buisan and Gordo, 1997), and culminating with the Single Market Programme, led to an unprecedented liberalisation of the Spanish economy. Structural changes were evidenced by both the volume and the composition of trade ﬂows, and the pattern of trade began to reﬂect the patterns of the advanced European economies. However, it should also be recognised that Spain was starting from a very low base as far as international transactions were concerned, and with a comparatively recent history of protectionism and nearautarchy. It is worth noting that ten years after accession to the European Union, total exports accounted for 25.4 per cent of national

44 Spain in the EU

GDP, while imports accounted for 24.3 per cent, measured in current prices (Buisan and Gordo, 1997, p. 33) – this represents a level of export and import volume lower than that of other EU member states. The growing trade deﬁcit that followed accession was on the one hand a symptom of the competitive weaknesses in the Spanish economy, and on the other hand a direct result of integration, and of the consumer optimism and buoyant investment growth which accompanied entry to the European Union. The competitiveness problem was eventually addressed by the devaluations of the peseta in 1992 and 1993, and by the success in reducing the level of inﬂation. However, in the longer term, additional measures may be required when it is no longer possible to resort to competitive devaluations under the single currency. Even though in principal an individual country’s balance of payments will not have the same prominence when the national currency no longer exists (since a region does not record its trade position with the national unit or other regions within the national unit), in practice individual member states will still wish to promote the market share of their national industries in the international and European context – unless and until a more federal political system emerges in the European Union. Until that point, the competitiveness issue remains a matter of concern for policymakers and producers alike. The external sector exhibits aspects of both convergence and divergence with respect to the EU. In terms of the trade specialisation, the Spanish patterns of trade showed a clear movement towards those of the advanced economies and a shift away from the traditional comparative advantage (based on low-skilled labour) in the direction of more technology-intensive and capital-intensive sectors. The latter represent greater growth potential and, for the present, less susceptibility to competition from newly industrialising countries. However, substantial differences remain, most noticeably in the limited specialisation in high-technology sectors with a strong dependency on imported technology which is reﬂected in a deﬁcit in the technological balance of payments. The issue of competitiveness has already been referred to above, and one may add to this the often poor marketing and distribution of Spanish output in many of the European markets (Alonso and Donoso, 1996). A third europeanising force was the impact of EU funds, operating to produce a surplus in the balance of payments and providing a supplement to the national ﬁnances available for investment. The virtual trebling of such funds over a seven-year period has built up what may be

The Europeanisation of the Spanish Economy 45

described as a culture of expectation focused on the centrality of such funds for economic and regional development, an expectation which is held by national authorities, regional bodies and much of the private sector. Inevitably, enlargement of the European Union to bring in new member states from Eastern Europe with lower levels of development and eligible therefore for a share of EU Structural and Cohesion Funds will compromise the Spanish share. This issue will be addressed in the concluding chapter of this volume. Finally, structural change cannot be explained by European integration alone. Many of the shifts identiﬁed in this chapter – the decline of the agricultural sector, the tertiarisation of the economy, changes in the capital–labour ratio – had already occurred in the other advanced economies, with the move towards post-Fordist production systems in the 1970s (Amin and Dietrich, 1991). Globalisation, shifting patterns of demand and technological change all played a part in structural change (Ruigrok and van Tulder, 1995). Spain was also affected by such structural changes, although the impact showed up somewhat later than in the other economies due to the protected national economy. European integration no doubt accelerated such changes by opening up the economy and bringing it into closer and more direct interface with the forces of change. To a large extent, globalisation represented the tendencies of European integration but on a wider scale. On balance, the evidence from this chapter reveals an overall positive impact on the Spanish economy as a result of European integration. But integration has singularly failed to correct the most intransigent problem of the Spanish economy, the persistent high unemployment rate. The next chapter looks at this issue, examining the nature of the problem and the attempts made by the government to reduce an unemployment rate that stubbornly remains above the EU rate as a whole.

3 The Labour Market, Unemployment and Divergence

Spain entered the European Community in 1986 with one of the highest levels of unemployment among all the member states. While the EU average for that year stood at 10.8 per cent, the Spanish rate of unemployment was practically double, at 20.8 per cent. When the country joined the third stage of European monetary union on 1 January 1999, with the introduction of the euro, the unemployment rate stood at 18.2 per cent for the country as a whole, with 3.07 million people out of work. However, the picture is far from uniform throughout the country. On a regional basis, unemployment rates of over 30 per cent have been registered, while some provinces saw unemployment levels below 10 per cent (Financial Times, 1999). Female unemployment, at just over 26 per cent, was double the jobless rate for male workers. During the intervening 13 years of EU membership, economic growth rates were above the European average for much of the time, with particularly dynamic growth in the second half of the 1980s. From the ﬁgures presented above, it would seem that these economic growth rates were not translated into job growth and unemployment reduction. Unemployment persisted on a regional and sectoral basis, and adversely affected certain groups within the labour market, in particular young workers, long-term unemployed and women. Despite the persistence of unemployment, however, the labour market showed a certain degree of dynamism, particularly in the closing years of the 1980s and during the years immediately prior to Spain’s entry into the euro zone. Job creation was clearly evident in the 1990s, in part as a result of the cyclical movements of the economy. In 1998 alone, some 440 300 people secured employment and Spain recorded the highest number of people working, with 13.3 million in employment. 46

The Labour Market, Unemployment and Divergence 47

Yet the most distinguishable feature of the Spanish labour market at the end of the 1990s remained the persistent high rate of unemployment. While the country succeeded in achieving convergence across a range of nominal economic indicators, and a more varied degree of convergence on real indicators (productivity, technological capacity, stock of human capital), the jobless rate highlighted the extent of divergence that continued to prevail against the trends elsewhere in the European Union. As European integration proceeds, and monetary union becomes more ﬁrmly established, the failure to address the issue of unemployment may put Spain at risk of jeopardising convergence with the Maastricht criteria. To qualify for entry to the third stage of monetary union, the Spanish government had to reduce public spending so as to bring the public sector deﬁcit below the 3 per cent target. Continued unemployment absorbs a proportion of government spending, and any cyclical downswing immediately results in greater public resources being directed towards unemployment subsidies while taxation revenues decline. European integration itself brings certain contradictions to the question of unemployment. On the one hand, the responsibilities associated with monetary union required the government to tackle the problem using essentially microeconomic supplyside policies while pursuing a restrictive ﬁscal policy. On the other hand, among the promised beneﬁts of monetary union are stability and growth, which will have positive consequences for employment creation. The problem is that these beneﬁts will not be immediately available – in the meantime, all national governments are required to implement effective labour market policies. This chapter will identify some of the causes of unemployment, and the reasons put forward by national and European analysts for the continued divergence between Spanish and European rates. In addition, an examination of the structure of the labour market is presented, highlighting the particular groups affected by unemployment. Thirdly, the broad institutional framework of the labour market is examined, together with the various policies and reforms undertaken by the different governments. The chapter concludes with a discussion on the potential of the labour market to adjust to the continued demands of European integration and the prospects for future convergence.

Why is unemployment so high? Concern over the causes of unemployment throughout the European Union as a whole was expressed with some frequency over the course

48 Spain in the EU

of the 1980s and 1990s. Numerous studies have cited a variety of factors, ranging from technological change, institutional rigidities in the labour market, structural change, increased international competition and even government macro-economic policy. Many of these analyses focused on the organisation and operation of labour markets, the inﬂexibility of which was cited as limiting the wage adjustment required to restore equilibrium. One explanation rested upon the role of those individuals in employment to inﬂuence wages upwards through their ability (via the trade union) to negotiate higher wage payments, preventing those unemployed workers from exerting downward pressure (Blanchard and Summers, 1987; Lindbeck and Snower, 1988). This explanation of insider-outsider conﬂict was accepted as a factor in Spanish unemployment (Bentolila and Dolado, 1994). The high cost of hiring and ﬁring workers was considered to be a factor in higher unemployment, since it prevented employers from responding to cyclical ﬂuctuations (Bentolila and Bertola, 1990). Malinvaud (1994) argued that capital shortages, the result of high real wages and high real interest rates, was a decisive inﬂuence. If ﬁrms do not increase capital investment, there is no possibility to raise labour productivity, and hence no incentive to employ extra workers. As unemployment continues and becomes entrenched in the economy, it has lasting effects on both the supply and demand for labour. Work seekers may become discouraged after long and futile searching for job placements, and eventually may stop looking for work even when the economy recovers from a recessionary phase. Another explanation centred upon the mismatch between supply and demand (Pissarides, 1992). This is a particular risk when in a recession fewer jobs are advertised and offered, with potential workers responding to this by ceasing their search for employment. Once recovery begins, ﬁrms create fewer jobs and workers become accustomed to lower levels of search. These various explanations – insider-outsider distinctions, discouraged workers, capital stock, mismatch between demand and supply – were grouped under the general category of hysterisis as explanations for the unemployment that dogged the European economy at the end of the 1980s. Not all factors have carried equal weight, nor indeed equal prominence at any given time. Theoretical developments in economics associated with monetarist thinking criticised the use of expansionary macro-economic policy to reduce unemployment, emphasising the inﬂationary effects of government spending and the merely temporary increase in employment. With the focus on inﬂation control in the

The Labour Market, Unemployment and Divergence 49

1980s, the monetarist concept of a non-accelerating inﬂationary rate of unemployment (NAIRU) was inﬂuential among policymakers who adopted a permissive attitude to rising unemployment, seeing excess supply in the labour market as a way of reducing inﬂationary tendencies (Layard, Nickell and Jackman, 1991). The view which gained ground was that unemployment reduction depended upon a judicious combination of macro-economic policy focusing on price stability to maintain international competitiveness, and micro-economic supplyside policies to increase the functioning of the labour market and the quality of the labour force. This position was promoted with regularity by both the European Commission and the Organisation for Economic Cooperation and Development (CEC, 1993; OECD, 1994). The OECD argued that the policies of the welfare state were maintaining unemployment at excessively high levels compared to other parts of the world such as the United States and Japan. High income tax rates and generous compensation payments to the unemployed distorted the operation of the labour market, the former discouraging people entering unemployment at the lower end of the wage scale and the latter acting as an incentive to choose leisure over work (Layard, Nickell and Jackman, 1991). A separate strand of research examined the role of structural change and technological progress, which shifts the demand for particular groups of workers and particular types of skills. The technological progress of the last two decades of the twentieth century eroded demand for the traditional skills that drove the labour markets and fuelled postwar economic growth. Instead, demand increased for highly skilled workers, and for workers who can adapt very quickly to new skills as technological progress exerts its ever-changing inﬂuence on the skills-base. Rising unemployment becomes the feature of economies that cannot offer this adaptable and highly skilled workforce. Unemployment resulting from technological shift is a feature especially within countries, and often on a regional basis, where large pools of jobless are to be found. This brief review of the various explanations offered for high levels of unemployment throughout Europe indicates the diversity of the analyses, and the lack of common agreement on a common problem that prevailed over the period since the economic crisis of the 1970s, albeit with different impact within and between countries. Moreover, there were few national cases that could be explained by reference to one particular factor, and most countries recognised the complexity of employment and unemployment – even if many resorted to simple

50 Spain in the EU

solutions, jumping on one or other bandwagon of labour market ﬂexibility, tax reduction, or welfare state reform. Where then can we locate the explanations for the persistence of Spanish unemployment? Spanish economists base their analyses of the continued high levels of unemployment within two broad categories of explanation – on the one hand, the rigidity of the labour market and the propensity towards high wage increases, and on the other, the historical features of the economic system (Sevilla, 1997, p. 138). The two explanations are not always mutually exclusive among economists, however, and there is a general recognition both of the weaknesses of the productive system and of the labour market. Ultimately, the difference between different interpretations lies in the emphasis on one or other explanation and the consequent recommendations for the resolution of the unemployment problem. Martín (1997) associated continued unemployment with the failure to maintain price and wage competitiveness, with a consequent displacement of national production by imported products. More concretely, she identiﬁes the enormous expansion in the labour market participation rate from the early 1980s due to the inﬂux of women workers and the increase associated with the earlier baby boom. Even so, the participation rate remained one of the lowest in the EU. Changes in the manufacturing structure also affected the structure of labour demand. In the Spanish case, the relative decline of weak demand, low technological-intensity sectors in favour of sectors facing medium demand, and medium technological intensity, had its impact on employment. After this point, the explanation of persistent unemployment becomes more uncertain in its linkage of the causal factors, moving from the mix of temporary/part-time job opportunities to wage rigidity, the level of social security contributions and dismissal costs. Throughout the European Union, the social groups that have been particularly badly affected by unemployment were women, young workers, and the long-term unemployed (Symes, 1998). In Spain, these groups were more adversely affected than the EU average. The Spanish rate of unemployment among women in 1986 was 25.3 per cent, compared with 12.5 per cent in the EU as a whole. Ten years later, the Spanish rate of female unemployment had increased to 29.5 per cent, against the EU average of 12.6 per cent (Martín, 1997, p. 61). The number of part-time jobs as a percentage of total jobs rose in the years following accession to the EU, but despite this it continued to lag below the EU average. The signiﬁcance of this difference lies in the fact

The Labour Market, Unemployment and Divergence 51

that many women seek part-time employment, and the limited availability of this kind of work means a restriction on the employment possibilities for women. On the other hand, a high proportion of temporary employment compared to those on indeﬁnite contracts had different results. Given the ﬁxed-term nature of temporary contracts, there was no incentive for employers or employees to invest in training and professional development, which therefore prevented the possibility of raising the productivity and quality of labour, and ultimately taking advantage of technological improvements. Sevilla (1997) explained the continued unemployment as a result of the industrial relations system that discouraged employers from taking on workers, especially young workers or those with least qualiﬁcations. He argued that the minimum wage was thus a disincentive to employers. Furthermore, many unemployed were sheltered from the harsher aspects of joblessness, as they lived with their families, and the family thereby acted as a substitute social security system. This arrangement, he argued, reduced the pressure to search for employment, and the unemployed held out for wages and conditions comparable to their previous job rather than accepting a reduced wage and less favourable working conditions. In addition to these features of the labour market, Sevilla pointed to the lack of an active policy on employment creation, including training for the unemployment, as decisive factors in the persistence of unemployment. It is not uncommon for analysts to locate the problem of Spanish unemployment to historical political and social conditions, the effects of which determine a trajectory of development that later turns out to be restrictive and inhibiting (Marimon, 1996). In the 1970s, the rapid growth of inﬂation which accompanied the transition to democracy was in part attributed to a breakdown of labour relations, the latter unleashing a ﬂurry of inﬂationary wage demands. In order to engender a return to price stability, the authorities pursued disinﬂation and allowed unemployment to remain high throughout the ﬁrst half of the 1980s so as to dampen the inﬂationary pressures in the labour market. The difﬁculty with this policy, and implicit to the NAIRU analysis, lay in predicting the time lag of adjustment. Another difﬁculty is that wage pressures are not the only causal factors pushing up the inﬂation rate. Where other factors exist causing inﬂation to continue, the risk is that unemployment is allowed to remain at high levels unless and until the battle against inﬂation is won. In the Spanish experience, the second half of the 1980s brought high levels of growth, consumer and investment spending in the aftermath of EU accession – and a

52 Spain in the EU

booming economy added to the inﬂationary trend. According to one study, this economic boom intermingled with strong wage demands that continued in the face of high levels of unemployment (Blanchard, Jimeno et al., 1995). The failure of high unemployment to bring about more moderate wage demands, and through this deﬂationary process to increase demand and thus boost employment, without refuelling inﬂation once again, resulted in the blame being placed on the inﬂexibility of the labour market. The Blanchard and Jimeno study (1995) concluded that it was the nature of the Spanish labour market institutions that prevented the emergence of wage moderation and allowed unemployment to persist. Two aspects of the institutional system came in for particular criticism – the structure of collective bargaining and the high ﬁring costs of labour, each one operating to prevent adjustment in employment and wages at the sectoral, regional and individual ﬁrm level. The effect of these was to create a dual structure within the labour market, comprising one category of workers who were in employment – with relatively good conditions, bargaining power and rising wages – and a second category of unemployed and ﬁxed-term workers, who possessed little or no inﬂuence on wages. Those in employment had a high level of protection against unemployment, and exerted inﬂuence within the collective bargaining system, so as to secure wage settlements which did not reﬂect the fact of high unemployment. The wage demands of the employed, the ‘haves’, exerted inﬂationary pressure, while the very large body of unemployed, the ‘have-nots’ were unable to exert the kind of deﬂationary pressure predicted by the prevailing economic theory. Other commentators also looked to the institutional system of the labour market. Martín (1997) noted the gradual convergence of hourly labour costs towards the European average, but questioned the real beneﬁt of this movement when productivity levels had not risen enough to compensate for higher wage costs. Social security contributions paid by Spanish employers were higher than the European average throughout the decade after accession to the EU. Compared to social welfare provisions in the United States and Japan, the EU continued to be more generous, and Spain even more so. In an increasingly competitive international environment, with mobile capital, the increased labour costs associated with higher employer social security contributions posed a risk to Spain’s traditional competitive advantage in this area. Andrés and García (1992) adopted a more comprehensive view to explain the continued high level of unemployment, citing historical

The Labour Market, Unemployment and Divergence 53

factors from the 1970s and in particular highlighting the severity of the economic crisis and its pervasive effects at the sectoral level. The oil crisis signalled an overwhelming supply-side shock, and a huge inﬂationary spiral, as both wages and prices moved upwards simultaneously. As the industrial sectors responded to the cost increases by reducing output, the recession spread throughout the economy. By 1979, the government sought to control the inﬂationary spiral through anti-inﬂationary measures, including higher interest rates. There was a strong contraction in the level of aggregate demand, and investment fell back as a result of rising interest rates. From then onwards, shortages of capital interacted with slower productivity growth to produce lower demand for labour. Unemployment rose as a result, thereby setting a trend that would become ﬁrmly established as the decade wore on. Alongside the effects of the economic crisis, a second set of factors became evident in the 1980s. These related to the industrial restructuring and reorganisation of traditional industrial sectors, in part initiated by the government and partly as a result of the inevitable readjustment associated with the demands of competition and European integration. Spanish unemployment exhibited many of the features of hysteresis, whereby the short-term disequilibrium resulting from the economic crisis inﬂuenced the long-run equilibrium of the economy, maintaining the jobless total at higher levels than those which prevailed before the oil crisis (Blanchard and Summers, 1987). According to Andrés and García (1992), because of the existence of hysteresis, any short-term supply or demand shocks reduce the level of employment and, in addition, increase the inﬂationary tendencies in the future. Economic recovery is therefore slower and the return to previous employment levels is also much more difﬁcult. Like other analysts, Andrés and García pointed to the nature of the wage bargaining process as one of the mechanisms that explain the presence of hysteresis. The importance of historical factors in explaining the high levels of unemployment was also recognised by Toharia (1997, 1998). In particular, the political and economic legacies of the Franco regime had a decisive inﬂuence on the development of the employment structure which continued throughout the 1980s, delaying important structural changes to the labour market and also affecting the range of government policies. As a result of this slow adaptation, Spain failed to match the degree of convergence of employment with the European Union which it had achieved with the nominal indicators. The political transition to democracy involved the establishment of an institutional

54 Spain in the EU

system of interest representation, which included trade unions eager to exercise their democratic rights and vocal in the pursuit of members’ interests. Against the extremely vigorous demands for wage increases made by the trade unions, the government were moved to tread cautiously, unwilling to force a confrontation or to destabilise the fragile new democracy. In view of this governmental caution, a formal system of industrial relations was not put in place until the beginning of the 1980s. Toharia (1997) argued that the new democratic government’s passive approach to macro-economic policy set a pattern within the economy that would later aggravate both unemployment and inﬂation. Instead of adopting strict monetarist policies to deal with the inﬂation of the 1970s that was initiated by the oil crisis, the government reacted by accommodating the inﬂation and the ensuing wage demands of the trade unions. By the 1980s, with inﬂation now regarded as the principal macro-economic problem, policy emphasis shifted to price stability and unemployment was allowed to rise in the expectation of reducing inﬂationary pressures. At this juncture, low inﬂation was regarded as a necessary pre-condition to the promotion of employment. The economic legacy bequeathed to the new democracy was an economic system which had developed under conditions of protectionism and interventionism, a large number of very small enterprises together with state enterprises unused to the pressures of international competition, and dominated by traditional manufacturing with low technological intensity. The prospect of European integration, bringing as it would greater levels of competition in a larger market, highlighted the necessity for a full-scale modernisation of the economic system and a restructuring of industrial sectors. This occurred slowly and painfully, most clearly in the job losses that emerged in traditional industrial activities and often geographically concentrated. Between 1978 and 1990, there was a net loss of some 12 000 enterprises within Spanish industry. The effect of industrial restructuring on employment was devastating – with a loss of 400 000 jobs over the same period (Buesa and Molero, 1998). By 1993, after several years of recession, restructuring and reconversion had yet to be completed and unemployment remained an inevitable part of the future for much of the industrial sector. Linked to the economic restructuring that was associated with entry to the European Union was a structural shift within the economic system, one that had already begun in other European states from the 1970s, namely the decline of agriculture and manufacturing with a rise

The Labour Market, Unemployment and Divergence 55

to prominence of the services sector. Between 1980 and 1996, the Spanish agricultural and manufacturing sectors underwent a decline in the share of total employment, from 19.2 per cent to 8.7 per cent in the case of agriculture, and from 29.4 per cent to 20.2 per cent in the case of manufacturing industry (Iranzo, 1997, p. 76). The services sector share of total employment rose steadily throughout the 1970s and 1980s, registering a level of 44.9 per cent in 1980 and rising rapidly to over 60 per cent by 1996. During the expansionary phase after accession to the EU (1986–90) employment in the services sector increased at an annual rate of 4.5 per cent, which was two percentage points above the average rate for the economy as a whole. Despite this impressive growth of the services sector, however, it was not sufﬁcient to provide enough jobs to absorb the total surplus in the labour market so unemployment continued to rise into the 1990s. A decade after the transition to democracy, Spain joined the European Union. During the ﬁve years after accession, the country enjoyed above average growth rates, led by strong consumer and investment demand. By this time, the inﬂuences of the past had been diffused in a process of political and economic modernisation, strengthened by the inﬂuence of internationalisation at the political, economic and social levels. Yet unemployment remained high, even as European Union rates began to decline. Explanations for the fact that unemployment continued throughout the 1980s and 1990s shifted somewhat – to focus on labour market ﬂows, the policy stance of the government and friction in the operation of the labour market. The size of the labour force increased signiﬁcantly in the 1980s, most notably with a rise in female participation rates. With greater inﬂows into the labour market, and continuing outﬂows, the mismatch between labour skills offered and the kinds of skills demanded by employers was exacerbated. Moreover, the labour market reform introduced in 1984 to faciliate the introduction of ﬁxed-term contracts, and intended at the time to promote employment, had the effect of actually adding to the outﬂows from the labour market. Eventually, this dual structure within the labour market, divided between permanent and ﬁxed-term workers, would be the source of criticism directed at the ability of the permanent workers to inﬂuence wage setting, delinked from the actual conditions of demand and supply in the labour market. By the 1990s, the unemployment beneﬁt system was also targeted for criticism on the basis that the generous payments acted as a disincentive to active searching for work on the part of the unemployed.

56 Spain in the EU

Explaining unemployment as the result of the structure of labour market institutions reﬂected a consensus that began to emerge throughout the European Union by the early 1990s. It was exempliﬁed by the European Commission’s White Paper on Growth, Competitiveness and Employment (1993), the OECD Jobs Study (1994), and at the national level by governments’ attempts at labour market reform. The Spanish government introduced two attempts at labour market reform, in 1994 and again in 1997, as part of a broader programme of macroeconomic and public sector reform in pursuit of convergence, and both of these interventions will be examined below. How successful labour market reform will be in reducing unemployment, however, depends on the extent to which the problem has been correctly diagnosed. Increasing the ﬂexibility of the labour market by reforming the beneﬁt system, reducing the ﬁring costs, modifying the collective bargaining system and changing the legislative system covering industrial relations so as to give more power to the individual ﬁrms and employers may improve overall employment, provided that these are the causal factors that inhibited employment in the ﬁrst place. As Toharia (1997) suggests, the empirical evidence on these causal factors is not conclusive. It is important to recognise the role played by internationalisation processes and structural change as key causal factors in employment creation and destruction. Micro-economic reforms alone may have little impact on employment levels in the face of broader forces of change. The Spanish economy is now more integrated with the European economy, so that competitive pressures, recession and structural change are transmitted more rapidly and with greater severity than ever before. Improving the ﬂexibility of the labour market is therefore only one way of responding to these pressures. It is a reaction to events and prevailing orthodoxy rather than a proactive attempt by policymakers to strengthen the underlying structure and quality of the labour force. Structural adjustment within the economic system is increasingly a continuing and permanent feature of the environment in which economic policy and economic activity is conducted, rather than being merely a temporary discomfort to be tolerated until equilibrium is restored. Given this reality of permanent change and continued structural adjustment, it cannot be reasonable to rely on employment policies at the micro-economic level that may have only marginal effects on the level and quality of the labour force. Instead, the demands of permanent structural adjustment require a strategic response at the macro-economic level, so as to more closely match the

The Labour Market, Unemployment and Divergence 57

kind of skills offered within the labour force with those demanded by potential employers, and to inﬂuence the patterns of investment and structural change as far as possible in accordance with the existing economic system and political preferences.

Labour market proﬁle In order to understand the nature and extent of Spanish unemployment, it is important to recognise the variation in the incidence of unemployment across different groups of workers. Demographic trends have played a part in both the size and composition of the labour force throughout the 1980s and 1990s. Speciﬁcally, movements in the fertility rate inﬂuenced the contemporary labour force in different directions. Firstly, a rise in fertility rates in the 1960s led to an increased inﬂow to the labour force of people aged 16–19 up to the early 1980s, and also in those aged 20–24. After the mid-1970s, fertility rates fell quite dramatically, dropping below European rates. The effects of this drop in fertility rates is slowly emerging in terms of the Spanish labour force as a slowing down of the working-age population and a gradual ageing of the overall population. The implications are for an increase in the dependency ratio (pensioners and young people to working population), which would place enormous burdens upon the working population especially under existing conditions of high unemployment. The development of the Spanish labour market since the 1970s has been neither consistent nor stable, and several distinct periods can be identiﬁed (Toharia, 1997). After a period of moderate growth, employment and the labour market began to stagnate around the mid-1970s, coinciding with the oil crisis-induced economic recession and the political transition. From then until the accession to the European Union, employment fell dramatically during a period when participation rates (comprising those in jobs plus those looking for work) were rising. Employment showed renewed dynamism in the period 1985–91, rising alongside higher levels of economic growth rates at both the national and international levels. Participation rates continued to rise, so that the total employment increase of 1.8 million jobs during this period was only able to reduce unemployment by half a million.1 Between 1991–94, employment again fell as Spain experienced a severe recession; this was most acute in 1994 with an unemployment rate close to 25 per cent, and among young people (18–25 year olds) the unemployment rate rose to 37.9 per cent, the highest in the

58 Spain in the EU

European Union (Gonzalez Pino, 1995). From 1995, this downward trend was reversed as economic growth returned, and employment rose steadily in each of the years leading up to Spain’s entry to the euro zone. Notwithstanding this positive development, the unemployment rate for 1998 stood at 18.2 per cent compared to the average for the European Union of just below 11 per cent.

Principal labour market features2 In the two decades before EMU, there was a steady increase in the female participation rate, rising more rapidly in the years immediately preceding entry to the euro zone. Among women in the 25–54 age group, participation rates doubled over this period, to almost 60 per cent. For women over 55, with an already low level of participation, the rate has fallen even further. Male participation rates, on the other hand, declined over the same period, with particularly sharp falls in the participation rates for young men in the 16–19 age group and those over 55. In both of these age groups, public policy has played a role in the decrease, with the educational system absorbing the former, and early retirement schemes the latter. A previous section identiﬁed the services sector as the major growth area for jobs and the declining importance of the agricultural and manufacturing sectors as possible sources of employment. Occupationally, this sector shift is reﬂected in an increase in the number of certain types of jobs. In general, there has been an increase in the number of non-manual jobs, and especially so in the case of professional and technical occupations. In terms of the division between public and private sector employment, the trend has been relatively stable. The proportion of total employed in the public sector and government employees (excluding public enterprises) rose in the period 1977–86, but showed no signiﬁcant decline since then. However, since accession to the EU, it is the private sector which emerged as the main generator of employment. The 1980s brought a decrease in the number of working hours and an expansion of part-time work. Some 75–80 per cent of part-time work is done by women. Despite this increase, nonetheless, Spain lags behind other member states of the EU in terms of the amount of part-time work available within the labour market. However, in terms of temporary or ﬁxed-term employment, the Spanish rate of 33.6 per cent exceeds the EU average rate of 11.8 per cent. The rate of ﬁxed-term contracts increased rapidly up to 1988, before following a more stable movement.

The Labour Market, Unemployment and Divergence 59

Part-time workers carry the burden of adjustments by ﬁrms in recessions, while beneﬁting from expansionary phases undertaken by enterprises – and for this reason have represented a buffer in the wage bargaining negotiations between permanent workers and employers, where the ﬁnal agreement reﬂects the bargaining power rather than the actual conditions in the labour market. Despite this ‘ﬂexibilisation’ of working time, the majority of workers remain employed on indeﬁnite contracts (‘permanent workers’), and the number of self-employed was less than half of the permanent workers in 1997 (Table 3.1). A great deal of regional variation permeates the Spanish labour market, and among the 17 regional autonomous communities differences exist at the sectoral level, in participation rates, and in unemployment level. Andalucía, Galicia and Extremadura have traditionally been the most underdeveloped regions, and heavily dependent on agriculture. Historically, the Basque country, Asturias and Cantabria were predominant in traditional manufacturing, based on mining, iron and steel, industries that were subject to the government’s programme of restructuring and reconversion in the 1980s. Since accession to the European Union, the most dynamic areas have been Madrid, Baleares, Canarias and the Mediterranean regions (Cataluña, Murcia, Aragón, Navarra, and La Rioja).3 Population is concentrated in the centre (the Madrid region) and along the Mediterranean coast, while four of the regions (Andalucía, Cataluña, Madrid, and Valenciana) contain 55 per cent of the population. There are other aspects of divergence at the level of the regional labour markets in addition. In terms of the activity rate, there is a spread of 10 percentage points between the highest (Baleares with 53.8 per cent, and Cataluña at 53.3 per cent) and the lowest (Asturias

Table 3.1

Employment classiﬁcation 1997 (CES, 1998, p. 219)

Employment category Self-employed Salaried indeﬁnite contract ﬁxed-term contract non-classiﬁed Others Total

1997

% 96/97

3 028 400 9 709 100 6 442 000 3 254 400 12 700 27 100

–1.8 4.6 4.9 3.8 109.9 –3.2

12 764 600

3.0

60 Spain in the EU

with 43.9 per cent). Employment levels vary from 47.7 per cent in Baleares to 32.9 per cent in Extremadura. Unemployment levels show particularly strong divergence between regions, with a spread of almost 20 percentage points between the highest (Andalucía with 30.8 per cent) and the lowest (Navarra with 10.9 per cent) (CES, 1998, p. 239). Demographic differences play a part in the regional divergence, and a high proportion of young people or older people would, for instance, affect the activity rate. Other factors such as the sectoral distribution of employment and differences in productivity can explain disparities in regional labour markets. Empirical evidence suggests that these disparities grow during expansionary phases and that unemployment levels among the regions tend to be similar during periods of economic crisis (CES, 1998). However, despite the disparities that exist among regional labour markets, there has been no signiﬁcant inter-regional mobility from low-employment regions to high-employment regions over the 1980s and 1990s. No satisfactory reason has been offered for the low mobility, although explanations tend to centre upon social and family ties as factors in reduced mobility. Certainly, it remains surprising that while there has been regional convergence in terms of income levels and structures of production, the regional labour markets continue to diverge.

Features of unemployment Unemployment has steadily and continuously increased since the 1970s. In 1971, the rate of unemployment stood at 3.4 per cent, rising to 11.6 per cent by 1980, at which point it was already well above jobless rates in the other European countries. The upward trend continued throughout the decade, before reversing from 1988 through to 1990 when unemployment was 16.2 per cent of the labour force. After that, unemployment began to rise again and the economic recession of the early 1990s took a heavy toll on the labour force. At the height of the recession, unemployment rose to close to 25 per cent. By 1995, economic recovery initiated a downward trend in unemployment which continued for the remainder of the 1990s (European Economy, 65, 1998). From this brief outline of the trajectory followed by unemployment rates, it is clear that European integration has not exerted a positive impact on unemployment reduction. Unemployment movements have closely followed the cyclical movements of the Spanish economy,

The Labour Market, Unemployment and Divergence 61

which are obviously related to the wider European cyclical trend. But the Spanish experience has tended to exhibit an exacerbated anticyclical trend, with a downswing bringing much higher levels of unemployment, and the economic recovery lower levels of employment creation than during previous cycles. In 1986, Spain entered the European Union with 21.2 per cent unemployment. In January 1999, the country joined ten other EU member states in monetary union, bringing with it an unemployment rate just over 18 per cent. Clearly, Spain had achieved the necessary nominal convergence, meeting the Maastricht criteria for entry to monetary union, without having to reduce its unemployment rate to the EU average. National unemployment ﬁgures give a global picture of the Spanish labour market. Within it, however, certain groups experienced a particularly high incidence of unemployment. Firstly, female unemployment has tended to be much higher than for men. This was compounded by the large inﬂow of women into the workforce, especially from the second half of the 1980s, which had the effect of increasing the female participation rate. The result was that as unemployment rose in the 1990s recession, it affected women disproportionately. Spain has gradually experienced a feminisation both of employment and unemployment over the past two decades. Secondly, unemployment has a higher incidence within certain age groups. The highest incidence of unemployment occurs in the agegroup 16–19, followed by the 20–24 age-group, with a higher incidence among young females in both groups. At the end of 1998, the unemployment rate among young men (16–19) was 36.6 per cent, while for women in the same age category the rate was 53.9 per cent. In the 20–24 age group, the rates were 24.2 per cent for men and 39.7 per cent for women. For the age-group 25–54, the gender pattern is similar, with an unemployment rate of 10.9 per cent for men, while the rate for women is more than double at 23.6 per cent (El País, 1999, p. 113). Throughout the 1980s and 1990s the age differences persisted, although there was a reduction over the period 1986–91 to coincide with the post-accession economic boom. Thirdly, unemployment is most prevalent among the unskilled and least qualiﬁed. As might be expected, Toharia (1997) found a relationship between educational attainment and employability, and the study cited evidence of the positive relationship between education level and the probability of leaving unemployment, particularly in the case of females. The fourth group affected by unemployment is the long-term unemployed, deﬁned as the proportion of the unemployed without

62 Spain in the EU

work for more than one year. This category has shown a rising trend continuously since the end of the 1970s, peaking at 66 per cent in 1986, and thereafter falling to around 48 per cent in 1992, before rising again to hover around 57 per cent. The fact that over half of the unemployed have been without work for more than one year is a cause of concern for policymakers anxious to reduce the overall level of joblessness. The situation is compounded by the view that the long-term unemployed have a higher probability of spending even more time unemployed, ﬁnding difﬁculties in obtaining work even when more opportunities become available. Finally, as the discussion in the preceding section suggested, certain regions have been more seriously affected by high and continuing levels of unemployment than others. In 1997, Andalucía and Extremadura both shared similar unemployment levels of just over 30 per cent, Asturias and Cantabria each had 22 per cent (CES, 1998, p. 239). The lowest levels of unemployment were in Navarra (10.9 per cent), La Rioja (12.7 per cent), Baleares (13.4 per cent), and Aragon (14.8 per cent). The Madrid region had an unemployment rate midway between these, at 19.1 per cent. Regions most badly affected by unemployment were those in which regional output had a relatively high proportion of value added that was contributed by the agricultural sector. Both regionally and nationally, the agricultural sector had been declining in importance with respect to employment throughout the 1980s and 1990s, and for some regions with a historical dependence on agriculture this decline exacerbated regional unemployment. By contrast, regions with a strong industrial concentration had a much lower rate of unemployment.

Policy and labour market reform Labour market reform became one of the principal challenges for the Spanish government from the 1980s onwards. Initially, the purpose was the immediate and obvious one of reducing the very high unemployment level. Even before the close of the decade, this purpose became intermingled with the objective of bringing about a real convergence with the other member states of the European Union. At the European level, no objectives or criteria existed for real convergence similar to those speciﬁed in the Maastricht Treaty for the nominal indicators. Nevertheless, the Spanish government recognised the necessity of pursuing real convergence, particularly in the labour market where it diverged so signiﬁcantly from the rest of Europe. In essence, the

The Labour Market, Unemployment and Divergence 63

labour market reform was encapsulated in the pursuit and promotion of ﬂexibility. Labour market ﬂexibility was regarded by the Spanish government as a panacea for the ills affecting the labour market. By the early 1980s the doctrine of liberalisation had been adopted by international organisations such as the OECD, IMF and the European Commission, and became the orthodoxy of many policy analysts and the academic community throughout Europe. The effect of this new thinking within Spain was to cast doubt on the institutional and regulatory system governing the labour market, which had been so recently established by the government of the newly ﬂedged democracy. Almost before it had taken root, the modern industrial relations system envisaged under the 1978 Constitution and the 1980 Workers Statute became the target of reform. In 1984, the Workers’ Statute was amended to allow for the introduction of ﬂexible contracts of employment and particularly ﬁxed-term contracts. This institutional development had a positive effect on the level of employment and between 1984 and 1991employment rose. The principal effects were to be seen in the increased number of people employed under the new type of ﬁxed or short-term contracts, compared to those engaged under the indeﬁnite contracts. However, this expansion was eventually curtailed as the economic recession of the early 1990s gathered pace. Even in the face of steadily rising unemployment throughout the 1980s, policy evolved slowly and somewhat haphazardly. After the ﬁrst proposal for making the labour market more ﬂexible, involving the 1984 statute which provided for the introduction of temporary contracts, there was a time-lag of ten years before the next set of major reforms. In the intervening period, policy was principally focused on economic and structural change with a view to establishing the necessary competitive conditions for Spanish industry within the European Union. One of the side effects of the rationalisation and restructuring programme initiated by the government was a huge increase in unemployment in the affected industries. A second reason for the delay in reforming the labour market to bring it into line with developments in other European countries was the political commitments associated with the establishment of the new democratic system. Included within this system was an industrial relations system and legal framework similar to that already well established in the other European states. The 1978 Constitution included provisions relating to the protection of workers’ rights within a legal framework, and this was subsequently established in 1980 with the

64 Spain in the EU

introduction of the Workers’ Statute (Ley del Estatuto de los Trabajadores – LET). The statute was the vehicle for the new industrial relations system – which regulated all aspects of employment relations – and the state introduced the modern unemployment beneﬁt system. Some of the features of the new system, particularly the legal and administrative elements, were strongly interventionist and added to the rigidity of the labour market at a time when unemployment was rising rapidly. Eventually, the ﬁrst principal reform of the LET was introduced in 1984 with the introduction of ﬁxed-term and temporary contracts. Until then, part-time work had been conﬁned to certain categories of workers (those receiving unemployment beneﬁt, or who had exhausted their unemployment beneﬁt, and young workers under 25). The reform was intended to make the labour market more ﬂexible and to increase employment, broadening the deﬁnition of the term part-time and extending the range of work contracts available to employers. In 1992, a further policy change sought to reduce the level of unemployment beneﬁts, and amended the support system so as to persuade the unemployed to put more effort into the search for work. By 1994, developments within the Spanish labour market showed the efforts made by the government and the social partners to secure and maintain competitiveness under conditions of integration. Wage increases had fallen to below inﬂation rates, while unit labour costs were also slowing. The number of strikes and days lost through industrial action fell to their lowest levels since the legalisation of the trade unions and the right to strike at the end of the 1970s. However, even these developments were unable to make any noticeable impact on the high level of national unemployment. The response which was widely favoured centred on greater ﬂexibility of the labour market. In 1994 and again in 1997, further reform measures were introduced to bring greater ﬂexibility into the labour market, and made in the recognition that some further action was needed to address the grave problem of unemployment. In effect, the 1994 reform comprised three distinct legal decrees directed at the provision of employment, the introduction of learning contracts, and the regulation of the employment agencies dealing with temporary work (Alonso Olea, 1995). Also included were measures to strengthen collective bargaining at a decentralised level. On both occasions, the reforms sought to secure several distinct objectives in an all-embracing approach that reﬂected the continued espousal of principles of ﬂexibility. One of the intentions was to make the system of collective bargaining more ﬂexible and decentralised, while another was to stimulate more part-time contracts,

The Labour Market, Unemployment and Divergence 65

while also reducing the very high level of temporary contracts that followed on from the 1984 reform. By the mid-1990s, one third of the work-force was employed under atypical contracts, a percentage which left Spain with one of the highest levels of temporary contracts in Europe as a whole. In contrast, part-time employment increased only slowly and stood at 7 per cent of total employed in 1996, compared to the EU average of just over 14 per cent. The 1997 reform was made as part of a collective national agreement between the trade unions (UGT and CCOO) and the employers’ organisation arrived at in April 1997. As a result of the agreement, the government then followed on with legislation covering the spirit and intent of the April accords.4 The outcome of this latest set of measures was the creation of a new employment contract, with an indeﬁnite nature and different conditions relating to employment and dismissal than applied in the case of existing indeﬁnite contracts. The new employment contract operated speciﬁcally to reduce dismissal costs, long regarded as one of the obstacles prohibiting ﬁrms from adjusting employment levels to the wider economic conditions. Under the new contracts, employees facing dismissal were entitled to 33 days’ pay for each year worked up to a limit of 24 months’ salary, compared to 45 days and 42 months in the case of the ‘ordinary’ indeﬁnite contract.5 The impact of the new indeﬁnite contracts on employment was not immediately evident. Although the number of indeﬁnite contracts registered with the government employment agency (INEM) rose substantially during 1997/98, there was no marked change in the number of indeﬁnite contracts as a proportion of the total. One reason for the slow takeoff of new indeﬁnite contracts with reduced dismissal costs may be the continued preference of employers for temporary contracts, often of short duration. A second explanation could be that employers considered the real costs of dismissal to be above the statutory limit. However, in the ﬁrst year of euro membership, employment began to increase as the positive effects associated with European monetary union were translated into a stronger demand for workers. The more immediate real effect of the 1997 reform was to remove aspects of the structural rigidity that characterised the Spanish labour market, allowing salaries to be adapted to the conditions prevailing throughout the productive system rather than being set according to the degree of inﬂuence exerted in a centralised bargaining system. In the decade following accession to the European Union, national policy towards employment and unemployment took the traditional

66 Spain in the EU

form, with a policy mix overwhelmingly concentrated upon passive policies of unemployment beneﬁt – with intermittent attempts to make the labour market more ﬂexible as the government responded to the prevailing orthodoxy regarding the causal factors associated with unemployment. Undoubtedly, the high unemployment levels of the 1980s in the recently-established democracy with its constitutional guarantees of social democratic rights and promotion of the welfare state provided the state with immediate justiﬁcation for a comprehensive use of passive policies to support the jobless. The optimism that followed accession, and the ensuing high levels of economic growth during the ﬁve years that followed, gave no impetus for a change of direction in the policy mix, or an espousal of more active labour market policies. At the policy level, the government was far more inclined to bold moves in the context of monetary policy. During this period Spain joined the European Exchange Rate Mechanism, with both the central bank and the government declaring the country’s intention to enter a European monetary union at the ﬁrst opportunity and to do so with the front runners. Stabilisation and inﬂation control became the primary objectives of economic policy, and a restrictive monetary policy with a managed exchange rate the means by which these goals would be attained, as is suggested in Chapter 4. Beyond this, it was considered that the stable environment would lead to economic growth and thereby provide for job creation. On this basis, therefore, there was little emphasis on active and direct policies such as investment in education and training, employment provision, or job search and placement services. Government spending on active employment policies remained among the lowest in Europe throughout the 1980s and 1990s, and these policies were regarded as secondary to the legislative arrangements relating to the labour market and at no point considered to be substitutes for these or the passive system based on unemployment beneﬁt support (Sáez, 1997). Nonetheless, initiatives under the broad sweep of active employment policies began to emerge slowly in the 1990s, partly in recognition of the need for extra measures to tackle the renewed growth of unemployment that occurred with the recesssion of that period. Three categories of intervention may be identiﬁed: public/private employment placement agencies; employment promotion programmes; training and professional development Job placement facilities already existed under the public employment ofﬁce, INEM (Instituto Nacional de Empleo), which was created in 1978. This ofﬁce was responsible for registering placements and job

The Labour Market, Unemployment and Divergence 67

contracts, implementing government employment programmes, managing the unemployment beneﬁts system and providing vocational training for the unemployed. In practice, it was the latter two responsibilities with which it became mainly identiﬁed and as a result was regarded in the public domain and the popular mind as ‘the unemployment ofﬁce’ (Toharia, 1997). Despite its broad remit, it proved to be somewhat bureaucratic and inﬂexible in its operation and unable to make any inroads towards reducing unemployment, making its inadequacies in searching for job opportunities and matching job seekers with employers widely recognised. Partly in response, the government announced the creation of temporary employment agencies in 1994, with the idea of acting as intermediaries between job searchers and potential employers for the creation of temporary employment contracts. These new placement agencies were private-sector organisations, breaking for the ﬁrst time the monopoly held by INEM. Within a year, some 355 agencies operated and these had instigated the creation of 256 000 temporary employment contracts (Sevilla, 1997, p. 308). By 1998, the temporary employment agencies had approximately 1.8 million temporary contracts registered with them, one tenth of the total contracts (temporary and indeﬁnite) registered with INEM, a strong indication of the effect which these agencies had on the labour market (CES, 1999, p. 232). In 1995, the so-called Integrated Employment Services were created to provide a personalised service for job seekers, with concrete plans to assist the unemployed by improving employability and bringing together private and public sector enterprises in the local or regional area. This development mirrored similar active employment policies being pursued in other European countries around the same time. In the same year, an agreement was signed between INEM and the Ministry of Labour and Social Security giving a new role to the former, which highlighted its responsibility for employment. The agreement proposed to increase the share of placements made by INEM, and to place particular emphasis on the placement of long-term unemployed, and those over 45. In its role as intermediator, the agency would also extend the number of contacts with those ﬁrms that acted as potential employers. Employment promotion programmes were initiated by the public authorities at regional and local level, across a variety of occupations and activities. Mainly, however, these programmes attracted the low skilled, and the more durable contribution to permanent employment has been modest at best (Sáez, 1997). Better and more durable results

68 Spain in the EU

may be obtained through the training and professional development programmes, which have increased signiﬁcantly over the past decade. These programmes are targeted at both the unemployed and young people, and organised by INEM, with some ﬁnancial support being provided by the European Social Fund. The scope and coverage of these training and development programmes has been substantial, with large numbers of unemployed participating in the professional development programmes. Such initiatives represent an important ﬁrst step towards a permanent reduction of Spain’s high unemployment levels. However, the challenge for the authorities remains that of forecasting future demand and the types of skills likely to be needed, so as to make such programmes truly successful in combating the problem of unemployment. All of the initiatives discussed here refer to national efforts towards more active labour market policies, undertaken by the government in response to the continuing adverse conditions which left national unemployment levels above those prevailing in the rest of the European Union. From the mid-1990s, however, action began to gather pace with the emergence of EU-level initiatives on unemployment that would directly affect the conduct of national-level employment policy, and to do so for the ﬁrst time since Spain became a member.

European integration and employment policy European Union-level direct initiatives on (un)employment did not really exist in the 1980s when Spain ﬁrst joined the community. Following the agreement of the Single European Act in 1986, the main priority of the European Commission and the individual member states centred upon the establishment of the single market programme which was timetabled for completion in 1992. 6 In essence, the single market programme was one of liberalisation, focusing upon the removal of barriers to the free ﬂow of goods, services, capital and labour between the member states. It sought to deepen the level of integration by providing a single market, freed from the legal, technical, ﬁscal and administrative restrictions that had affected the European Community since its establishment under the Treaty of Rome in 1958. The proposed beneﬁts of the programme, as outlined by the European Commission, included greater efﬁciency, increased welfare and lower prices for consumers, and a higher level of economic growth for the European Community as a whole (Cecchini, 1988). Implicit in this was the view that greater efﬁciency and higher growth would increase the employment potential of all the member states,

The Labour Market, Unemployment and Divergence 69

without the need for more explicit measures to reduce the level of unemployment at either the national or supranational level. If each member state followed up the deregulatory approach adopted for the single market programme at the national level, and ensured the ﬂexibility of the labour market, both the economy and employment should be in a position to avail itself of the opportunities presented by this latest phase of European integration. Continuing high levels of unemployment throughout the European Union during the 1990s highlighted the ineffectiveness of the single market programme in making a signiﬁcant impact on reducing joblessness and the issue came into the forefront of debate once again.7 The European Commission White Paper Growth, Competitiveness and Employment located the problem of unemployment in causal factors from the 1970s – the stagﬂation which had an extremely negative effect on investment and led to spiralling inﬂation, thereby closing off job-creation potential (CEC, 1993). One of its central recommendations was increased investment in transport, energy, environmental and telecommunications networks across Europe by the year 2000. The Essen summit meeting of the European Council in the following year failed to agree on an expansion of funds for the investment proposals outlined in the White Paper, the Council restricting themselves to a consensus on certain principles for employment policy. These included an endorsement of vocational training, greater ﬂexibility of labour markets, reduced non-wage labour costs, greater emphasis on active policies towards employability and jobsearch. Successive summit meetings reafﬁrmed the centrality of job creation in the objectives of the European Union and its member states, but, overwhelmingly the effective orientation of EU policy lay with a stabilityoriented macroeconomic policy. Gradually, more explicit measures were adopted by the European Commission as it sought to co-ordinate national effforts on employment creation. At the Luxembourg summit held in November 1997, a European Employment Strategy was agreed by the member states, responding to the Employment Title of the Amsterdam Treaty. Employment was now regarded as a ‘common concern’ within the EU, and the treaty made an explicit commitment to a high level of employment. However, the treaty was not indicating a supranational-level policy; instead, pursuing the principle of subsidiarity, it stated that responsibility for employment policy should remain at the national level. Under the European Employment Strategy agreed at Luxembourg, the European Commission, therefore, adopted the role of co-ordinator of the national policies.

70 Spain in the EU

The central focus of the employment strategy is the formulation of annual employment guidelines by the European Commission through a process of consultation with various parties, which are then adopted by the European Council and subsequently implemented by each member state. National Action Plans and yearly implementation reports are produced by each member government, and these are subjected to scrutiny by the European Commission and the Council to ensure compliance with the agreed employment guidelines. Overall, the new employment strategy marks a stronger emphasis on active policies, with individual policies tailored to the needs and problems of the domestic economic situation. Therefore, Spain and the other member states remain free to adopt their own policies to cater to particular labour market circumstances, limited only by the general principles of the guidelines already agreed by the Commission and the Council. How did Spain respond to the European Employment Strategy? In September 1997, the government introduced the multiannual Employment Plan for the period 1997–99, proposing several principles to be pursued in employment creation within the framework of the EU-level strategy. It maintained the government’s commitment to non-inﬂationary growth, in line with the continued observation of the convergence criteria; it also stipulated the intention to foster social dialogue so as to improve the working of the labour market; ﬁnally, the plan proposed the integration of different government responsibilities and areas concerning employment (Alvarez Aledo, 1998). The stated intention was a shift from passive to active policies, emphasising training oriented to employability and adaptability, greater efﬁciency in the labour market, and the reduction of non-wage costs. It did not, however, envisage any overall increase in ﬁnancial support for speciﬁc measures in any of these areas. Ultimately, it represented both an attempt at co-ordination of the diverse elements of a national system perceived by many as inefﬁcient, and an opportunity to ‘europeanise’ both the policy and the institutional system. In addition, the government was required to prepare an annual national Action Plan for Employment for scrutiny by the European Commission, as stipulated by the Luxembourg agreement. The annual Action Plans for 1998 and 1999 submitted to the European Commission were ﬁrmly based upon the multiannual Employment Plan (1997–99) which the government had prepared earlier. And, indeed, these were favourably received by the Commission, which noted that the Spanish National Action Plan, together with those submitted by the Swedish, French, Italian and

The Labour Market, Unemployment and Divergence 71

Luxembourg governments, presented the most adequate measures for the reduction of unemployment (El País, 1999).

Conclusion This chapter has sought to provide a proﬁle of the Spanish labour market in the period since accession to the EU, acknowledging along the way the inﬂuences and factors which pre-date entry to the community. The most outstanding aspect of the period under membership was the high level of unemployment which continued largely unabated for most of this time, and was noticeably above the EU average unemployment rate for all categories affected. Within Spain, certain groups experienced particularly high unemployment rates – young people, women and the long-term unemployed (see Appendix 4). Despite the undoubted beneﬁts of EU membership, including high growth rates in the ﬁve years after 1986, a large volume of foreign direct investment, and an internationalisation of industry together with increased trade with the other member states, European integration seemed to have a very limited impact upon employment levels. The continued problem of unemployment attracted the concern and interest of policymakers and academics alike. Explanations abounded as to the causes – including labour market rigidities, high ﬁring and other non-wage costs, structural change and lack of competitiveness of Spanish industry. Traditional integration theory does also offer some contribution in the predictions of adjustment costs, including joblessness, that accompanies the structural adjustment following the creation of a customs union. In the newly-created enlarged market of the customs area, competition from low-cost and more efﬁcient producers can be expected to displace the production and trade ﬂows of inefﬁcient producers, formerly protected by customs duties. Competition displaces the inefﬁcient producers, forcing them to shift out of production or to become more efﬁcient. The burden of this adjustment will most likely fall, initially, upon the workers in the threatened sector, with a consequent rise in joblessness. As has been said, Spanish industry developed over many decades under high levels of protection, and although this practice fell gradually since 1959 and more rapidly since the 1970s, accession to the EC in 1986 brought with it the adoption of the community commercial policy and the complete elimination of Spain’s structure of protection against trade with the other member states. For an industrial sector until then largely unac-

72 Spain in the EU

customed to the pressures of competition, the impact of the new market conditions was both unexpected and painful. However, the impact of European integration on a somewhat uncompetitive economic sector cannnot be taken in isolation. The timing of accession coincided with structural changes that were taking place in the Spanish economy. Marimon and Zilibotti (1996) point to the initial size of the agricultural sector and the subsequent decline of this sector from the 1970s as an important explanation for the differences in unemployment levels between Spain and the rest of Europe. Between 1980 and 1996, the agriculture share of total employment had fallen from approximately 20 per cent to just over 8 per cent. Industry also declined in share of employment over the same period, from almost 30 per cent to 20 per cent. The services sector, on the other hand, expanded its share of employment, to account for two thirds of the total employed by the mid-1990s. However, this sectoral expansion was unable to absorb the surplus labour from the agricultural and industrial sectors, resulting in a high jobless rate. Moreover, many of the new jobs created in the services sector throughout the 1980s and 1990s were temporary, and some very short-term in nature, providing few opportunities for conversion to permanent employment. The situation was further exacerbated in the Spanish case by several supply-side factors, acknowledged by analysts but not really taken account of in the policy formulation process. These factors included a reversal of the migration and emigration that had characterised the 1960s and 1970s, when the country and particular regions were able to use the vent of emigration as a channel for surplus labour. From the mid-1970s the situation reversed as employment opportunities abroad dried up with the economic recession and a fall in economic growth. In the 1980s, emigration levels remained low, and there was also very little inter-regional migration comparable to previous decades. Two other supply-side factors were referred to in this chapter, namely the increased activity rates, and higher female participation rates – both of which had the effect of boosting the unemployment statistics. Moreover, Spain has seen a huge increase in the number of long-term unemployed, a feature of the labour market that accords with sectoral decline. On the other hand, those sectors that were expanding were unable to absorb the surplus labour, not least because the structure and composition of demand had shifted, with different skills and knowledge required in the tertiary sector. Here, it is worth reiterating the fact that the services sector itself encompasses a vast range of activities, from tourism, transport, personal services, ﬁnancial, insurance, consul-

The Labour Market, Unemployment and Divergence 73

tancy, education, communications and information technology, to name but a few – with an enormous diversity in the quality and range of skills, qualiﬁcations and knowledge demanded in each area. The national policy towards employment was formulated under the inﬂuence and constraints imposed by European integration, and continues in a similar vein under the so-called ‘Luxembourg process’. With the advent of EC membership in the 1980s, government was preoccupied with the task of preparing for membership and meeting the conditions necessary to comply with the acquis comunitaire, changing institutional, political and legal systems, and generally undergoing a process of ‘europeanisation’ at both the political and economic level. The Single Market Programme compounded the ‘europeanisation’ of the institutional system, as the government launched the process of removal of the various obstacles to the free movement of goods, services, capital and labour. Effectively, this meant for Spain merely a continuation of the liberalisation commitments associated with European integration undertaken as conditions of membership. However, the inﬂuence of the Single Market Programme was pervasive. It permeated not only politics at the European level, but the work of the European Commission and of national governments, as well as attracting the interest of the international business community. More than this, the philosophy and ideology associated with this massive programme of liberalisation determined the stance on many other policy areas, at the supranational and national levels. As an example of this, labour market rigidity was identiﬁed in many minds as a major contributing factor to the problem of unemployment. The solution to the problem was sought in the liberalisation of the labour market, and international organisations such as the OECD and the EU advocated widespread structural reforms in the pursuit of greater liberalisation. This recommendation effectively passed the responsibility for (un)employment policy to the national governments, leaving the EU authorities with the liberalisation programme of the Single Market, followed by the EMU project in the 1990s. As a result of the establishment of the European single currency, monetary policy came under the jurisdiction of the EU-level authorities, and the direct responsibility of the European Central Bank. In the past two decades of European integration, employment policy was treated very much as the poor relation in the political and policy arena. It occupied a secondary position in the ﬁrst instance, with the Single Market Programme occupying centre stage in the second half of the 1980s, and in the second instance with monetary integration, as governments

74 Spain in the EU

concentrated upon meeting the convergence criteria of the Maastricht Treaty. The treaty set no criteria for employment, no nominal indicators or qualitative objectives related to desired employment levels. The relative neglect of (un)employment that is suggested by the obvious absence of an active EU-level policy, compared to monetary policy, produced a similar relegation of the member state employment policies and a general reliance on unemployment beneﬁt among a range of passive employment policies in many countries.

Convergence and cohesion In the light of this chapter’s discussion of Spanish employment and labour market change, to what extent can aspects of convergence and cohesion be identiﬁed for this particular member state? The answer to this question is neither easy nor obvious, and it is difﬁcult to make general conclusions capable of being applied over a long period of time. Certainly, the experience of the 1980s and much of the 1990s, borne out by the evidence, is one of divergence. Throughout this period, national unemployment rates remained above the EU average unemployment rate, and were consistently the highest in the region. The activity rate, measured as a percentage of the population in the age range 15–64, stood at 56.3 per cent in 1985, while the EU rate was 66.4. By 1996, the Spanish rate had risen to 60.6 per cent, still below the EU average of 67.7 per cent. In 1985, the national employment rate (measured as a percentage of the population between 15–64) was 44.1 per cent, at that time the lowest among the countries comprising EU15, with an EU average of 59.8 per cent. In 1996, the Spanish employment rate had risen to 47.2 per cent, while the EU rate stood at 60.3 per cent. Unemployment, measured as a percentage of the civilian labour force, was 21.6 per cent in 1985, before falling in the boom years following accession, rising again in the recession of the early 1990s to register 22.1 per cent in 1996. The EU unemployment rate for this latter date was 10.9 per cent (CEC, 1998 European Economy, 65, 1998, p. 194). The nominal labour market indicators present a fairly consistent picture, one which suggests a continued gap in the performance of the Spanish labour market in contrast to the situation in the EU as a whole, and in comparison with the leading member states. The positive and measurable positive effects on employment and the labour market from European integration are at best difﬁcult to assess, and at worst neglible. The review of the Single Market, published by the European Commission in 1997, reported that the single market

The Labour Market, Unemployment and Divergence 75

had limited effects on labour ﬂows. It also noted that all the Spanish regions increased their capital/labour ratios, but for many of them this increase was moderate (CEC, 1997). More recently, the annual review of employment Employment in Europe (1999) stated that, although there had been a slight improvement of employment over the previous four years, ‘there was not much convergence in employment levels’ (p. 26). The review also noted that the pattern of employment rates between regions had not changed very much since 1980, attributing this stagnation to structural problems. Moreover, it acknowledged the singular lack of success of national and EU regional policies in achieving a ‘more balanced distribution of net job creation’. In effect, the review is sceptical of the convergence and cohesion of employment that has occurred to date in the EU. The Spanish employment experience bears out this scepticism – in the regional and national levels of employment and unemployment, and in the pattern of change affecting these indicators since accession. Despite Spain’s prominent position as recipient of EU Structural and Cohesion, these ﬁnancial ﬂows made little discernible positive impact upon the level of employment at the national or regional level. Monetary union poses a question mark over the possibility of improving the situation in the labour market. Certainly, the restrictions on public sector spending imposed by the Maastricht Treaty and the commitments undertaken in the Growth and Stability Pact limit the room for action by the public sector, particularly in terms of any expansionary policies. Current policy, framed in the context of the ‘Luxembourg process’ seeks to promote greater use of active employment policies and to shift away from passive policies of compensation and subsidy. In essence, it seeks to make more efﬁcient and effective use of the existing resource and institutional system, while the requirement of annual national action plans can have the effect of limiting a more strategic, long-term approach to the solution of labour market problems. The emphasis on principles and guidelines such as employability, adaptability and entrepreneurship is laudable, but the long-term impact on the composition and structure of employment, as well as in effecting a permanent reduction in unemployment, is still uncertain. For the Spanish labour market, the path of convergence with European Union employment rates and labour markets has been a difﬁcult one to follow. Largely due to the labour market policy conducted since 1984, the Spanish labour market has achieved a high degree of ﬂexibility and conforms quite closely to the model in other European countries (Sevilla, 1997). However, employment creation

76 Spain in the EU

remains weak, and the skills gap still has to be bridged. Unemployment is falling slowly, and at a rate which ensures that convergence will take some time to emerge. Ironically, a convergence has taken place at the policy level, the most recent being the National Action Plan under the ‘Luxembourg process’. However, like earlier policies, this initiative remains subject to the broader considerations of a ‘sound stabilityoriented macro-economic framework coupled with structural reforms’ (CEC, 1999c European Economy, Supplement A, 1, 1999). Demographic trends should be helpful in facilitating lower unemployment, but again this seems likely to happen only in the very long term. On one estimate, it would take at least ﬁve years of successive annual increase in the active population rate of 1 per cent combined with annual employment growth of 3 per cent to bring unemployment to 15 per cent, and ten years to reduce it to 10 per cent (CES, 1998, p. 215). If annual employment growth is less than 200 000 persons, the level of unemployment in ﬁve and ten years is likely to be closer to 20 per cent. Toharia (1997) refers to projections which indicate that the Spanish working age population is reaching a maximum, and will thereafter decline, so that by 2020 it will have returned to its 1990 level. However, projections also suggest structural differences, with half the future working age population in the age range 45–64. More importantly, the signiﬁcance of these projections lies in the possibility of Spain experiencing labour shortages in the future. Nonetheless, it is neither politically feasible nor economically desirable to sustain continuing unemployment at the levels that existed in the past. Still less is it democratic to tolerate large numbers of people without jobs over a long period, or permanently as is the case for many people in Spain. Throughout the European Union the ﬂexibility thesis has gained ground as a solution to the problem of unemployment. Yet the case for it is far from proven. There is a clear lack of a coherent and comprehensive theory of unemployment, and of a complete understanding of the complexities of economic and social change and how these changes interact with the labour market and the broader economic system. Furthermore, there is still limited understanding of the relationships between (un)employment and technical change, (un)employment and internationalisation/globalisation, and indeed how European integration affects employment. Particular developments in European integration – successive enlargements, the Single Market Programme, European Monetary Union – have been analysed from a number of viewpoints that essentially marginalised the employment implications or treated them as secondary to the main goal of

The Labour Market, Unemployment and Divergence 77

integration. Sustained high economic growth rates are undoubtedly crucial to employment creation and hence the reduction of unemployment. But strong economic growth alone will not ensure that unemployment falls to levels comparable in other EU member states. Gradual improvements in the operation of the labour market, and particularly in the reduction of unemployment, have been evident as the Spanish economy approached the new millennium. While still some way from a convergence with the EU average employment level, a degree of optimism appears to run through government pronouncements. The Stability Programme, covering the period 1999–2002, which was presented to the European Commission in December 1998 by the conservative-led government, predicted a net growth of 1.3 million jobs during the four years of the programme, and an unemployment ﬁgure of 12.8 per cent by 2002. Such an outcome is predicated upon an economic growth rate of 3.3 per cent on average, against an average growth for the EU of 2.5 per cent. In regard to employment, the Stability Programme set a growth rate of 2.3 per cent, equivalent to the creation of 350 000 jobs annually.

4 Towards Monetary Union – and Beyond

One of the triumphs of the Spanish government towards the end of the 1990s was joining European monetary union as a founder member. Under the conservative-led government, the country succeeded in meeting all of the Maastricht Treaty convergence criteria well ahead of schedule, and was launched on the path of monetary integration with the promise of price stability and economic growth in return for its commitment to ﬁscal rectitude. It was a remarkable achievement, even for a country such as Spain which was an enthusiastic participant in the European integration process since its initial entry to the EC. The enthusiasm for monetary union had been just as fervent, but the seemingly intractable economic problems gave the impression that eligibility was beyond even the careful management of the Bank of Spain. Inﬂation was considered to be one of the more serious issues, and one which many people regarded as beyond either the ability or the will of the authorities to manage. The persistent nature of the problem led to the view that there was a ‘culture of inﬂation’ within the economy, which restricted the competitiveness of industry, eroded living standards, and prevented a real convergence with the rest of Europe (Alcaide, 1995). By the close of the 1980s, with instability still a feature of the Spanish economy, there was a growing acceptance on the part of the monetary and political authorities that monetary union could be both the ultimate solution to permanent inﬂation and be presented as an ultimatum challenging the prevailing culture. This chapter examines how the national authorities approached the problem of inﬂation, and examines the role of the monetary authorities in macro-economic stability and exchange rate management. As the chapter shows, there was a very early commitment by the Spanish authorities to European monetary integration, shown clearly in the 78

Towards Monetary Union – and Beyond 79

decision to enter the Exchange Rate Mechanism of the European Monetary System in 1989. The membership of the ERM was a ﬁrst step towards co-ordination of monetary policies before the eventual introduction of a single currency. Although the monetary authorities showed this strong leaning towards European integration, the national ﬁnancial sector proved to be more reluctant, and for a time ill-prepared for competition in the enlarged marketplace. The chapter also brieﬂy outlines the monetary union programme and examines the costs and beneﬁts for Spain. The difﬁculty with assessing monetary union, and therefore the challenge for its proponents, is that the beneﬁts tend to occur in the long term, while the costs began to operate once the country had signalled its intention to join. The arguments in favour of monetary union range from the esoteric through the political and the practical, encompassing among them a wide variety of interests, from a concern with price stability, to the desire to cut back public spending and to seeing a reduction in transaction and exchange rate costs. The chapter concludes with a brief review of the prospects for longer term growth, an issue that will arise in later chapters of the book as well.

Monetary policy – the early years Monetary union implies the adoption of a single monetary policy, set by the independent central bank – in this case, the European Central Bank (ECB). In the euro zone, policy has one fundamental objective, the maintenance of price stability throughout the region. The Spanish monetary authorities had, since the early 1970s, pursued the same objective, consistently, but with limited success. The battle against inﬂation proved to be difﬁcult, especially so in the wake of the economic crisis throughout the decade, and the authorities were forced to make several policy shifts as prices and costs continued to rise. In the following decade, with national inﬂation rates still stubbornly above the European average, the policy experimentation continued but with a growing orientation towards a European solution. Following the collapse of the international monetary system in 1971, many governments welcomed the opportunity to have monetary policy restored as an instrument in macro-economic management. No longer bound by the responsibility of the managed exchange rate system, they could return monetary policy to the armoury, this time directed at domestic objectives rather than the external relationship of

80 Spain in the EU

the exchange rate. Very soon there was an opportunity to exercise the newly restored autonomy. This opportunity came with the economic crisis in the wake of the oil price rise, and the subsequent oil price increase at the end of the decade. The escalation in prices, accompanied by a collapse of growth, persuaded governments of the need to implement an active monetary policy so as to reduce the inﬂationary pressures. Because of the collapse of economic growth at this point in time, the continued inﬂationary pressures were viewed as a constraint upon eventual recovery. It seemed that the acceptance of this inverse relationship between growth and the price level was widespread, and this was especially true for Spain. Because the economic circumstances of the time were both unexpected and extraordinary, certainly by comparison with the years of economic boom, monetary policy was experimental and dogmatic by turn. From 1973, Spanish monetary policy was conducted at two levels – in what was the orthodox approach for the time. Firstly, it established objectives for the growth in the price level and real output through the control over the broad monetary aggregate, M3, essentially as a medium-term target. Secondly, the growth in the monetary aggregate was managed through the manipulation of the banking deposits held by the central bank. This two-level approach allowed for the necessary ﬂuctuations in the interest rate, and the exchange rate, to keep both in line with the planned path of growth. The problem, of course, was that growth did not return, while inﬂation continued to exist. Control over the monetary aggregate was supplemented by a large devaluation of the peseta in 1977, in an effort to restore the competitiveness of Spanish industry. Since the country was heavily dependent on imported energy, the unexpected rise in oil prices placed a heavy burden on costs, which was passed on in the form of higher consumer prices wherever possible. Soon, there was an additional cost pressure in the shape of escalating demands for higher wages. Newly legalised trade unions sought to protect members from the erosion of living standards, and launched a series of wage claims on behalf of growing numbers of new members. Responding to wage pressures and trade union demands, the government encouraged wage restraint in the agreement signed between the trade unions and employers in October 1977, and known as the Moncloa Pacts. What the agreement sought to do was to delink the wage rises from past inﬂation (that is, higher inﬂation) and to substitute predicted inﬂation rates as the determinant of future wage

Towards Monetary Union – and Beyond 81

rises. In that year, consumer price inﬂation was just over 24 per cent, and there was no wish to see this rate become the benchmark for future wage rises. In keeping with the developments in monetarist economic theory regarding the causes of inﬂation, and particularly the role played by the expectations of economic actors concerning future inﬂation and how this determines pricing decisions, the general approach of government policy was towards exerting a downward pressure on inﬂationary expectations. It seemed to have some success for inﬂation fell to 16 per cent by December of the following year. Not long afterwards, the expectations regarding downward inﬂationary trends, as a consequence of the Moncloa Pacts, were reversed by the second oil shock. Between 1979 and 1982, very little success was actually achieved in bringing down the inﬂation rate. Taking as a measure of inﬂation the price deﬂator for private consumption, the annual percentage change was 15 per cent over the period 1974–85, compared to less than half that level for the years 1961–73. Either it was difﬁcult to create a situation of downward expectations, in the face of obvious proof that actual inﬂation rates were moving upwards, or the policy instruments used were inappropriate or ineffective. The monetary policy instruments, control over the monetary aggregates and over the banking deposits, would soon become inadequate because of structural changes in ﬁnancial markets as well as the widespread adoption of new ﬁnancial instruments and near-money substitutes. Financial and banking deregulation occurred in the period between 1978 and 1987, leading to greater, although by no means complete, integration of the capital and money markets into the international system. The issue of government bonds and other debt-related instruments to ﬁnance rising government spending and the growing public sector, combined with this increased international ﬁnancial integration, meant ﬂuctuations in interest rates. While the central bank attached a great deal of importance to the stability of the ﬁnancial system, a stability that was crucial to improving the transmission mechanisms of monetary policy, the developments in the system were not always conducive to high levels of stability. It was also increasingly evident that while there was some downward movement of the price level throughout the 1980s, the volatility of the exchange rate had an adverse impact on the level of economic activity, on trade ﬂows, and on sectoral specialisation. Between 1984 and 1989 there was a shift of emphasis in monetary policy in response to a perceived divergence between the stability aims of the monetary authorities, the behaviour of the ﬁnancial markets,

82 Spain in the EU

and the uncertainty surrounding a system of exchange rates with complete ﬂexibility. In order to maintain control through monetary policy, the monetary aggregate target of M3 (notes, coins and bank deposits) was extended to include the range of liquid assets in the hands of the public, including short-term government securities. This new measure of the money supply (ALP) was designed to bring a greater degree of realism to monetary control, and to reﬂect the links between monetary policy and objectives on price and output levels. At the same time, the central bank moved away from controlling banking deposits held with the central bank towards more extensive use of interest rates, especially short-term rates. On exchange rates, the central bank moved towards a more concrete policy of shadowing exchange rates in other countries. This was especially so from 1986, with the accession to the European Community, when the peseta shadowed the exchange rates of the major countries in the EC, and from 1988 the Deutschmark. Exchange rate stability was considered to play a key role in the integration of Spain into the Community. Movements of the exchange rate were followed closely by the monetary authorities, the patterns of currency movements throwing into sharp relief the extent to which the external sector imposed limitations on the independent conduct of Spanish monetary policy. Spanish inﬂation rates continued above the levels pertaining in the principal member states during the mid-1980s, forcing the monetary authorities to raise interest rates above those elsewhere. As a result, Spain became the recipient of large-scale capital inﬂows, some of them long term in nature, but, increasingly, short-term speculative capital also featured. By 1987, the combination of a tight monetary policy and a booming economy, with growing speculative capital inﬂows, exerted upward pressure on the peseta. But the amount of central bank intervention needed in the foreign exchange market made the possibility of full sterilisation practically unrealisable. In practice, the central bank was caught in a vicious circle in which interventions in the foreign exchange market to maintain the desired level for the peseta caused deviations to other objectives of monetary policy, the correction of which then demanded further interest rate increases, which in turn attracted additional capital inﬂows and further pressures on the exchange rate. The conﬂict inherent in a tight monetary policy was then evident. As a result of continued appreciation of the peseta during the ﬁrst six months of 1987, the monetary authorities resorted to the use of temporary capital controls to limit the inﬂow of capital. Restrictions were

Towards Monetary Union – and Beyond 83

introduced on the withdrawal of peseta-denominated deposits by nonresidents, and on the foreign exchange liabilities held by banks as well as on the external debt of the private sector. These measures had little effect, however, and the pressure on the peseta continued. Given the constant innovation and evolution of the ﬁnancial sector, it did not take long for the ﬁnancial markets to develop new ﬁnancial instruments with which to circumvent the restrictions placed by the monetary authorities. In the circumstances, the central bank appeared to have two options (Banco de España, 1997). Either it could concentrate on maintaining strict control over the growth of liquidity, and accept the appreciation of the peseta, or it could allow disequilibrium in the monetary policy with deviations from targets. Choosing the ﬁrst option would, however, have a negative impact upon domestic demand, on investment levels and the export sector, and adversely affect the growth path of the national economy. The central bank settled on the second option, and used short-term changes to the interest rate to reduce pressures on the exchange rate. The outcome was a compromise between internal demands and external pressures on the monetary policy. In 1987, the target range for growth of the ALP monetary aggregate was set at 6.5–9.5 per cent; however, the actual growth was 14.3 per cent. At this point, the advantages of monetary integration were becoming stronger. Exchange rate stability could offer important beneﬁts for integration, and at the same time provide an ideal opportunity to secure price stability. A stable exchange rate would generate a degree of credibility and discipline, which in turn would operate on expectations and reduce inﬂationary pressures. Monetary integration in the form then available, namely the Exchange Rate Mechanism, would also force the authorities into taking a more restrictive monetary policy, unhindered by the usual political concerns which often deterred the taking of unpopular decisions when these were most needed.

ERM entry and its aftermath The decision to take the peseta into the ERM was made at the June 1989 meeting of the European Council held in Madrid, when the Delors report on monetary union was presented to the member state governments. The peseta entered the system at the 6 per cent margin of ﬂuctuation, and the entry effectively formalised a situation which had operated in practice for some time. At that point in time, it was particularly important to establish the credibility of the government’s

84 Spain in the EU

anti-inﬂation stance because growth rates continued to be buoyant, with strong levels of domestic demand giving rise to continued inﬂationary pressures. These circumstances offered reason enough to doubt the capability of the authorities to maintain the monetary aggregate targets in the absence of some external constraint. Between 1989 and 1992, the peseta enjoyed a period of stability within the ERM, remaining at the upper end of the ﬂuctuation band against the other currencies in the system. High interest rates continued to prevail within the domestic economy. Clearly, in holding to the upper limit within the ERM system, the authorities were using the maximum room for manoeuvre to control inﬂation, while maintaining their commitments under the system. Despite the high interest rates, however, the inﬂation differential with other countries within the system was reduced at a much slower rate than desired. Nonetheless, to reduce the inﬂation differential more quickly would have required raising the interest rate even further – an option that was not available in practice, given the fact that the peseta was already at the upper end of the system. With the potential of monetary policy therefore exhausted, the other option was to use ﬁscal policy so as to complement the aims of monetary policy. In other words, a contractionary ﬁscal policy was needed to mop up any additional inﬂationary policies, when the interest rate could not go any higher. In the four years after joining the ERM, some additional monetary measures were implemented to tighten demand and reduce liquidity. The central bank announced an increase in the amount of commercial bank deposits held by the central bank, and raised its intervention rate. These measures were temporary and, in the event, inadequate to dampen the level of domestic demand. Further temporary measures were introduced, including restrictions on household and business credit. A more restrictive ﬁscal policy was considered necessary to cut public spending and reduce the size of the budget deﬁcit. In addition, several efforts were made in 1990 and 1991 to establish agreements between the trade unions and employer representatives on wage moderation. The temporary credit restrictions were eventually removed in 1991. In 1992, the exchange rate system itself came under pressure from speculative attack. The crisis that resulted raised serious questions regarding the timetable for monetary union, as well as the actual viability of the entire plan. More immediately, a number of currencies within the system came under immense speculative pressure, forcing governments to intervene in the foreign exchange markets. In truth,

Towards Monetary Union – and Beyond 85

the crisis was the result of two sets of pressures, speculative as already stated, as well as systemic pressures. It is worth examining the second set of factors in a little more detail, for the situation illustrates some of the difﬁculties implicit in operating a managed exchange rate system and highlights the requirements necessary to make it work. At this period, the individual member countries were experiencing diverging economic conditions. Several countries, including Spain, were in recession. With their economies situated at the trough of the economic cycle, the domestic economic conditions required expansionary measures to stimulate recovery or at least avoid a worsening of conditions. At the same time, other countries were in a much better position economically, with higher levels of improvement in macroeconomic stability. Germany was in the throes of an economic boom stimulated by expansionary ﬁscal policy associated with the reuniﬁcation of Germany. It had earlier emerged in the 1980s as the country with the greatest degree of stability and economic growth, and effectively became the hegemonic leader within the monetary system, and perhaps more generally within the European Union. In practice, taking this leadership position implied that whenever German interest rates changed, other countries followed suit. Hegemonic leadership thus provided the system with a degree of stability. However, when German interest rates were raised in 1992 to combat the inﬂationary pressures of the post-uniﬁcation boom, this policy measure came at a time when other countries were in recession. With the existence of diverging economic conditions, the possibility of maintaining a common or at least converging policy among the members of the system seemed increasingly difﬁcult to sustain. Therefore, the credibility of the system was rapidly questioned, and speculation in the weaker currencies escalated rapidly. For Spain, the question of an appropriate monetary policy had to be confronted in March 1991, when the peseta reached the upper limit of appreciation against the French franc. A solution would be to lower interest rates, but this was not considered desirable by the monetary authorities, still preoccupied as they were with the question of lowering inﬂation. France, on the other hand, could have raised its interest rates, except that it too was in the throes of a recession so such a measure was equally undesirable. Since both countries were members of the ERM, and bound by the exchange rate commitment, the responsibilities of this membership demanded that both countries move their interest rates in the opposite direction to that demanded by the prevailing, and diverging, economic conditions in each one.

86 Spain in the EU

These two examples highlighted the inherent contradiction of the managed exchange rate system. The implication to be drawn from the two examples, and they were in fact drawn by the architects of the plan for European monetary union, was that for monetary integration to work effectively, the member countries would need to establish prior conditions, that is to ensure a degree of economic convergence among the economies of the member states. The eventual result would be the adoption of the nominal convergence criteria of the Maastricht Treaty. The ERM crisis enveloped member states over the autumn of 1992 and into the following year as speculation in the beleaguered currencies mounted. In September 1992, the Italian lire and the pound sterling were forced out of the exchange rate system by the volume of speculative pressures. The peseta was devalued by 5 per cent in September 1992, with a further 6 per cent devaluation in November, and another 8 per cent in May of the following year. The Portuguese escudo also experienced several devaluations, while the Irish pound was devalued at the beginning of 1993. In August of that same year, the European monetary authorities eventually tried to salvage the situation, concerned about the long-term implications of the currency instability, and in particular the effect on the proposed monetary union. The outcome was a widening of the ﬂuctuation band by 15 per cent either side of the central parity (the exception being the DM/ﬂorin exchange rate which remained at the original 2.25 per cent rate). In the aftermath of the currency crisis, the peseta moved away from its position at the upper end of the ﬂuctuation band, depreciating against the Deutschmark and rising strongly against sterling. Continued interventions by the central bank were needed throughout 1992 and 1993, supported by a rise in short-term interest rates. This time the bank did not take advantage of the room for manoeuvre afforded by the wider ﬂuctuation bands to lower interest rates and let the peseta fall. Instead, it remained ﬁrmly committed to anti-inﬂation policy, undeterred by the fact that the country was struggling through a rather severe recession during those years. Even so, some critics suggested that this position adopted by the monetary authorities did not alone guarantee the credibility of the inﬂation policy, given the size, degree of openness, and structural characteristics of the Spanish economy (Perez Jurado, 1997). The nature of ﬁscal policy and particularly its role in regulating the level of domestic demand, was a crucial element in the overall strategy, as was the complementary policy of

Towards Monetary Union – and Beyond 87

wage restraint. This was the view which shaped central bank thinking, and which determined the actual stance on macro-economic policy throughout the ﬁrst half of the 1990s. Less critical, and probably less dogmatic, commentators have suggested that the period of ERM membership did contribute positively to the battle against inﬂation. The continued use of a high interest rate strategy did play a part in dampening inﬂationary pressures. Moreover, movements in the nominal and real exchange rates played a part in inﬂuencing the levels of competitiveness. Over the ten-year period following accession to the EU, the nominal exchange rate fell in three stages, with a decline of 13 per cent overall. In the ﬁrst stage following accession, the peseta actually appreciated due to the inﬂow of capital and the general opening up of trade and capital markets, increasing in value by 9.3 per cent between 1987–89 (Martín, 1997, p. 92). The second stage was after the entry of the peseta into the ERM, when there was a tendency towards appreciation, but with much greater stability. Capital inﬂows continued, attracted by the high interest rates favoured by the Spanish government, by the stability and the growth prospects offered. Eventually, the ERM crisis brought the successive devaluations of the peseta, culminating in an effective depreciation, and an improvement in the competitiveness of traded goods. For policy analysts, the period of ERM membership brought into sharp relief the essential constraints imposed upon national economic policymaking as a result of European integration. It also provided a very useful exercise in policy co-ordination under a situation of diverging economic conditions, and highlighted what would be required of monetary policy makers under monetary union.

Towards monetary union With a return to economic growth already evident by 1995, the monetary authorities focused on a monetary policy strategy that was even more closely tied to the inﬂation path of the other ERM member states. This departure was marked by granting independence to the central bank, whose constitution set out explicitly that price stability was the principal objective of monetary policy. Central bank autonomy was itself an explicit condition for eligibility under monetary union, since Article 108 of the Maastricht Treaty decreed that the statutes of the central banks of the member states should adapt to that of the European Central Bank. Autonomy and price stability were the two central features of the ECB statute.

88 Spain in the EU

In order to achieve the objective of price stability, the bank reviewed a range of indicators, including the behaviour of the exchange rate, the evolution of the interest rate differentials with external rates, the evolution of salaries and other cost indicators, and the growth of the ALP monetary aggregate. This latter was targeted to converge towards an 8 per cent annual growth rate in the medium term, consistent with non-inﬂationary growth. The bank also set a target for the inﬂation rate, with a projected rate of well below 3 per cent for the retail price index by 1997, based upon estimated rate of economic growth in the range 3.5–4 per cent. By choosing an inﬂation target below 3 per cent, the monetary authorities sought to maximise the possibility of meeting the convergence criteria relating to the third phase of monetary union. However, the policy was launched at a time when the economy was just emerging from recession. After moving downwards, the inﬂation rate hovered around the 4.5 per cent level in 1994 with little tendency to fall further since dynamism was returning to the economy. The timing, however, was somewhat imperfect, given the general uncertainty surrounding other developments. The depreciation of the peseta and continued risks of currency and exchange rate variability, albeit within the enlarged bands of the ERM, gave rise to doubts as to whether the price stability targets could be achieved. In addition, the increase in indirect taxes at the beginning of 1995 added to the doubts. Around the same time, uncertainty surrounding the political environment and the future direction of economic policy after the general election due to be held in 1996 provoked further question over the sustainability of monetary policy objectives and the international ﬁnancial markets reacted accordingly. Early in 1995, the central bank raised the intervention rate from 7.35 per cent to 8 per cent, trying to ensure that the increase in indirect taxes would not be indirectly transferred into price rises in the future. The markets viewed this interest rate increase as an attempt to defend the peseta, at a time when exchange rate instability still featured within the ERM, alongside international instability associated with a falling dollar. In March of that year, after a depreciation of the peseta, the monetary authorities were forced to raise interest rates by a further half point, and an additional three-quarters of a percentage point four months later in July. By September, the bank reported its optimism that inﬂation would fall to within the target range by the early months of 1996. It did so, and on the strength of a consistently tight monetary policy (Table 4.1). The growth in the ALP monetary aggregate also slowed from the second half of 1995, to drop below the reference 8 per cent level by mid-1996.

Towards Monetary Union – and Beyond 89 Table 4.1 1986 8.3

Inﬂation trends 1986–98

1988

1990

1991

1992

1993

1994

1995

1996

1997

1998

5.8

6.5

5.5

5.3

4.9

4.3

4.3

3.2

2.0

1.4

Source: El País (1999) ‘La Lucha contra la Inﬂación’, 16 January 1999, p. 47.

The consistent approach to monetary policy adopted by the Spanish government, and even more so by the European Central Bank, proved central to realising the objective of price stability. However, there were several accommodating factors operating at the domestic and international levels that contributed to this success. Firstly, at the international level, the downward trend in commodity and oil prices was important for a country with a heavy dependence on imported energy, and thus exerted a downward pressure on import prices and domestic production costs. Also, the downward trend in the other countries of the European Union was important for Spanish importers. In this situation, and with the greater openness of the Spanish economy, the country was effectively importing deﬂationary pressures. At the national level, the economic recovery that followed the early 1990s recession was strongly centred upon investment and exports, thus generating fewer inﬂationary pressures than the period of consumer-led growth during the second half of the 1980s. In addition, wage increases also slowed, while the continued high levels of unemployment and greater numbers of temporary contracts had a dampening effect on consumer conﬁdence. In 1997, around one-third of contracts were for temporary jobs, compared to an EU average of 15 per cent, while the turnover rate for these contracts had continued to rise, the average duration being about six months. This sector of the labour market was characterised by weaker earning capacity, with average earnings about half those of workers in ﬁxed term employment (OECD, 1998, p. 24). Alongside these factors, the broadly deﬂationary stance of the government’s ﬁscal policy should be highlighted, as the authorities sought to bring the budget deﬁcit down to the 3 per cent of GDP required by the Maastricht Treaty.

Convergence programmes and ﬁscal policy There was much room for the potential conﬂict between monetary and ﬁscal policy to become realised, but in fact there was a general consen-

90 Spain in the EU

sus among the government and the central bank regarding the appropriate policy measures consistent with the achievement of stability. Achieving a convergence in inﬂation rates and interest rates were key policy objectives for the government as much as for the central bank, since they represented fundamental cornerstones of a broader policy towards European integration. Implementation of this policy was made through the successive convergence programmes drawn up by the government between 1992 and the date of entry to monetary union. In March 1992, the government approved the ﬁrst convergence programme covering the period 1992–96, which set out the target for reduction of the government deﬁcit. At that point, the national indicators showed the inﬂation rate to be falling and with a 3.3 per cent differential against the three best performing countries. The government conviction was that the Maastricht criteria could be met without too much difﬁculty and the convergence programme thereby set out quite ambitious targets for the period – the reduction of the public deﬁcit to 1 per cent by 1996, inﬂation below 3 per cent, and government debt down to 42 per cent. These targets would be met by a combination of structural measures related to liberalisation and greater ﬂexibility in the labour and goods market, on the one hand, and by wage restraint agreements, measures to increase public receipts from the taxation base and more restraint in public spending, especially on the part of the regional governments on the other hand. Despite the protestations of the government, the targets set out in the ﬁrst convergence programme proved to be overambitious. The predicted growth rate never materialised, as the recession still held sway and unemployment rose to around 24 per cent in 1994. Inevitably, the public sector deﬁcit absorbed the effects of the recession, rising to 6.8 per cent while the government debt rose to 56 per cent (Sevilla, 1997). In fact, it appeared that the severe economic slowdown in the period 1991–94 had not been anticipated by the government. In any event, it was forced to revise its convergence plan. The second convergence plan, covering the period 1994–97, drew attention to the changed circumstances and indicators, and was less ambitious in scope than the ﬁrst one. The stated intention was to meet the Maastricht Treaty convergence criteria, but with no concern to go further. The principles remained the same, namely, reduction of the public sector deﬁcit through cutting public spending, maintaining the existing tax burden and a programme of liberalisation based upon structural reforms. Some of the reforms have already been discussed: the granting of independence to the central bank, labour market

Towards Monetary Union – and Beyond 91

reforms (discussed in Chapter 3), liberalisation of the transport sector, the break-up of the mobile telephone monopoly, and privatisation of state sector enterprises. However, this second plan allowed for revisions to the national indicators up to 1997, implicitly accepting the second date (that is, 1999) suggested by the Maastricht Treaty for the entry into force of European monetary union. At the time that the second programme was being prepared, the ofﬁcial position of the EU itself regarding the timing of monetary union had still to be declared. Moreover, the programme allowed for the substantive reduction of the public deﬁcit to be concentrated in the latter two years of the plan, thereby allowing for a continued and smooth recovery from the economic crisis of the previous years. However, this second programme also fell foul of events as, following the election of a new government in 1996, it was withdrawn midway through its term. The third convergence programme, covering the period 1997–2000, was intended to extend beyond the ﬁnal phase of monetary union to meet the requirements of the Stability and Growth Pact, agreed at the European Council meeting in Dublin in December 1996. The pact sought to place budgetary discipline at the centre of government decision-making in the member states by bringing budgets towards surplus. Under this third programme, the structural reform measures proposed in previous programmes were strengthened, while giving greater emphasis to speeding up the privatisation agenda, sectoral reforms in areas such as energy, land and housing, transport and road and rail networks, as well as the regulatory system dealing with competition. This third programme was, in fact, to form the basis of the Stability Plan (1999–2002) presented by the Spanish authorities to the European Commission in December 1998. Each member state’s government, eligible to participate in the monetary union programme, was required to submit a plan setting out the proposed objectives for the four years up to 2002, the date on which the euro would replace the national currencies. One of the primary objectives in the Spanish government’s plan was the projected path of deﬁcit reduction, based upon a projected average growth rate of 3.3 per cent over the period, principally linked to buoyant domestic demand. More than anything else, the Stability Plan was a measure of how far the public sector model of the early 1980s had changed, replacing public spending and expansion with ﬁscal rectitude and ﬁnancial conservatism in a much slimmed down state sector. The plan extolled the virtues of structural reforms, and the need for deregulation in the

92 Spain in the EU

context of improved conditions of competition. It also expressed the desire to see real convergence within the European Union, which was interpreted essentially in the context of per capita income. This was the only indicator of real convergence used in the plan, perhaps reﬂecting the priorities of the government. Any other indicators of real convergence (human capital levels, R&D capacity) might have brought into sharper focus the potential for conﬂict between the achievement of nominal and real convergence, given that the latter depends so much on public investment, while the focus of the former is precisely the reduction of public spending.

EMU – the challenges for Spain European monetary union involves the introduction of a single currency to replace the national currencies of the member states within the union. The Maastricht Treaty set out the timetable for completion of the monetary integration programme, following the earlier successful Single European Market (SEM) model which also used a phased introduction with timetable deadlines, and a target completion date. Under the treaty, stage two of monetary integration was set to start in January 1994 with the establishment of the European Monetary Institute and co-ordination of economic policies. Stage three involved the establishment of irrevocably ﬁxed exchange rates with the granting of full monetary authority to the European Central Bank, and the introduction of the euro alongside existing national currencies. It would start either by the voluntary decision of a majority of European states to start monetary union on 1 January 1997, having met a set of economic conditions by that date; or, automatically, on 1 January 1999, and to include the member states that met the convergence criteria. Under monetary integration, monetary policy is set by the independent European Central Bank for the region as a whole, without reference to individual economic conditions or speciﬁc political factors. Moreover, the primary objective of the ECB is to ensure price stability, a function that is enshrined in the statute of the central bank. The ECB is required to make decisions free from political inﬂuence or interference. In the conduct of monetary policy, however, it is assisted by the Council of Economic and Finance Ministers (ECOFIN), which undertakes surveillance of economic policy throughout the monetary union, adopting common economic policy guidelines and close examination of how governments implement the guidelines.

Towards Monetary Union – and Beyond 93

Spain and EMU – the costs and beneﬁts Part of the case made by the European Commission and the supporters of monetary union was that a single currency was essential in order to effectively implement the single market, and to fully exploit the advantages of economic integration. It was argued that, on balance, the beneﬁts of monetary union would outweigh the costs, particularly for a group of countries with broadly similar economies operating at the same point on the economic cycle, and with a high level of economic integration. For Spain, these beneﬁts offered broad appeal. So, too, did the promise of stability associated with lower inﬂation, and the consequent beneﬁts in terms of improved competitiveness and greater economic growth. The orthodoxy of the European Central Bank, on ﬁscal constraint and liberalisation, and the emphasis on stability as a necessary precondition of economic growth had long been accepted by the Spanish monetary authorities. And, although monetary union was important for Spain as part of a broader framework of European integration, there is reason to suppose that it represented a vehicle for the achievement of the kind of economic stability that had heretofore eluded the country and which it could not achieve by itself. Recent history showed the volatility of the national economy with respect to cyclical movements in the European and international economy, something which monetary integration might be expected to reduce. Moreover, membership of monetary union gave enhanced credibility to government policy within the international capital market and among investors generally. Spain now has the means to exercise a direct and positive effect on expectations. One of the costs of monetary union is the loss of the exchange rate as a tool of adjustment to protect competitiveness in the event of one country experiencing an asymmetric shock. The traditional theory on monetary integration suggested that problems associated with this could be overcome where a country or region had a high level of factor mobility (Mundell, 1961). It has been suggested that, in the case of Spain, the principal sources of asymmetric shocks lie with different macro-economic policies and the effect which these have on expectations in the ﬁnancial markets. If this is true, then monetary union should eliminate the source of nominal shock, given that there is now one monetary policy and strict budget rules. However, the approach adopted by the European authorities is to strive to create the conditions for an optimum currency area

94 Spain in the EU

through wholesale advocacy of ﬂexibilisation and liberalisation across labour and goods markets. Within Spain, the liberalisation of markets, especially the labour market, remains fundamental to the government programme. However, there are problems in estimating how well this may work within the country in practice. Certainly, there is very little interregional migration inside Spain, and limited emigration. Functional and sectoral labour mobility are also restricted. On the other hand, the mobility of capital is high throughout Europe generally, and it can be expected to increase with monetary union. The impact upon Spain of greater capital mobility is somewhat ambiguous. So long as the country offers the location advantages that attracted foreign direct investment to the country in the past, then it should beneﬁt from greater capital mobility. But, in a world of global capital markets, there are greater risks of losing investment to other locations, and Eastern European countries have become a greater threat in terms of attracting some of this footloose investment.

Conclusion The longer term beneﬁts of monetary union rest with the contribution it makes to economic growth. In the Spanish case, this should follow through two channels: from macro-economic stability and through deepening of the process of integration (Alberola Ila, 1998). However, there are no ﬁrm guarantees on convergence from the fulﬁlment of the nominal convergence criteria alone. Economic integration is, according to the traditional theory, a basis for growth, but again there are no certainties. Recent growth theories place important emphasis on investment in capital, in research and development, and in the quality and quantity of human skills. There is a very strong possibility that richer countries, capable of making higher investment in the necessary infrastructure, in the development of education and skills, and in research and development, may grow faster than the poorer countries. Similarly, there is every possibility that such patterns of convergence, and of divergence, may operate within countries, between regions that are better off and capable of growing at a faster pace than less developed regions. The evidence already exists of patterns of regional convergence and divergence within Spain.

5 The Public Sector and European Integration

The Spanish public sector has witnessed tremendous changes since the formal structures for the modern democratic state were ﬁrst approved in the signing of the Spanish Constitution in 1978. The document itself established the outlines of the proposed social democratic state of the new democracy. It also provided for the decentralisation of some areas of government through the creation of 17 regional autonomous communities. The most immediate result of this decision was an addition to the layer of government, and an expansion of the public sector. Both in the years leading up to and following accession to the EC, the public sector continued to increase in size, partly due to a concerted attempt by the authorities to establish what was perceived to be an appropriate institutional framework for a properly constituted democratic state, and also due to a desire to catch up with the rest of Europe. For Spain, from the end of the 1970s through to the signing of the Maastricht Treaty in 1992, convergence in the public sector meant expanding towards a level comparable with the EU average. It is somewhat ironic that, having made such strenuous efforts to converge with the EU average, European integration would then force a reversal of the Spanish authorities’ expansionary phase through the limitations imposed on public sector deﬁcits and government debt under the convergence criteria set out in the Maastricht Treaty. In this chapter, the development of the public sector in Spain, primarily during the period of the 1980s and 1990s is examined, identifying the particular features of this expansion and the consequent impact upon the size of the public sector deﬁcit and the level of public debt. As the sector expanded, it did so largely through an increase in government debt, and a permissive attitude on the part of the authorities which made little effort to control or limit the national borrowing. 95

96 Spain in the EU

The Spanish parliament was especially lenient, approving the measures put before it by successive governments without the imposition of any real budgetary restrictions. Public receipts, especially taxation revenue, did not match the growth in public spending, despite numerous approaches made by the government to modernise the ﬁscal system. The different layers of government, from central government to the regional autonomous communities and the local authorities, all added to the burgeoning level of the overall public spending, so that management of the decentralised public sector became both a challenge and a necessity, especially after the Maastricht Treaty. The government’s response was gradual, as well as being both uneven and incomplete. It combined a programme of proposed privatisation, structural reforms, attempts to improve the efﬁciency of public spending and the attempted eradication of tax evasion.

Origins and problems of deﬁcit spending Many aspects of the public sector mark it as a modern construction, a product of the democratic political system that emerged after the transition to democracy. However, a core area of the public sector developed under Francoism, including health and education, public enterprises, infrastructure provision and a large bureaucracy to implement the regulatory and interventionist system that formed the basis of the authoritarian regime. What most distinguished the postFrancoist system, by contrast, was the sheer size and the rapid pace of growth. Public spending as a proportion of GDP accounted for 25 per cent of national income in 1975, when the European average was already 40 per cent. By 1986, the Spanish public sector had expanded in size to 41.9 per cent of GDP. From then it grew much more slowly, and ten years after accession it had reached a level of 44.8 per cent. However, despite the enormous growth in the years following the transition to democracy, and the continued expansion under conditions of membership, Spain’s public sector did not converge towards the EU average, which stood at just over 50 per cent of GDP. Public revenues grew at a much slower pace and failed to achieve the necessary dynamism to ﬁnance the growth in spending. In 1975, Spanish government receipts accounted for 24.6 per cent of national GDP, compared to 43.1 for Germany, 41.4 for France, and 28.9 per cent for Italy. By 1998, Spain had succeeded in raising the government

The Public Sector and European Integration 97

receipts to 40.8 per cent, but this still did not match the revenue volumes of the other European states, with Germany receiving 44.9, France 50.7 and Italy 46.8 per cent respectively (CEC, 1998 European Economy, 65, 1998, Table 62). The inevitable result of this mismatch between growth rates of public spending and government receipts was a steady rise in the public deﬁcit, around 7 per cent of GDP in 1995, and a rising level of government debt. Developments in European integration, especially following the Maastricht Treaty and the programme for monetary union, had certain intended consequences for the public sectors in all the member states. In Spain, these consequences revolved around the reversal of trends that had emerged under the new democracy – forcing reductions in both the public deﬁcit and the government debt and effectively changing the size and composition of the public sector. The original objective of convergence towards the EU average, measured in terms of the size of the public sector as a proportion of GDP, and involving expansion in health, education and a national welfare system comparable to well-established systems elsewhere, gave way to the objectives set out in the Maastricht Treaty and the Stability and Growth Pact. The need to consolidate democracy was replaced by the desire to consolidate European integration.

The emerging public sector The enormous expansion of the public sector in the ﬁrst decade following the transition to democracy brought a structural and institutional development to Spain that was unprecedented in scale and pace among the other European member states, with a virtual doubling of total public spending in 20 years. As a result, the management of the expanded public sector placed an overwhelming burden on the administrative authorities, ill-prepared for the task partly because of the sheer scale of developments, and partly due to a lack of strategic planning and of a recognition of the need for administrative and ﬁnancial reform to accompany this growth of the public sector.1 In substance, the newly emerging public sector took the form of a social pact, characteristically intended to solidify the new democracy. This was evident in the fact that some 70 per cent of the increased public spending went on transfers rather than public goods and services of a productive nature. Out of the remaining 30 per cent, consumption outweighed investment spending. Salaries of public sector workers accounted for the bulk of the increase in public consumption

98 Spain in the EU

spending, registering an increase of 3 per cent of GDP over the period 1975–95. Public capital spending increased much less than current spending, from 3.73 per cent of GDP in 1975 to 5.98 per cent in 1985, moving to 6.51 per cent in 1990 before falling back to 5.71 per cent in 1995 (Valle, 1996). The behaviour of investment in the public sector showed a much less stable trend, and was subject to greater adjustment than consumption spending whenever there was pressure to cut back the government deﬁcit. In many respects, investment offered the line of least resistance to proposed budget cuts, and thus a pattern was established where consumption spending was allowed greater freedom from budget control programmes. Whenever economic conditions responded to cyclical movements, and as the labour market deteriorated throughout the 1980s and 1990s, public consumption spending was permitted to grow unfettered by concerns over the public deﬁcit that was emerging at the same time (see Appendix 1). The government budget served primarily as a redistributive mechanism. From the end of the 1970s through to the 1990s income transfers in the form of social security payments, unemployment beneﬁts and pension payments constituted a growing share of the public sector. Social security spending rose from 7 per cent of GDP to 16 per cent in the 1990s. When the other areas of health, education and housing are added to this list, the resulting total expenditure accounted for the bulk of the overall increase over the period 1975–95. By way of illustration, in 1995, the Spanish state spent more than double the 1975 amount on pensions and education, ﬁve times more on unemployment, one and a half times more on investments and ﬁve times more on interest payments on debt (Sevilla, 1997) In part, this was a reﬂection of the demographic changes in the country – with more pensioners and increased life expectancy – and in part it reﬂected the political desire to distribute the wealth being generated by the improved economic and social conditions. The extent of this demographic shift may be gauged from the rise in the dependency ratio (measured as the ratio of public salaries, pensions, unemployment beneﬁt recipients to the total occupied workforce in the economy), from 47 per 100 in 1975 to 109 per 100 in 1995. This attempt at catching up with the rest of Europe by the construction of a public sector comparable to that of other member states eventually led to a public sector that later came under scrutiny as the Spanish government sought to meet responsibilities and commitments under European integration. Three aspects of the modern Spanish

The Public Sector and European Integration 99

public sector came into direct conﬂict with not only the policies but also the norms and values of the European Union in the closing years of the 1990s. These were the interventionist role played by the state in economic management, the growing and at times unstable public sector deﬁcit, and the level of government debt. Throughout the 1970s and 1980s the state played a greater role in the economy, with the management and subsidisation of a number of public enterprises in both the secondary and tertiary sectors. Much of the state involvement took place through the activities of three holding companies – INI (Instituto Nacional de Industria), INH (Instituto Nacional de Hidrocarburos) and Patrimonio de Estado – which operated across a broad spectrum of sectors with a much more heterogeneous range of economic activities than state sectors elsewhere in Europe.2 The level of subsidies to public enterprises doubled between 1975 and 1985, before levelling off in the years after accession. Public sector employment, including central and regional authorities, public enterprises, and all other areas of state activity, increased by almost one million people, from 1 245 900 in 1975 to 2 244 400 at the end of 1995 (Requeijo, 1998, p. 35). By then, the public sector had become the principal employer in an economy where secure employment had become extremely difﬁcult to obtain. Public spending grew through the activities of the different layers of government. By creating the extra layer in the shape of the regional autonomous communities, an extra spending authority was created, and an additional major employer was added. Moreover, the way in which power was devolved from the central government to the regional government allowed for the emergence of certain inbuilt expansionary forces. The Basque and Catalan communities demanded wider powers and greater competence in policy-making, claiming differences with the other communities; the other communities continually tried to catch up so as to possess comparable and similar powers and in order to avoid secondary status; once the gap was closed, the Basque and Catalan authorities renewed their claims for greater autonomy. Competition and catch-up between the differentiated levels of authority among the autonomous communities therefore led to inﬂated expectations and a spiralling of expenditure. As a result of decentralisation, and the competition between regional authorities, spending by the autonomous communities rose from an almost negligible 0.07 per cent of GDP in 1980 to 7 per cent by 1995, with no reduction of central government spending (Requeijo, 1998).

100 Spain in the EU

As a result of the expansion of the public sector over the two decades 1975–95, with spending growing faster than government receipts, the public ﬁnances began to show signs of strain, with a growing public deﬁcit and government debt (Table 5.1). Debt was not a new problem for the Spanish authorities, as the experience of history showed. From the reign of Felipe II in the second half of the sixteenth century, to the nineteenth century wars, political instability and resource shortages had all contrived to destabilise the state ﬁnances (Gonzalez and Mendoza, 1994). However, towards the end of the twentieth century there appeared to be fewer possibilities for debt reduction that did not depend on reductions in the public sector. The public deﬁcit has several aspects which make its reduction more difﬁcult (Valle, 1996). For one thing, the public sector deﬁcit extends to all levels of the public sector, from central government to regional autonomies and local authorities, and including social security. Each level has, with few exceptions, displayed a pattern of deﬁcit spending over the years since 1986, leading to a situation where a deﬁcit became normalised in the ﬁnancial management of the public sector. Correcting such an endemic institutional feature would therefore require substantial change to the scope of activities and the remit of each level in the public sector. Secondly, the deﬁcit tended to be essentially structural rather than cyclical. Revenues responded to the cyclical upswings in the economy without ever being able to reach an inﬂow that could reduce the deﬁcit to any noticeable extent. Reform of the ﬁscal system alone could not make a decisive impact on a deﬁcit which was predominantly structural in origin. Describing the deﬁcit as structural underlines the extent to which it derived from the legal obligations and commitments undertaken by the government in the past, rather than from current budget programmes which can be controlled by the budgetary authorities. Critics ascribed some of the responsibility for the budget deﬁcit to the inadequate management and weak control exerted by the adminisTable 5.1

Evolution of deﬁcit and debt, 1975–98 (% GDP) 1975–85

Deﬁcit Debt

–2.8 43.7

1986–90 1991–95 1995 –3.7 44.8

–5.7 65.5

–7.3 65.5

Source: CEC (1998) European Economy, 65, Table 88.

1996

1997

1998

–4.6 70.1

–2.6 68.8

–2.2 67.4

The Public Sector and European Integration 101

trative authorities, rather than conﬁning the problem to the structure and composition of public spending (Valle, 1996; Fuentes Quintana and Barea Tejeiro, 1996). For some, it was a question of failure to use the budget instrument as a mechanism of control over the public sector and a means to secure economic stability, which was how it was envisaged by the General Budgetary Law, the legal basis for the budgetary instrument. Moreover, at the budget preparation stage when spending proposals were put forward, the review and evaluation of such proposals tended to be lax, with little effort to consider whether the proposed budget could meet the intended objectives or represented the optimum allocation of resources (Barea Tejeiro, 1995). A persistent, pervasive and growing public sector debt contributed to the growth in government debt. In 1975, the level of debt stood at 13.3 per cent of GDP, rising steadily throughout the 1970s and 1980s to reach a level of 65.5 per cent in 1995 and exceeding 70 per cent of GDP by the following year. Furthermore, in 1995, the public sector deﬁcit had risen to just over 7 per cent of GDP. The position of these two economic indicators therefore gave serious concern, given that the Maastricht convergence criteria for entry to monetary union set limits of 3 per cent of GDP for public sector deﬁcits and 60 per cent for government debt. For Spain, entry to monetary union was a serious and long sought-after aim, in part because of Spain’s belief that membership would exert the necessary discipline on economic management and provide the means to secure inﬂation control on a permanent basis. Monetary union offered the promise of price stability and beneﬁts such as economic growth, lower interest rates and greater certainty in international trading relations (De Grauwe, 1997). In the Spanish case, it also represented an essential route to international competitiveness and lower transaction costs, entry to a zone of stability and lower inﬂation (Alberola Ila, 1998). However, the condition of participating in this next stage of European integration was a reduction in the size of the public sector, at the moment when the Spanish public sector was still trying to converge towards the European public sector. The programme of monetary union posed a direct challenge to the domestic goal of creating a public sector comparable in size and composition to that existing in other member states. In the next section, we consider the nature of this challenge, as represented speciﬁcally in the convergence criteria set out in the Maastricht Treaty, and in the conditions laid down in the Stability Pact proposed by the German authorities and accepted at the European Council meeting in

102 Spain in the EU

Amsterdam in June 1997, before going on to examine how Spain responded to the European conditions, and identifying the implications for the public sector and welfare state that had evolved under democracy.

European integration and the public sector The Maastricht Treaty conditions stipulated that any country wishing to join monetary union must meet the necessary convergence criteria. The criteria concerning budgetary discipline set out two speciﬁc targets: a member government’s budget deﬁcit should lie within 3 per cent of GDP; and the government debt should not exceed 60 per cent of GDP. The Stability and Growth Pact, agreed at the European Council meeting in Dublin in December 1996, set out additional mechanisms to ensure that the countries would continue to observe budgetary discipline once they had joined monetary union. Countries that failed to stay within the 3 per cent limit during a given time would be required to pay a ﬁne ranging from 0.2 per cent to 0.5 per cent of GDP. The ﬁnes would not automatically apply, but instead be instigated after deliberation by the Council. Where a country experienced an excessive deﬁcit due to exceptional circumstances (for example, a deep recession which caused GDP to drop by more than 2 per cent) it would be exempted from ﬁnes. With the Stability Pact came the assurance of and the commitment to budgetary discipline over the long term, and not just for the purposes of establishing the eligibility requirements. Spain, like the other states, had therefore to address the question of public sector spending from a long-term perspective, and in particular the issue of how to reform the public sector deﬁcit – in effect to introduce certain changes to the structure of the public spending programme and to increase the government revenues from taxation.

The challenge of reform The difﬁculty and the challenge facing the government was to reorient the expansionary focus of the welfare state towards tighter control and management of the system, a task that was complicated by several seemingly intractable structural defects. Firstly, spending on pensions had increased steadily throughout the 1980s and 1990s, and looked set to continue this upward trajectory. Demographic change over the previous three decades has resulted in a fall in the birth rate, from 3.0 to 1.2 births, and an increase in the number of people of post-retirement

The Public Sector and European Integration 103

age. With improved health care, and rising living standards, the age expectancy has increased. In addition, Spanish society has gone through a period of rapid social change, with greater urbanisation and a signiﬁcant femininisation of the workforce. Higher unemployment levels and more older people, combined with sluggish growth in employment, resulted in an increase in the dependency ratio. Moreover, these societal and demographic changes were accompanied by shifts in social values, affecting the traditional family structure, marriage age and divorce rates. As a result, traditional support systems no longer offered the same degree of protection and instead there emerged a greater reliance on the mechanisms provided under the welfare state system. Various analyses undertaken in recent years suggested that the dependency rates would rise quite signiﬁcantly in the years 2010–2025, as the baby boom generation reached retirement age, thus placing greater strains on the pensions budget (Requeijo, 1998; Herce and Pérez Díaz, 1995). The effect of these projections, fewer people working and paying income tax with a higher dependency ratio, would mean greater demands being placed on the welfare system at a time when the ﬁnancial resources were projected to decline. The demands of European integration served to sharpen the vision of how the public sector could develop, highlighting the constraints and difﬁculties facing its future development. The second problem facing public sector reform was the persistent, high level of unemployment, which coincided with a low activity rate in comparison with the other advanced member states of the European Union.3 In 1996, the activity rate (measured by the number of people working and those actively looking for work) in Spain was 60.6 per cent, compared to the average of 67.7 per cent for the EU as a whole (CEC, 1998 European Economy, 65, 1998). The rate of unemployment in Spain at that time was 22.1 per cent, whereas the EU average stood at 10.9 per cent. Unless and until the unemployment rate was reduced and the activity rate increased to match the EU levels, the Spanish government would continue to face this drain on public resources, with more people claiming unemployment beneﬁt and fewer people earning income and contributing to the public resources through taxation. The third problem lay in the widening of the welfare system safety net, the outcome of applying the universality principle enshrined in the 1978 Constitution. The effect of including the universality principle was that access to public resources was guaranteed to all citizens, and protection

104 Spain in the EU

against a wider range of eventualities and risks was offered. Eligibility was not just restricted according to the level of social security contributions paid in by each individual. Instead, access was extended so as to include the poorest members of society. Similarly, health and pension beneﬁts were broadened in accordance with the principle of universality, and raised towards ‘an equality of the highest standards, not an equality of minimal needs’ as beﬁtted the social-democratic welfarestate. Perhaps the real problem for welfare-state reform, under these conditions, is that of altering the expectations that arise as a consequence of ‘the universal solidarity in favour of the welfare state’ (Esping-Anderson, 1990, pp. 27–8). Universality worked best when, as Esping-Andersen noted, ‘most people worked, and the fewest possible lived off social transfers’, something that was not the case for Spain. A fourth problem related to the weaknesses in the ﬁscal system, and the existence of tax fraud, with the adverse impact exerted by both these features upon the ﬁnancial capacity of the public sector. The weakness of the administrative system derived in part, initially anyway, from the fact that the ﬁscal system was comparatively recent in terms of the apparatus of the state and not designed to meet the demands which were placed upon it with the rapid expansion of the taxation base (Barea Tejeiro, 1995). Two principal sources of taxation were products of democracy on the one hand, and of European integration on the other – income tax (IRPF) was introduced in 1978, and value added tax (VAT) in 1986, with accession to the European Union, thereby bringing ﬁscal system into line with that of the EU. The consolidation and extension of the income tax base was phenomenal, with 5.3 million contributors in 1979, 7 million in 1985, rising rapidly to 14.1 million in 1995 (Sevilla, 1997, p. 47). This tripling of the numbers in the tax net occurred over a period when there was no signiﬁcant increase in the activity rate, indicating a signiﬁcant increase in the tax burden. Tax evasion and fraud compromised the efﬁciency of the ﬁscal system. One estimate calculated that during the period 1986–91 some 25 per cent of potential taxation revenue was lost to fraud (Sevilla, 1997, p. 54). The problem of tax evasion attracted increasing attention from the beginning of the 1990s, and the government escalated efforts throughout the decade to detect and discourage tax fraud, improving the administrative system for dealing with evasion. Since the two largest sources of public sector revenue are taxation receipts and social security contributions (50.7 per cent and 37 per cent respectively of

The Public Sector and European Integration 105

total revenue in 1999), both areas attracted the attention of the ﬁscal authorities in their efforts to improve the ﬁscal resource base. The ﬁnal problem affecting public sector reform, made necessary through the restrictions imposed by the EU and the Maastricht Treaty, related to the general objective of improving the efﬁciency and effectiveness of public sector spending and revenue collection. The decentralisation of the political system had added to the administrative and political layers of government and also created an overlap in spending, as these autonomous communities sought to establish the legitimacy of regional government and to build their own political constituency. EU-imposed restrictions on the national public sector deﬁcit implied the need to co-ordinate spending programmes of both the central and regional governments, and also some signiﬁcant commitment by the latter towards long-term control of spending. The central government’s commitment to budgetary discipline and ﬁscal rectitude would amount to very little without a similar stance being adopted by the regional governments.

Tackling public sector reform The conditions of the Maastricht Treaty combined with the Spanish government’s unwavering commitment to monetary union left no doubt that some reform of the public sector was necessary. Given the undoubted opposition that could be expected from across the social and political spectrum, it was fortunate perhaps for the Spanish government that the message of budgetary discipline and ﬁscal conservatism should be promoted by the European Union authorities and the European Central Bank. Public sector reform was, therefore, presented as a package of conditions linked to the next stage of European integration, and therefore not originating in domestic policy proposals, thereby ensuring the national government might escape at least some of the opprobium likely to follow any declaration regarding stringent spending cuts in welfare, health or pensions.

The pension sector Spending on pensions constituted one of the largest and growing liabilities of the public sector, and as suggested in the preceding sections, it was expected to escalate in the future. In 1975, the percentage of GDP devoted to pensions was 5.6 per cent; by 1995, this ﬁgure had increased to 11.6 per cent (Sevilla, 1997, p. 55). By 1998, some seven

106 Spain in the EU

and a half million people were receiving pensions (CES, 1997, p. 614). Studies also suggested that in some areas there were effectively more pensions than pensioners, as some 400 000 recipients were receiving more than one Social Security pension. Retirement pensions represented the largest share of the total pensions bill, just over 47 per cent, with three and a half million pensions being paid out at the end of 1997. Between 1990 and 1996, the number of retired people increased by 2.6–2.9 per cent on an average annual basis. Non-contributory pensions were introduced in 1990, broadened the welfare safety net to include people who had made no social security contributions or made insufﬁcient contributions to qualify for a contributory pension. Since then, the number of non-contributory pension recipients has risen substantially, reaching 423 000 by 1998. The rising pension allocation, with the anticipated increases as future commitments are realised attracted a great deal of attention. However, it remained a delicate area in which politicians were reluctant to opt for root and branch reform. The Toledo Pact (Figure 5.1), which was agreed in February 1995, setting out the principles for the future system, seemed to adopt a less alarmist tone than that which permeated the many technical studies that were conducted during the 1990s (Herce and Pérez Díaz, 1995).4 What the pact represented more than anything else was the articulation of common areas of consensus regarding pension reform among political parties and trade unions. In October 1996, the government signed an agreement with the two main trade unions, UGT and CCOO, on the consolidation and rationalisation of the Social Security system, opening the way for progress on the implementation of the recommendations made in the Toledo Pact. As a result of the accord between the political parties, trade unions and government, some of the reforms were approved by the Parliament in 1997, ahead of entry to monetary union. Those changes either impacted on the ﬁnancial situation of the system or made it more equitable – widening the pension base to the last 15 years of contributions rather than the eight years originally allowed, discouragement of early retirement by a reduction of the front-loaded accumulation of pension rights; tightening up eligibility for disability and temporary incapacity; easing eligibility for old-age pensions, widowhood and orphans’ pensions; and indexing pensions to inﬂation. Other changes were directed at improving the effectiveness and efﬁciency of the administrative system, in particular to reduce the level of pension fraud.

The Public Sector and European Integration 107 Figure 5.1

The Toledo Pact: principles for reform.

1. Separation and clariﬁcation of the sources of ﬁnance (social security contributions, taxation, etc.) – by 2000. 2. Creation of a reserve fund – to cover the effects of the economic cycle. 3. Improvement of the contribution base. 4. Financing of the different pension regimes – on the basis of equality of protection and of contribution. 5. Improvement of collection, and extension of ﬁscal regulation over broader range of economic activities. 6. Simpliﬁcation and integration of special regimes – self-employed and employed. 7. Integration of the various areas within the administrative system, from the identiﬁcation of those individuals and organisations liable for taxation, to collection, and the management of different pension payments. 8. Evolution of contributions – as an incentive to employment. 9. The equity and contributive character of the system – linking the amount of contributions to the value of pension payable, and raising the number of years upon which a pension is calculated from 8 to 15 years, from 2001. 10. Retirement age – to facilitate the continuation of working life, but without prejudice to the statutory pension age of 65. 11. Maintenance of index-linked pensions. 12. Strengthening of the solidarity principle, as ﬁnancing allows, by improving the eligibility for orphans and widows pensions. 13. Improvement in the management of resources – control of invalidity and temporary incapacity payments. 14. Complementarity of the system. 15. Analysis and monitoring of the system – with provision for ﬁve-year reviews. Source: CES (1997) España 1996, pp. 561–5.

The broader question revolves around the extent to which these changes will alleviate the pension burden in the future, limit the public spending bill and mitigate tendencies towards deﬁcit in future budgets (OECD, 1998). Certainly, the proportion of GDP devoted to pensions stabilised at 10.2 per cent over the period 1996–99 but without any decline in real terms. By contrast, the level of public spending on unemployment beneﬁt and other social security beneﬁts actually fell in real terms between 1993–99 (González-Páramo, 1999, p. 223). Twenty years after the approval of Spain’s Constitution, and the blueprint for the whole social security system, the pension reforms approved by the Spanish parliament marked a small step towards acceptance of a different model to the one proposed by the founders of

108 Spain in the EU

the new democracy. It seemed, however, to generate very little broader opposition.

Regional government and ﬁnancial autonomy The imprint of the 1978 Constitution was most clearly evident in the ﬁnancing arrangements for the regional autonomous communities, which was guided by the principle of solidarity among the regions. The principle was both a guide and a constraint in inter-regional ﬁnancial relations, as the national government sought to maintain equal treatment for all regions even when in practice it was not possible. By the early 1990s, regional spending and deﬁcits had risen to levels that put the country’s efforts to meet the Maastricht convergence criteria in serious doubt. It was evident that if the country was to qualify for entry into monetary union, and to continue within the conditions of the Growth and Stability Pact once it became a member of the monetary union, that some long-term reform of the ﬁnancial arrangements governing the regional level of the public sector was required. The challenge facing the proposers of any new ﬁnancing arrangements was to maintain equilibrium between essentially conﬂicting forces – the preservation of ﬁnancial autonomy at the regional level, continued observance of the principle of solidarity among the regions, and the maintenance of central government authority over the broad direction of public sector spending in the face of its commitments to the European Union. By 1996, the autonomous communities were responsible for some 25 per cent of total public spending, equivalent to 10 per cent of GDP (Monasterio and Zubiri, 1996). Part of this increased spending came about through an expansion in the structure of regional government, with each region creating the bureaucratic and administrative system necessary to carry out the responsibilities and competencies that had been delegated to it by the central government. Between 1990–97, the number of organisations, public entities, and state enterprises that comprised the regional public sector doubled from 247 to 489 (Utrilla de la Hoz, 1998). The number of state (that is, regional) enterprises increased quite considerably in the ﬁrst half of the 1990s, rising from 130 to 293, with a noticeable expansion in regions such as Andalucía, País Vasco, and Cataluña. The majority of these enterprises were concerned with the promotion of regional economic development, encouraging regional investment and attracting inward investment. Some regional enterprises were set up to promote activities in the cultural and tourist arenas, others to develop the regional infrastructure and social capital.

The Public Sector and European Integration 109

From a starting point of zero debt, the drive for autonomy led to regional governments using debt to ﬁnance current spending, no legal restraint having been placed on them either by the Constitution or by central government. The result was a rise in the volume of debt, reaching some 5 billion pesetas in 1998 (Ezquiga et al., 1998). The nature of the agreements between central and regional governments on the matter of ﬁnancial autonomy led eventually to escalation of central government’s spending commitments and inevitably to the explosion in Spain’s public deﬁcit, which reached a peak of 7.3 per cent in 1995 (Banco de España, 1998). In other words, the particular decentralisation model adopted by the Spanish government at the beginning of the 1980s sowed the seeds of ﬁnancial conﬂict later on, placing the central government in the difﬁcult position of having to reconcile the competing demands of the regional communities for greater ﬁnancial autonomy with the stringent conditions and limitations on public deﬁcits and government debt set out in the Maastricht Treaty. The guiding principles underlying the ﬁnancing of the regional autonomous communities were set out by the government, with the publication in 1980 of the legal instrument covering ﬁnancial autonomy, the LOFCA (Ley Orgánica de Financiación de las Comunidades Autónomas). It is worth mentioning these principles here, since their observance in subsequent negotiations between the central and regional communities determined the nature of the negotiations and also would eventually highlight conﬂict between the central and regional governments over levels of ﬁnancing. The main principles were adequacy of ﬁnancing; ﬁnancial autonomy; solidarity; and coordination with central government. Instead of a single model of decentralisation, the government negotiated separately and individually with the regional communities regarding the degree of autonomy and hence the range of responsibilities to be transferred to regional government level. At a general level two groups of regions emerged, distinguishable in terms of the range of competencies ceded by the national government. Those regions with the broad range of competencies (plus education and health) included Andalucía, Canarias, Cataluña, Galicia and Valencia (Article 151). The second group of regions held a narrow range of competencies (Article 143), but in both groups there existed differences between the regions as to the precise range of competencies ceded in each case.5 In broad terms, ﬁnancing of the responsibilities delegated to the regional governments would be either through transfers from the

110 Spain in the EU

central government (all regions except País Vasco and Navarra) or by taxation, transferring responsibility for the management and collection of the taxes to the regional communities (País Vasco and Navarra). The level of these ﬁnancial transfers was determined by reference to the amount spent by central government, prior to decentralisation, on the provision of these services to the particular region – known as the effective cost of provision. The ﬁnancing system developed throughout the 1980s as a quinquennial negotiation process between the central and regional governments. This model of decentralisation had the beneﬁt of guaranteeing that there would be no signiﬁcant change in the level of provision of public services after the transfer of these responsibilities to the regional level. Furthermore, by using the effective cost of provision to determine the amount of ﬁnancial transfer to each region, the central government sought to ensure an adequate level of ﬁnancing established by LOFCA principles. It also had the simplicity, from the viewpoint of the regional governments, of guaranteed ﬁnancial resources requiring limited ﬁnancial management. And, using the effective cost of provision to calculate the volume of ﬁnancial transfers served to maintain the principle of solidarity among the regions, implicitly suggesting that no region was made worse off through decentralisation while all regions were treated the same as before decentralisation. The effective cost method of ﬁnancing was amended in 1986 to take account of regional conditions, and the transfers from central government were made with reference to regional indicators, such as population size, area, location, relative wealth and taxation levels.6 However, this change in ﬁnancing arrangements was criticised on the basis that the choice of indicators and the weighting attached to each had not been subject to serious analysis, and the practical outcome was no different to the effective cost method (Monasterio and Zubiri, 1996). A

Table 5.2

Decentralisation of the public sector %

Years

Spending

Revenue

1979 1983 1987 1991 1993

11.28 23.95 32.91 41.14 40.92

8.25 14.89 15.63 17.53 10.99

Source: Monasterio and Zubiri (1996), p. 177.

The Public Sector and European Integration 111

further revision of ﬁnancing took place in 1992, changing the weighting of the different variables used to assess the distribution of central government funds among the regional communities. 7 Again, it was criticised for merely preserving the status quo among the regions, seeking consensus but leaving the issue of ﬁnancial autonomy unaddressed. In 1993, some attempt was made to address the issue of ﬁnancial autonomy for the regional communities with a new modiﬁcation to the ﬁnancing system. It consisted of a proposal to release 15 per cent of income tax collected within the region, which would be retained by the regional government to ﬁnance spending areas decided upon by the particular autonomous community. This was the ﬁrst real proposal to grant ﬁnancial autonomy to the regions since the decentralisation process was initiated in 1980. In the intervening period since 1980, regional governments gradually acquired greater competencies from the central government, which were individually negotiated on a bilateral basis and hence ultimately dependent upon the negotiating power of the particular autonomous community. However, the decentralisation of competencies and responsibilities gave autonomy to the regional governments in the matter of regional spending which of course escalated as the decentralisation proceeded. The whole process was asymmetrical in design, since it became apparent that the grant of autonomy over spending to the regional governments was not matched by any similar grant of ﬁnancial autonomy (Table 5.2). Regional governments had limited control over the ﬁscal resources that were required to ﬁnance the spending decisions that they made. As an illustration of this lack of ﬁnancial autonomy, in 1991 80 per cent of regional government receipts came from the central government budget, with only 20 per cent originating from the taxation that was directly under the control of the regional authorities. In only two of the regions, the so-called forales regions País Vasco and Navarra, was the situation different. In these regions, 90 per cent of receipts originated from taxation collected regionally, with the remaining 10 per cent received as ﬁnancial transfers from the central government. Most of the regions had limited revenue sources (Gómez Jiménez and Roldan Alegre, 1995). The primary own resources available to the regional authorities (excluding the forales regions) were the range of taxes which the central government had ceded to the regional governments as part of the decentralisation (tributos cedidos). These included taxes on wealth, inheritance, donations and stamp duties. On top of these, the only remaining ﬁscal capacity of the regional governments centred upon the

112 Spain in the EU

imposition of surcharges on existing taxes of the central government. However, the scope for imposing surcharges was limited, given the already existing ﬁscal burden and the risk facing individual regions that used this means to deepen the tax base of losing investment and contributors to other regions with lower tax burden. From the beginning of the 1990s, the issue of regional ﬁnancial autonomy began to assume greater prominence for both the central government and the regional governments, with the escalation of regional debt. The total budget spending for the autonomous communities rose from 4.8 billion pesetas in 1990 to 9.7 billion in 1997 (Utrilla de la Hoz, 1998). Without the revenue to ﬁnance this increased spending, the regional authorities resorted to debt ﬁnancing. Cataluña doubled its volume of debt between 1992 and 1995, while Extremadura saw its debt rise ﬁvefold between 1991 and 1995, and Navarra had the highest level of debt as a proportion of GDP among all the regions (Monasterio, 1996). All of the regions sought a revision of the ﬁnancing system, which was generally considered to have been divisive from the beginning, and hence failed to maintain solidarity among the regions. Moreover, many regions viewed greater ﬁscal autonomy as essential to the conduct of regional government on the one hand, and the means to avoid having to resort to debt ﬁnancing of the autonomous community’s spending programme. The central government acted with a variety of motivations, combining the need to meet the criteria on deﬁcit and debt reduction associated with entry to the third stage of monetary union with national political concerns surrounding the preservation of inter-regional solidarity, cohesion and national unity.8 The outcome of these distinct concerns was the ﬁnancing arrangement for the period 1997–2001, approved on 23 September 1996, which was anticipated to involve major qualitative and quantitative changes in both the funding of the regional communities and in the political economy of state-region relations (Ezquiaga et al., 1998). In an attempt to establish ﬁscal co-responsibility, a proportion of income tax (15 per cent) was ceded to the regional authorities, with effect from 1 January 1997, a second tranche of 15 per cent to be ceded at a later date, so as to eventually establish control over 30 per cent of income tax resources by the regional authorities.9 Under this arrangement, the regional community could set its own rate of income tax, with the proviso that the regional rate of tax should not be more than 20 per cent above or below the tax rate set by the state (Giménez-Reyna Rodríguez, 1996). In addition, the regional autonomous

The Public Sector and European Integration 113

communities would for the ﬁrst time be able to directly participate in the ﬁscal management activities of the national revenue authorities (AEAT, Agencia Estatal de Administracion Tributaria). The ﬁnancing arrangement for 1997–2001 thereby sought to combine ﬁnancial autonomy with ﬁscal co-responsibility – giving the regions their own revenue, control over the setting of the actual rates (within certain limitations), and independence over the management of the ﬁnancial resources, while sharing ﬁscal responsibilities with the national revenue authorities. Since revenue sources based upon income tax receipts tend to exhibit cyclical variations, the new ﬁnancing arrangement retained the central government’s responsibility for ensuring the adequacy of ﬁnancing arrangements – the regional authority must be able to retain sufﬁcient ﬁnancial resources to implement the competencies of the autonomous community. In other words, the national government would continue to guarantee the viability and operability of the regional public sector. Under the new ﬁnancing arrangement, this guarantee was offered in the creation of ‘an instrument of solidarity’ which was intended to cover any future deﬁcits in ﬁnancial resources consequent upon shortfalls in income tax receipts in any of the autonomous communities. Although this solidarity instrument was a new element in the ﬁnancing system, the commitment of the government to guarantee a minimum level of public sector provision and to underwrite the competencies and services offered in each region was not new. This commitment dated from the Constitution, and from the principles set out in the 1980 legal instrument (LOFCA) covering the ﬁnancing system for the autonomous communities. Since then, the principle, at least, has continued through each quinquennial ﬁnancing arrangement between the state and its regions. In practice, the principle was embodied through two provisions in the ﬁnancing system: one, the allocation of funds from central government to effect a levelling in the services provided by the regions (under Article 15 of LOFCA); the second provision existed through the operation of the inter-territorial fund, the FCI, which was directed towards correcting regional economic imbalances through investment expenditure (Article 158 of the Constitution). The solidarity instrument introduced in the 1997–2001 ﬁnancing arrangement was envisaged as supplementary to the these two existing provisions. The transfers made from state resources to the regional governments, formerly calculated according to weighted indicators such as population, area, and so on, would no longer be calculated on this basis under the new arrangement, and instead would be treated as a residual necessary to make up the total resources of the region, supplementing the

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extended own resources (the various ceded taxes and now income tax) state transfers and any solidarity transfers. The cession of a share of income tax to the autonomous communities represented in many respects a structural shift in the national ﬁscal system, and a recognition of the maturity of the decentralised public sector. The new system also sought to secure and maintain convergence among the regions through the various instruments of solidarity, this time not in reference to the status quo prior to decentralisation but to the actually existing situation in each region. If income (and hence tax receipts) in a particular region falls below the national average, the state will make compensatory payments. It also guarantees a certain growth – assuring each region that the increase in its resources will not be less than 90 per cent of the increase for all the regions, and that by the end of the period the per capita ﬁnancing will not be less than 90 per cent of the average for the regions as a whole. Of the 17 regional autonomous communities, 12 accepted the new ﬁnancing system, giving the regions ﬁnancial autonomy and ﬁscal coresponsibility, when it was presented in the autumn of 1996. The ensuing political debate that followed the introduction of the new ﬁnancing system for the regions highlighted wide opposition to some of the proposals and dissatisfaction among many of the regions regarding the equity of the system. Based as it was primarily on one source of revenue, the system favoured those regions with dynamic growth and rising income levels thus generating greater revenue from taxable incomes for the better-off regions; regions with slower growth had to depend far more on transfers from the state. Linked to this bias within the new arrangement was the criticism that the system lacked any attempt to address equity in terms of the equality in the level of services provided among all the regions, and failed to deﬁne transparent criteria for deciding on equality of service provision between individual regions, such as ﬁnancing on a per capita basis (Pérez García, 1998). Without this kind of yardstick it was difﬁcult to assess the extent of the distribution of regional resources in proportion to the population or to per capita income. The other difﬁculty regarding the system was its dependence on a source of regional revenue which was targeted for reform at the national level. As part of a broader strategy to foster a more competitive environment within the framework of the European Single Market, the Spanish government had targeted reform of the ﬁscal system with lower taxation rates as essential in the maintenance of competitive advantage within the international trading system. It seemed, therefore, all the more difﬁcult to

The Public Sector and European Integration 115

secure a level of ﬁnancial autonomy when the central government was in the process of lowering the income tax rates, with likely implications for the tax yield and future regional autonomy. The government’s position was that the high taxation and social security rates contributed to the high level of unemployment and reduced the competitiveness of Spanish business, while discouraging saving, employment, investment, entrepreneurship and risktaking (Iranzo, 1999). The ﬁscal system also encouraged fraud, so that actual taxation yields bore little relation to the potential yield. 10 Mindful of the downward trend in direct taxation rates throughout the other member states of the European Union, the Spanish government announced changes to the taxation system in 1998, bringing down the top marginal rate of 56 per cent to 48 per cent, reducing the number of bands, and making changes to the deductions and entitlements. The reform of the national ﬁscal system called into question the feasibility of the new regional ﬁnancing arrangement for the period 1997–2001, especially as lower rates of income tax, the lynchpin of the system, could lead to reduced yields for the regional communities. Accordingly, the government responded to the concerns of the regions by reafﬁrming the commitment to co-responsibility and ﬁnancial autonomy. It further declared a broadening of guarantees in favour of the regional communities so that any shortfall in taxation yields consequent upon the reduction of the direct taxation rates would be borne by the central government rather than the regional communities (Ezquiaga and García, 1999). In effect, the state would lower tax rates on its share, while the regional communities could maintain the higher rate on the 15 per cent share ceded under the 1996 agreement. It also reafﬁrmed the commitment to maintaining a growing share in the transfers from state resources, linked to nominal GDP. The broader picture that emerges from these attempts to encourage regional ﬁnancial autonomy suggests that autonomy has been redeﬁned, with the emphasis on limiting the adverse effects of reduced tax rates on regional revenues. Also, the commitment to ﬁnancial autonomy and ﬁscal co-responsibility seemed to be modiﬁed by the central government’s emphasis and commitment to ensuring the adequacy of the regional public sector. The outcome represents an uneasy compromise by the government between the demands of the regions for ﬁnancial autonomy and its commitments under the Maastricht Treaty. This means that there remain many points of conﬂict, in the aspirations of the regions for ﬁnancial autonomy, and in the goals of the state with regard to balancing its commitments to the regions against external responsibilities as a

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member of monetary union. Moreover, the heterogeneous nature of the regional autonomous communities offer continuous opportunities to destabilise the route towards complete ﬁnancial autonomy.11 Taxation revenues vary enormously among the regions, as do transfers from the central government, while the continued diversity of negotiating powers and strategies among the regions means there is effectively an inbuilt ﬂaw which perpetuates both regional diversity and the struggle for autonomy.

Privatisation and the public sector In 1978, the Constitution deﬁned the role of the state under the aegis of the social democratic state as having a key position in the management of the economy. By the mid-1980s, the public sector management of the economy accounted for 12 per cent of the national GDP, still below the European average of 15 per cent. It was around this time that pressures for change began to emerge, driven in part by an emerging neoliberal consensus on the role of the state in the economy (that it should be limited), and then by the liberalisation agenda of the European Union, embodied in the Single Market Programme. The privatisation of the Spanish public sector, begun slowly by the Socialist government in the mid 1980s, gathered much greater momentum only in the years immediately preceding entry to European monetary union under the conservative government which took ofﬁce in 1996, led by José María Aznar. Before that, the Socialist government approached privatisation cautiously, but it did accept privatisation as essential to the sound management of public ﬁnances. In practice, the receipts from privatisation helped to reduce the size of the public deﬁcit as the process gathered speed. During the period 1985–91, the state concentrated upon the sale of mainly industrial enterprises to a single buyer, often foreign. The objective in this period was largely focused upon improving the competitiveness of the enterprises on the one hand and promoting the internationalisation of their activities on the other, and was a natural follow-up to the modernisation and restructuring programme launched at the beginning of the 1980s (CES, 1998). Between 1992 and 1995, the objective shifted towards greater emphasis on raising resources and maximising the ﬁnancial gain from the sale of public enterprises. The method of privatisation shifted towards stock market placing, as had occurred with many of the UK privatisations, and this period saw the partial or often complete privatisation of traditional state monopolies (Cuervo, 1997). There was a major boost to stock market activity during this

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period, although it was modiﬁed to some extent because of the economic recession. Under the Conservative government, a new strategy of privatisation was launched in 1996, conducted in the context of a need for consolidation of the public sector ﬁnances and the push to qualify for entry to European monetary union. The strategy revolved around a global approach to privatisation amidst a broad programme centred upon reform and modernisation of the public sector, strengthening the market economy, greater liberalisation and increased efﬁciency, and an emphasis upon competition and job creation. Instead of privatisation on a piecemeal basis, examining each public enterprise individually on a case-by-case basis, the privatisation programme was allocated to the state agency, SEPI (Sociedad Estatal de Participaciones Industriales).12 The privatisation programme moved forward very rapidly in the period 1996–98, generating some 202 000 million pesetas in 1996, and 716 300 million in the following year (CES, 1998). Moreover, despite what seemed like another attempt to add to the bureaucratic system in the creation of the privatisation agency, SEPI, the agency proved to be highly motivated and succeeded in effecting a structural change in the ownership of many economic enterprises and industrial sectors that had long operated under the umbrella of the public sector. By 1 January 1999, there remained little that was recognisable of the Spanish public enterprise sector as it appeared when Spain joined the European Union in 1986. The government’s Stability Plan (1999–2002), presented to the European Commission at the end of 1998, envisaged the continuation of the privatisation programme, and promised that by the year 2000 only the mining industry and a few defence sector enterprises would remain within the public sector. The rapid completion of the privatisation programme stood in marked contrast to other areas of attempted reform within the Spanish public sector. In matters such as regional ﬁnancing, social security and pensions, as well as the health sector, widespread debate and limited reform have intermingled with contradictory positions and counterproposals, all combining to preserve the status quo, albeit with a lingering recognition that reform must come some time in the future. What, then, explains how it was the Spanish government was able to change one aspect of the public sector relatively rapidly and with little opposition from groups within either the public sector itself or the private sector? The answer seems to lie with a set of conﬂuent factors, which together allowed for the creation of a consensus on the rationale and content of the programme on the one hand, and a commitment to its completion

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on the other. Firstly, the conservative government espoused the neoliberal approach to policymaking, and ﬁrmly endorsed the principles of efﬁciency and competition in both the private and the public sector. These two principles underpinned the privatisation programme, which was ultimately concerned to reduce the state role in economic management, another fundamental principle of neo-liberal thinking. Secondly, there was a pressing need to curtail public ﬁnances in the context of qualifying for entry to monetary union. The conservative government was as committed to monetary union as its predecessor, and endorsed the inﬂation and monetary stability strategy of the Bank of Spain. With less than three years remaining before the start of monetary union when the government took ofﬁce in 1996, and state ﬁnances continuing to give cause for concern, it was clear that concerted and immediate reform was required. Thirdly, the strategy had the support of the general public, and the public sale through the stock market was well publicised, encouraging the emergence of popular capitalism. The popularity of share-holding in the newly privatised companies made successive offerings easier, and enabled the state to maximise revenues from future sales. The economy had recovered from the recession of 1992–95, with a resumption of economic growth and stronger optimism regarding the prospects for the economy and for investment in particular. There was greater interest in stock market investment, which was perceived to give higher returns than more traditional means, even though it was also more volatile than the stock markets in London, Frankfurt or Paris. Fourthly, the state agency, SEPI, was a new organ of the state. It therefore did not have the time to become established and entrenched within the bureaucratic structure, to stagnate and ossify, or to become inﬂuenced by long-standing interests within the sector, thus avoiding the kind of regulatory capture that could prohibit necessary action for reform. Not being part of the old guard, SEPI could begin the task for which it was set up to accomplish, freed of old loyalties and independent of particular interests and political division. In effect the privatisation programme offered winners – reduction of the public sector ﬁnances (and thereby improved prospects for entry to monetary union), more competitive industrial sectors, popular capitalism and the opportunity to make money on the stock market. Ultimately, this was where the privatisation reform programme succeeded, when regional ﬁnancing, and social security and pensions foundered on the rock of opposition, unable to guarantee the winners or to protect the losers.

The Public Sector and European Integration 119 Table 5.3

EU–Spain ﬁnancial ﬂows 1992–99 (billion pesetas)

Years Contributions Receipts Net surplus

1992

1993

1994

1995

1996

1997

1998

1999

659 991 331

750 1146 396

814 1166 352

629 1769 1140

750 1664 914

912 1743 832

993 1990 996

1029 2098 1068

Source: Ministerio de Economía y Hacienda, Presentación del Proyecto de Presupuestos Generales del Estado 1999, p. 229.

Spain and EU ﬁnancial ﬂows Spain has been a signiﬁcant beneﬁciary of European Union funds since 1986, especially under the Structural and Cohesion Funds. At the end of the 1990s, it was the largest beneﬁciary among the 15 members of the European Union, with the largest surplus in its transactions with the community (Financial Times, 1999). In this chapter, we concentrate on the overall ﬁnancial relations between Spain and the EU (Table 5.3); Chapter 6 will examine the speciﬁc distribution and overall impact on cohesion and regional development of these funds. Both Spanish payments into the EU budget and receipts under the various EU programmes have risen consistently over the years since accession. National contributions to the EU budget displayed an upward trend, with marked increases in the share of own resources, VAT payments and the national contribution based upon GNP. 13 In the latter case, the contributions spiralled, with an eight-fold increase between 1989–97, while VAT contributions rose four-fold over the same period. By 1992, Spain was contributing 8.6 per cent of the Community budget, the ﬁfth largest contributor after Germany (30.2 per cent), France (18.7 per cent), Italy (14.7 per cent) and the United Kingdom (11.9 per cent). Following this, the Spanish contribution to the EU budget showed some instability, falling to 5.4 per cent in 1995 before eventually settling at 7.1 per cent in 1997. On the receipts side, the picture looks particularly rosy. In absolute terms, Spain receives more than any of the other member states, although on a per capita basis, or measured as a proportion of total output, the country falls behind the other Cohesion countries, Ireland, Greece and Portugal (Martín, 1997, p. 151). The net receipts in 1999 accounted for 1.2 per cent of GDP, while the cumulative effect of EU funds has been estimated to have increased Spain’s gross domestic product by four per

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cent over the period of membership (Financial Times, 1999). In the main, these funds have been targeted at the modernisation of the national infrastructure, especially transport, with large investments in road and rail systems, airports, linking the disparate areas of the country to the major national and European economic centres. These investments stand out as prominent and obvious results of European Union membership, serving to promote a degree of cohesion among the regions and diverting to them more funding than provided by the central government budget for transfers under the national inter-territorial compensation fund (FCI). The principal European programmes of which Spain is a large beneﬁciary include the Guarantee and Guidance section of the Common Agricultural Policy, the Structural and Cohesion Funds, and the European Social Fund. In other policy areas, the national share is much less. In the case of the European Union’s technology policy, which is promoted through the Framework Programme, Spain is actually a net contributor – a result of the weakness of the national technological capability which restricts the quality and quantity of participation under research collaboration programmes. The national share of EU Structural and Cohesion Funds is an acknowledgement of the diversity of regional economic development on the one hand, and an implicit acceptance of the extent of convergence yet to be achieved between the Spanish regions individually and collectively with the European average.

Conclusion European integration brought many political and economic beneﬁts – and the much sought-after modernisation of the political and economic system. However, integration also changed the planned route to modernisation from the one envisaged at the end of the 1970s and set out in the principles of the Constitution. Successive developments in European integration in the 1980s and 1990s brought continuous challenges for the state and the national economy. The Single European Market brought free movement of goods, capital, services and labour, and with its liberalisation programme all member states were required to eliminate barriers to free trade. For Spain, the general result was an increase in competitive pressures on the economic sector. A more speciﬁc outcome was the hardening of the government’s intention towards privatisation, especially in the years before monetary union. European monetary union called for a major diversion to the original route to modernisation in terms of the convergence criteria set out in the Maastricht Treaty. Instead of increasing public sector deﬁcits and

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debts in the creation of a modern public sector, Spain was now obliged to reduce both its deﬁcits and national debt, to reduce the state involvement in economic management, and to contract the size of the public sector. Convergence had moved away from the 1978 viewpoint of growth and expansion, to be replaced by that of contraction and reduction, and the pursuit of a set of nominal indicators on public sector deﬁcits, government debt, inﬂation, interest rates and exchange rates. The new conceptualisation of convergence imposed a set of goals on the national authorities which forced a revision of the existing ﬁnancial relations both within the public sector and between the state and the regional autonomous communities. The evidence to-date suggests some convergence on the basis of the nominal indicators set out in the Maastricht Treaty. Successful entry to the third stage of monetary union, and in the ﬁrst entry group, is another clear indicator of convergence. In this chapter we have concentrated upon the public sector; we now conﬁne remarks relating to convergence to that particular area, leaving other aspects of convergence to be dealt with in the chapters that follow. This chapter highlighted the issues affecting public sector reform and examined some areas where the national authorities have sought to balance the responsibilities of EU membership with the national demands. Monetary union provided the context and the impetus for public sector reform, shaping the choices and decisions of the national governments, essentially from the moment of accession to the community. This chapter has identiﬁed points of conﬂict and areas where divergence remains a risk for the future. At a general level, the Stability and Growth Pact poses strict conditions and tight limitations on the scope for manoeuvre by the national government, and especially so in the case of a slowdown in economic activity. The option of raising government spending in a recession is not available, and where taxation revenues fall as a consequence of the slowdown in economic activity the pressure to reduce expenditure so as to keep within the conditions of the pact becomes even greater. A second source of divergence lies within the attempt to reduce the welfare state under the existing demographic and social structure in Spain. Attempts at reform strike at the heart of the democratic system envisaged by the Constitution, and proposals for reform touch a raw nerve both with Spanish society and with political interests within the country. While it is difﬁcult to reduce government spending, it is equally difﬁcult to increase the sources of revenue as the tax burden is already very heavy, with relatively high social security contributions

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compared to other member states. Direct taxes, especially on labour which bears the vast majority of the revenue burden, have limited scope as potential sources of additional revenue. In a competitive international economy, where governments use the ﬁscal system to give them competitive advantage, Spain cannot raise the ﬁscal burden when other countries are going in the opposite direction. A third source of divergence lies in the nature of the regional autonomy structure and the model adopted by the state. As indicated above, regional autonomy was established through a diversity of models, with central government negotiating the cession of competencies and responsibilities on a bilateral basis with individual regional autonomous communities. Financing of the communities was agreed for a ﬁve-year period, at the end of which another set of negotiations would precede a new arrangement. The system was asymmetrical in the sense that while spending was decentralised, revenue was not (with the exception of the two forales regions, País Vasco and Navarra). As a result of this asymmetry, regions resorted to deﬁcit spending, borrowing money from the ﬁnancial markets to cover escalating levels of spending. Regional debt rose, thus aggravating the national public deﬁcits and accentuating the need for reform of the ﬁnancing arrangements so as to strengthen regional ﬁnancial autonomy while also extending the principle of co-responsibility. The agreement on ﬁnancial arrangements for the regional autonomous communities for the period 1997–2001 was a response to these pressures. Although hailed as a signiﬁcant move towards ﬁnancial autonomy, ceding up to 30 per cent of income tax revenues to the regional autonomous communities (when responsibilities for health and education are ceded), in practice the state retained the responsibility to cover any shortfalls in regional spending. This commitment by the state to cover shortfalls in spending places a quite different interpretation on regional autonomy. It also binds the state to commitments made by the regional autonomous communities, irrespective of the commitments at the national level with regard to national deﬁcits and debt. So long as diversity in regional economic development continues, and is combined with a diversity of regional ﬁnancing models, it remains difﬁcult for the state to control the independent ﬁnancial decisions of the autonomous communities. Ultimately, this affects the position of the state with regard to its nominal convergence criteria.

6 Regional Diversity and Convergence

Since the creation of the 17 regional autonomous communities in 1978, the political and economic development of the regions has varied enormously. Some have strengthened their positions politically, from the initial level of autonomy negotiated in each case between the regional community and the central government, depending on factors such as economic development, historical circumstances and political weight.1 Since then, the evidence suggests a varied picture of economic growth and development and of convergence in the distribution of regional per capita income. This chapter examines the nature of the regional disparities that existed in Spain and goes on to consider some of the explanations for the existence of these disparities. The chapter considers the role of national regional policy and also European policy (principally Structural Funds and the Cohesion Fund) in mitigating some of the inequalities in regional economic development and income distribution. Since 1986, European Union resources have played an increasingly signiﬁcant role in the attempt to bring about regional convergence. In 1998 alone, Spain received 55 per cent (1576 MECU) of the Cohesion Funds to ﬁnance projects in transport infrastructure and the environment. In 1997, Spain was the largest net beneﬁciary of the EU budget, receiving a net 5.54 million euros (1 euro = 166 386 pesetas). The crucial question for Spain is whether the regions have developed the independent capacity and the conditions necessary to sustain regional growth and to support a level of convergence towards the EU average, particularly in the context of growing pressures on both the Cohesion Funds and the Structural Funds.

123

124 Spain in the EU

Regional development proﬁle The experience of Spanish regional development since the 1970s shows a somewhat mixed picture, one that is replete with successes and failures, progress and retreat, convergence and divergence all bound up with processes of structural change, political transition and adaptation to the demands of European integration. Some regions adapted better than others to these challenges, but any evaluation of the regional development proﬁle over the ﬁnal two decades of the twentieth century faces a difﬁcult task in summarising the nature of the progress achieved. The regional development outcomes do not necessarily correspond to theoretical models of regional development, whether neo-classical or endogenous growth theories (Raymond and García, 1996). Nor do they necessarily correspond to simple lines of demarcation, such as north-south divisions, the predominance of particular economic structures over others or historical experience of industrial development. Instead, the review of regional development points to a very varied experience of growth within and between regions, with certain broad common features distinguishable in the patterns of regional growth up to the mid-1980s and a change in these patterns from then on which has continued up to the end of the 1990s (Vázquez, 1996).

Regional growth – facts and trends This section sets out the principal features of Spanish regional growth over the period since accession to the EU. However, it is imperative to extend the temporal perspective so as to identify the trends in regional growth prior to 1986 in order to understand how, or indeed whether, membership of the EU has been a positive force in enhancing the economic prosperity of the regions. Certain preliminary economic indicators will be considered ﬁrst in order to establish a picture of regional growth and the extent of convergence and diversity in growth patterns between regions. Attention is therefore focused upon the average growth rates in output at the national and regional levels, and upon changes in the relative weight of each region in total national output, employment and population.2 Since the transition to democracy in the mid-1970s, both the national and the regional economies have gone through several cyclical periods encompassing crisis and economic boom. The period between 1974 and 1985 was marked by economic crisis and stagﬂation

Regional Diversity and Convergence 125

and an international recession which adversely affected output growth, employment levels and inﬂation in all of the European economies (Boltho, 1982). The effect on Spain was particularly marked due to a very heavy reliance on imported energy supplies. From 1985 to 1990, the Spanish economy displayed a remarkable recovery, experiencing an economic boom in the wake of entry to the European Union that was fuelled by a combination of buoyant investment and consumer demand. The early 1990s witnessed a cyclical downturn with a trough in 1993, when unemployment rose dramatically to register a rate of 24 per cent by 1994 (Appendix 4). However, recovery and expansion returned in 1995, with growth rates above the EU average continuing right up to Spain’s entry to the single currency in 1999. This latest phase of growth was marked by lower inﬂation and greater macroeconomic stability compared to the previous phase of growth at the end of the 1980s. Between 1980–95, the average rate of output growth for the country as a whole was 2.39 per cent. Within this time span, lower growth rates of 1.42 per cent were registered for the ﬁrst half of the 1980s, to be followed by growth rates just under ﬁve per cent for the second half of the decade, and thereafter succeeded by an average of 1.19 per cent between 1991–95. Regional growth responded to these cyclical phases of the national economy. During this 15-year period, 9 of the 17 regional autonomous communities experienced average growth rates for the period as a whole that were above the national average. The northern region of Asturias experienced the slowest average growth rate (0.85 per cent), while Canarias had the highest rate of growth at 3.79 per cent. In general, the fastest growing regions were located in the so-called Ebro axis (Navarra, La Rioja, and Aragón), the Mediterranean axis (Cataluña and Valencia), Madrid, the Balearic and Canary Islands, and Extremadura in the west. In the ﬁrst ﬁve years of the 1980s, three regions (Canarias, Extremadura and La Rioja) had average growth rates above 3.5 per cent. However, nine regions had growth rates below the national average (1.42 per cent), while one region, Galicia, suffered a real decline in average output over the ﬁve-year period. During the economic boom that followed accession to the European Union, all regions experienced economic growth, but there was a clear disparity in the growth rates between regions. Asturias recorded the lowest average growth rate for the period, while above average growth rates were witnessed among a disparate group of regions, including Andalucía, Cantabria, Castilla-La Mancha, Cataluña, Madrid and

126 Spain in the EU

Navarra. Between 1991 and 1995, the recessionary phase brought a sharp reversal, with very poor growth rates in Andalucía, Castilla-La Mancha and Extremadura. Overall, the evidence suggested that there remained at least nine regions that consistently performed below the national average throughout the period since the beginning of the 1980s, and the number of lagging regions remained constant a decade after accession to the EU. Differing regional growth rates were accompanied by changes in the relative weight of each region in the total national output. Geographically, the regions that experienced an increase in the relative weighting within national output were concentrated in the north-east, including La Rioja, Cataluña, Navarra and Aragón; Madrid also increased its participation, as did Canarias and Extremadura. Among the regions which declined their participation in national output, and did so signiﬁcantly, were Asturias, Galicia and Castilla-La Mancha. Other regions experienced smaller declines, notably País Vasco and Castilla y León. Regional demography displayed certain characteristics that were distinct from previous decades. Two notable changes emerged to interact in a crucial way with regions capacity for growth – the virtual ending of inter-regional migration and a fall in the birth rate, combined with an associated ageing of the population. As a result of these two factors, certain regions increased their weighting within the total population, with Andalucía, Murcia, Canarias, Madrid, Baleares and Valencia showing signiﬁcant change. Regional employment levels maintained distinct variations, as was suggested in Chapter 3 (see also Appendixes 3 and 7). Four regions experienced a decline in their relative weighting within total employment: Asturias, Galicia, Castilla y León and País Vasco. Those regions that witnessed an increase in their relative weighting within national employment were located in the south and east coastal zones – Andalucía, Murcia, Valencia, the two island groups and Madrid. A ﬁnal indicator to be considered in this section is the change in per capita output over the 15-year period. On this measure, the advanced regions registered above average increases (Cataluña, Madrid, Navarra, La Rioja, and País Vasco) while the less-developed regions (Andalucía, Galicia, Castilla y León, and Castilla-La Mancha) suffered a decline. Asturias also registered a steep decline in respect of this indicator. This fact points to a lack of convergence between the regions in terms of per capita output. Moreover, the varied experiences of individual regions with respect to each of the economic indicators referred to in this

Regional Diversity and Convergence 127

section suggest a stagnation of inter-regional economic convergence over the period considered (Cuadrado et al., 1998). Different productivity growth rates associated with structural changes produced an extremely heterogeneous pattern of development, and one that was not easy to classify. One attempt to present a coherent picture was the typology of regional growth developed by Cuadrado et al. (1997). In this framework, which is illustrated in Figure 6.1, four models of regional growth are identiﬁed: (1) the virtuous circle, where productivity, employment, and output growth exceeded the national average; (2) the vicious circle (decline), where all three variables lay below the national average; (3) restructuring through employment, where employment growth exceeded the national average while productivity was below it; and (4) restructuring through productivity, where productivity exceeded the national average, while employment was less. The virtuous circle model captured the experience of later development and industrialisation, with the associated capacity to catch up quite rapidly and to beneﬁt from signiﬁcant increases in employment and productivity. The reconversion model encompasses regions (although none are included here) which experienced positive growth in the three variables, but where the reallocation of resources from traditional sectors to developing sectors had a negative impact on the overall level of regional employment. Modern, emerging sectors were less labour-intensive and employed fewer people than were released Figure 6.1

Typology of Regional Growth 1985–95.

1. Virtuous circle 1. Virtuous growth 2. Reconversion 2. Restructuring through productivity 3. Dynamic restructuring 4. Relative restructuring 5. Absolute restructuring 3. Vicious circle 6. Economic decline 4. Restructuring through employment 7. Traditional restructuring 8. Intensive restructuring Source: Cuadrado et al., 1997, ICE, no. 762.

Canarias

Navarra, Castilla-La Mancha Extremadura Castilla-León Galicia, Cantabria Asturias, País Vasco, Aragón Valencia Cataluña, Murcia Andalucía, Baleares, Madrid, La Rioja

128 Spain in the EU

from the traditional sectors. In the dynamic restructuring group, regions experienced output growth and large increases in productivity, but with employment growth below the national average. In the relative restructuring category, productivity increases were based on increases in production and output above the national average, while the absolute restructuring category included regions where the increase in output was below the national average – but in both groups restructuring involved adjustments to production facilities with adverse impact on employment levels. Regions in decline experienced levels of output, employment and productivity growth below the national average. The category included regions that in the recent past had a dynamic industrial sector, specialising in manufacturing industry. Also included in this category were the regions with a heavy dependence on traditional agricultural activities. The ﬁnal category included regions which improved or maintained the level of employment in the process of restructuring, by the use of a model which incorporated labour-intensive production, and in some regions by traditional industrial sectors being prepared to sacriﬁce efﬁciency gains in the interests of maintaining employment levels. Other regions took a more long-term view, focusing on the development and encouragement of economic activities with the capacity to generate employment.

Inter-regional convergence Since 1986 the Spanish economy has become much more integrated with the European economy, with a shift in the country’s traditional patterns of trade to reﬂect the increased levels of exports to, and imports from, other member states within the European Union. 3 As a result of this deeper level of integration, the national economy has become more closely linked with the economic fortunes of the EU and hence the national economic cycle reﬂects the cyclical movements of the rest of Europe. In the Spanish case, however, the response so far has been higher growth rates than the EU average during the cyclical upswing, and deeper recessionary effects, particularly on employment levels, during the downturn (Raymond, 1995). How have the regions within the national economy fared in these circumstances? The question essentially relates to the extent of convergence of income, output and employment levels against some benchmark. Here, there are effectively two benchmarks, one relating to the national average, and the second one to the European average. So, the question

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posed above calls for an assessment of the extent of the regional convergence towards the national average on the one hand, and towards the European average on the other. Each element is important, for the answers have distinct implications in terms of both domestic policies and politics, and in terms of judging the effectiveness of European policies as well as the nature of the impact of European integration on regional economies. Regional economies are sensitive to the condition of, and the changes in, the national economy. The former are essentially embedded in the national economy, and this embeddedness produces a set of relations between the regional and national economy, whereby the region reacts to the broader set of circumstances and economic (and political) conditions that prevail in the national economy at any given time. However, some regions display a greater sensitivity than others, and this in effect produces a disparity of regional outcomes. Taking the issue of inter-regional convergence ﬁrst, the evidence suggests that there was a noticeable degree of regional convergence in terms of output per inhabitant up to the early 1980s, and from then onwards a slowing of the trend. 4 During the years of interregional convergence, the high economic growth rates of the national economy exerted a positive effect on all of the regional economies, closing the gap between the richest and poorest. From the 1980s, the gradual process of reducing the dispersion (output per inhabitant) was weakened, to reﬂect since then a stagnation of convergence. Categorising the experience of individual regions is, however, difﬁcult, given that there was no discernible pattern. Cuadrado (1998) attempted to present a typology of regional convergence over the period 1980–95 by classifying regions on the basis of the convergent behaviour identiﬁed by the evidence, although the result serves more to highlight the diversity of the convergence pattern than to illuminate the actual process. His groups distinguished three types of regional behaviour: divergent behaviour, neutral and convergent. Regions in the ﬁrst group included those that diverged in terms of an improvement, that is a growth of output per person above the national average (Madrid, Navarra, Aragón and Cataluña) and those which diverged downwards (Andalucía, Asturias, Castilla y León, Galicia and Murcia). Several regions displayed neither convergence nor divergence over the period from 1980 up to the mid-1990s; these included Castilla-La Mancha, Cantabria, País Vasco and La Rioja. The third group included regions which did experience distinct convergence of per

130 Spain in the EU

capita output, either moving upwards or downwards towards the average. Included in this group were Extremadura, Valencia, Baleares and Canarias. Again, this approach does little to clarify the extent of convergence. Taking a slightly different view of the regions, grouping them according to per capita output, Cuadrado (1998) identiﬁed convergence within groupings but not between groups. For instance, in the case of groups of regions with a per capita output in 1980 of 110 (with the Spanish average = 100), the evidence pointed to convergence within the group (regions such as Baleares, Cataluña, Madrid and Navarra). Regions which had a per capita output lower than 90 in 1980 experienced a convergence within the group, but not a convergence towards the group of regions with a higher per capita output. Similar results were identiﬁed in the case of productivity and employment. Elsewhere in this book, an examination of the development of the labour market suggested that the gap between the highest and lowest (un)employment levels remained throughout the period of the 1990s, and that in many regions the dispersion had

Table 6.1

Output and incomes in the regions, 1997, Spain = 100

Andalucía Aragón Asturias Baleares Canarias Cantabria Castilla-La Mancha Castilla y León Cataluña Extremadura Galicia Madrid Murcia Navarra País Vasco La Rioja Valencia Ceuta Melilla Source: CES (1998) España 1997, p. 62.

GDP

Income

71.78 109.09 87.28 152.30 101.77 92.97 80.28 90.64 124.91 72.29 82.57 127.69 80.89 119.07 111.88 119.36 99.36 78.68 72.64

83.34 114.90 95.92 133.17 94.74 101.45 94.47 102.82 111.85 87.21 93.71 108.31 84.50 111.28 108.64 123.41 99.86 93.25 83.19

Regional Diversity and Convergence 131

increased in those regions unable to maintain employment creation. Earlier convergence in productivity per worker, achieved largely through adjustments in employment in the agricultural sector and reconversion in certain areas of manufacturing, had stagnated by the mid-1990s. In effect, the ﬁrst decade of European integration witnessed a convergence among regions with similar levels of development, but overall a stagnation of the process by the mid-1990s. Moreover, there was no direct relation between the position of a region at the beginning of the 1980s and its subsequent convergence. Table 6.1 shows the position of each region in terms of per capita output and income in 1997. Eight regions display a per capita output above the national average, while nine regions had a per capita income above the national average. The per capita income measure used here (disposable income) included receipts from public subsidy, unemployment beneﬁt and other transfer payments/deductions which have helped to close the gap between regions.

Regional convergence with the EU The foregoing section suggested a slow-down in inter-regional convergence that began to emerge in Spain from the mid-1980s and continued right through to the mid-1990s. This process was mitigated only by a degree of convergence among groups of regions, but no closing of the gap in per capita output levels between the richest and poorest regions. The picture was less pessimistic in terms of the extent of regional convergence with the EU average. The periodic regional reports of the European Commission indicated the gradual improvement in the relative position of the Spanish regions within the EU, as measured in terms of per capita GDP. Regions with a per capita GDP equal to or above 75 per cent of the EU average (Aragón, Baleares, Cataluña, Madrid and Navarra) all improved their position. In the case of those regions with a per capita GDP below 75 per cent of the EU average, there was a convergence towards this threshold for Canarias, Extremadura, Castilla-La Mancha and Valencia. During the decade 1986–96, only one region, Murcia, showed no improvement (Appendix 7a). All of the regions included in the Objective 1 category for the purposes of funding under the EU Structural Funds showed an improvement in their relative position with respect to the European average (CEC, 1999b).5 Nonetheless, when other indicators are considered, the position is somewhat changed. On the one hand, there has been a convergence in

132 Spain in the EU

productivity per person towards the EU average (CEC, 1999b). However, a contrary position emerged when the indicator under examination is employment, with little evidence of convergence towards EU levels. Moreover, it has been suggested that with little further scope for improvements in productivity, the potential for further convergence may be extremely limited (Cuadrado, 1998). Despite the regional advances and improvements that have been witnessed in the period of European integration, there was no evidence that the poorest Spanish regions grew at a faster rate than the more advanced ones in the type of catching-up process that is suggested by traditional neo-classical theory (Barro and Sala-i-Martin, 1991). This fact is surprising given the degree of structural change that occurred within and between regions, releasing labour from agriculture and thereby allowing productivity in the sector to increase. Restructuring in manufacturing over the course of the 1980s resulted in signiﬁcant job losses, and it was through the adjustment of employment that many areas of manufacturing were able to effect gains in productivity. But other factors clearly operated to push certain regions forward towards convergence or in some cases rising above the national and/or EU average, while in the case of other regions, there were factors which hindered regional advance. It is important to identify those factors in order to assess the potential capacity for future growth, and not least to understand the processes of regional growth or non-growth. Later in this chapter the role played by national and EU policy will be considered.

Regional conditions and convergence During the decade and a half since 1980 the Spanish economy underwent a process of adjustment and restructuring, in part forced to do so by the oil crisis of the 1970s when the need for industry to be able to adapt to external competitive pressures was ﬁrst highlighted. More generally, economic structures throughout the main European economies had already embarked on a process of change, shifting to service-based activities, incorporating new developments as the information and communications technology sector made greater inroads into economic and industrial processes. In Spain, structural change was reﬂected in the regional impact and may be divided into two broad categories: the shift to service-based activities, particularly evident in the Madrid region and the Mediterranean coastal zone (including Cataluña and Valencia); and a process of de-industrialisation in regions which

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had long-established traditional industries, such as Asturias, Cantabria, País Vasco and Madrid. The difference between the two categories lay essentially in the extent to which structural change became the catapult for adaptation by industrial sectors and the capability of sectors and ﬁrms to successfully meet the challenges of the new circumstances. The regions with a high dependence on traditional sectors, such as iron and steel, shipbuilding and machinery and equipment, all experienced a reduction of both output and employment – parts of north and north-west Spain were unable to effect the structural change necessary to maintain an evolving modern economy. In the south and south-west, the continued dependence on agriculture, combined with a major fall in inter-regional migration, produced similar effects on the regional economy. Two exceptions to the relative decline in regions with traditional industry generally were Madrid and Cataluña, which beneﬁted from other locational and dynamic advantages, and attracted new industry, capital and technology as a consequence. Other dynamic regions were the islands of Baleares and Canarias, beneﬁting principally from the tourist industry and government policy to promote this sector. Within regions, certain growth poles emerged either as a consequence of being regional capitals, such as Sevilla (Andalucía) and Vitoria (País Vasco), or due to their proximity to larger growth areas, such as Toledo and Valladolid. An important explanation of the differences in regional development and the emergence of regional disparities lay with the behaviour of productivity. Structural change associated with the shift from agriculture to industry, and from industry to service-based activities, affected the productivity levels at both an inter-sectoral level and within each sector. For regions that were formerly heavily reliant on agriculture, the subsequent employment losses, as labour moved out of the sector and into industry, raised productivity levels within agricultural sectors. Industrial productivity growth rates were higher in the ﬁrst half of the 1980s than in the subsequent period of economic boom which followed accession to the European Union, even though the early part of the decade also witnessed the highest levels of job losses in those industries undergoing restructuring. As was the experience in other countries, the industrial sector stood out as the principal source of productivity increase, in marked contrast to the services sector. Research showed that between 1975 and 1993, it was the least developed regions that experienced the most rapid productivity growth rates (Cuadrado et al., 1997). However, by the end of the 1980s, there was a reduction in inter-regional differences in pro-

134 Spain in the EU

ductivity levels. From this point onwards, the tendency towards convergence between the regions gave way to a stagnation. But even with the productivity levels that were associated with structural change, the overall ranking of regions changed little. Richer, more-developed regions maintained their position, although with lower productivity levels. The general processes of de-industrialisation and industrialisation encompassed a variety of particular developments; the emergence of new and more efﬁcient ﬁrms, greater capital investment, more intensive use of new technologies, reconversion and restructuring and the elimination of production and managerial inefﬁciencies. Productivity differences go some way to explain regional disparities in output and income levels. However, this explanation is limited in that it fails to provide an understanding of why growth continued in some regions even as productivity slowed down. Moreover, some regions where productivity growth was weak still managed to achieve rising income levels over the decade of the 1980s and 1990s, and with good prospects for a continuation of this favourable position. Recent contributions to regional growth theory emphasise various processes, including the contribution and role played by human capital, research and development capability, innovation and knowledge capital, and spillover effects.6 According to Lucas (1988), the engine of regional growth is the accumulation of human capital, deﬁned as the general skill level and quality of labour supplied by each individual. Regions possessed of a plentiful supply of highly-skilled labour will beneﬁt in terms of higher growth, and there will be a positive spillover on the productivity of others from the accumulation of human capital. Regional growth may also be facilitated through technological progress, through the investment in technical knowledge and its embodiment in production processes which leads to more output being produced from the same inputs of labour and capital. Firms that invest in research and development raise the technological knowledge, and their competitive capability, while there is a positive externality in terms of an improvement in the public stock of knowledge. Regionally, there is a great deal of diversity in the stock of both human capital and technical capital. Signiﬁcant differences continue to exist in the rate of increase in investment in education and technology between regions, while the overall level of spending nationally on research and development as a proportion of GDP remains well below the EU average. At the national level, despite concerted efforts to increase the total research spending, Spain currently allocates about

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0.9 per cent of GDP on R&D compared to 2 per cent in the EU. Accession to the EU highlighted the need for greater technological capability so as to retain competitiveness, while recognition of the technology gap that existed with the rest of Europe prompted a series of initiatives by the Spanish government on technology policy from the mid-1980s onwards. Over the decade following accession, the national effort to raise technological capability far exceeded that of any other individual member state in the EU. There was a doubling in the number of researchers, and of total research spending, while the scientiﬁc output also rose substantially as did the number of doctoral theses in the sciences. Participation in the EU Framework Programme collaborative programmes strengthened, with both universities and industrial ﬁrms taking part in cross-border European research projects that were themselves partly funded by the European Union. However, the bulk of resources devoted to research and development came from the public sector, while the private sector continued to spend less on technological development and innovation than the business sectors in the main European economies.7 Undoubtedly, in its attempt to raise the national technological capability towards the EU average, Spain was starting from a very low base compared to most of the other member states and partly because of this fact had further to go in order to achieve convergence, as measured in terms of gross spending on R&D, or the proportion of business spending on research. Notwithstanding the efforts made in the years following 1986 to build the technological capability of the economic system, and despite the support for a decentralisation of technological development through the EU Structural Funds, there remained a substantial dispersion in the regional technological capability. Madrid and Barcelona continued to have the strongest concentration of high technology enterprises, and received the largest share of technology resources from different sources. Valencia and País Vasco also ﬁgured strongly in the technological intensity of the economic activities, but the remainder of the regions constituted what one commentator described as ‘a technological desert’.8 In practice, central government distributed funds for research and technology to those applicant ﬁrms and research institutions that had the most technological capability. These were inevitably located in the most developed regions and in the meantime the government continued to proclaim the need for ensuring equity in the regional distribution of public funds. In 1992, three regions (Madrid, País Vasco and Cataluña) received over 65 per cent of the national

136 Spain in the EU

funds allocated to technological development. The clear division between regions with a relatively high concentration of high-technology ﬁrms and the majority of the regions without such a concentration helps to highlight one of the reasons for continued regional disparity and inequality. Moreover, this division serves to pinpoint the probability of continued divergence between those regions with technological capability and those without the necessary basis for establishing their future economic progress. This conclusion is further borne out by the investment patterns over the past decade and a half. Investment in new industries was directed at the sectors with high technological intensity in the most dynamic regions, and it was these sectors which beneﬁted from the synergies associated with spatial, and particularly urban, concentration. Regions with a low technological base lacked either the channels of innovation and diffusion or the capacity to absorb new technology, so that, from both the demand and supply side, a set of factors operated to generate a vicious circle, excluding the less-developed regions from technological development. Less-developed regions lacked the technological capability, the skilled labour force and R&D resources to absorb new technology, while the perception of low technological intensity discouraged investment from outside the region. Similarly, the less-developed regions tended to have a low accumulation of human capital, measured in terms of the population with different education levels. Innovation and technological development depends upon a well-qualiﬁed workforce and a population that is ﬂexible and capable of adjusting to the demands of new technology. At the national level, in 1995, some 8 per cent of the total population was classiﬁed as illiterate or without any formal studies. The proportion of the active population with a university-level education was 15 per cent, despite the fact that from the 1980s, the numbers of students entering university education has been rising steadily. Moreover, despite the increased level of public funding devoted to the education system, notable regional disparities in terms of the level and distribution of human capital remain. In Andalucía, Extremadura, Castilla y León and Galicia, the proportion of the population without formal studies was around twice the national average. Certain regions, including Madrid and País Vasco, had a very high proportion of the population with university education (Cuadrado Roura et al., 1998, p. 454). Regionally, the level of employment in technologically-advanced sectors and ﬁrms was related to the level of human capital accumulation within the individual region. To reiterate the point made earlier,

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the less-developed regions faced a vicious circle, whereby inadequate levels of technological capability and of research and development spending and an industrial base that was weak in technology combined with low levels of accumulation with respect to human capital to produce growth rates below those achieved by the more advanced regions. These factors constituted the obstacles towards regional convergence, and prohibited the less-developed regions, from attaining levels of per capita income comparable to the most advanced regions. This section has pointed to the importance of the underlying conditions that existed within regions as an explanation for the diversity of regional development and thereby suggests that different conditions will determine the path of growth for the region, and effectively the extent of convergence or divergence. Two factors have been considered in detail, the technological capability and the quality of human capital, making the point that human capital-rich and technology-rich regions have both the potential for, and the necessary prerequisites for, convergence. The emphasis on technological and human capital made here does not preclude in any way the existence of other unique factors that might facilitate development, as was the case for the Balearic and Canary Islands where the tourist industry developed on the basis of natural conditions and public support for the sector. However, not all regions can follow the same path to development, and must therefore build their own capability to sustain future growth. This conclusion has important implications for public policy, given regional and national concerns with bringing about convergence. The following section considers the role and effectiveness of national and European Union regional policy in addressing the economic and social disparities among the Spanish regions.

Regional policy and European integration In recent years, regional policy has comprised a series of initiatives undertaken at different levels, from regional authorities to central government, and the European Union’s Structural and Cohesion Funds. Increasingly, the EU-level regional policy in the guise of Structural Funds has taken on added importance, particularly in respect of the volume of ﬁnancial ﬂows and the consequent impact in reducing regional income disparities (Lazaro and Cordero, 1995). Moreover, since the adoption of restrictive macro-economic policies by the Spanish government with the aim of qualifying for ﬁrst entry to the euro zone, there was less ﬂexibility in the use of ﬁscal policy and hence

138 Spain in the EU

fewer opportunities for an expansive national regional policy. EU regional policy therefore ﬁlled a vacuum.

Spanish regional policy At the national level, a regional policy has been in operation for several decades, changing in both form and objectives according to either national priorities and, more latterly, the conditions of European Union membership. Throughout the 1960s and 1970s, among the regional development measures adopted by the government were incentives to foster the creation of industrial zones, development poles and special preferential areas. Part of the strategy concentrated upon encouraging the ﬂow of private capital through the use of incentives to locate in the areas targeted by public policy, so as to contribute to the economic development of those regions. The principal regions targeted for development under regional policy were Extremadura, Galicia, Andalucía, Castilla-La Mancha, and Castilla y León. The general approach to regional policy was in many respects similar to the types of measures adopted elsewhere throughout Europe. And, as with other countries, the regional policy was a reactive one which recognised the traditional problem of regional disparities, but essentially stopped short of actively promoting economic restructuring and industrial change. Regional policy received a new impetus in the 1980s from two distinct forces. One was the establishment of the 17 regional autonomous communities within the national territorial and political unit. The second factor in renewing regional policy emerged through Spain’s accession to the European Union, membership of which granted eligibility for support under the newly enlarged Structural Funds from 1988. With the introduction of the Cohesion Funds in 1994, Spain, along with three other member states, received additional ﬁnancial ﬂows with a distinctly regional orientation. At the national level, one of the principal instruments of regional policy throughout the 1980s was the Inter-Territorial Compensation Fund (ICF), established under Article 157 of the Constitution. The objectives of the inter-territorial fund were set out in Article 158.II as the maintenance of inter-regional solidarity and correction of interregional economic disparities. In practice, the fund emerged in the 1980s to fulﬁl two functions: as an instrument of regional policy, on the one hand; and to ﬁnance the investment and spending associated with the competencies transferred to the regional autonomous com-

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munities by the central government (Correa and Manzanedo, 1998). However, it became apparent as the decade wore on that the fulﬁlment of these two functions presented certain contradictions. As an instrument of regional policy, the fund should favour the less-developed regions; while as a ﬁnancing instrument, all regions were entitled to receive transfers under the fund. It was generally the more developed regions that were granted the greatest level of competencies, and so received comparatively more ﬁnancial resources from the central government to ﬁnance these responsibilities. As a consequence, the fund proved unable to serve as a redistributive mechanism in the way that was intended. In 1990, the inter-territorial compensation fund was reformed so as to become exclusively an instrument of regional policy. From then onwards, only the less-developed regions were given assistance, and these were chosen to coincide with the regions classiﬁed under Objective 1 status by the European Union. Ten regions received ﬁnancial support under the inter-territorial fund in 1996, with almost 40 per cent of the total going to Andalucía. Galicia received 18 per cent of the total, while the remaining regions received less than 10 per cent each. (Correa, 1998). Also in line with the EU policy, the reformed inter-territorial compensation fund provided support for both particular investment projects as well as making general ﬁnancial transfers. Apart from the inter-territorial compensation fund, other measures of regional policy operated throughout the 1980s. New legislation introduced in 1985 acknowledged the changed circumstances of the state and its regions, and the need for national policy to adapt to the European policy. It also sought to co-ordinate the myriad initiatives that had operated in an uncoordinated fashion throughout the previous two decades. Adopting the acquis communautaire, meant changing national policy so as to avoid coming into conﬂict with the articles of the Treaty of Rome. One of these articles, Article 92, prohibited state aids which threatened competition by giving a region an unfair advantage over other regions elsewhere in the EU. Exceptions were allowed, however, in the case of aid to regions with a low standard of living, or where unemployment was a serious problem. Henceforth, from 1985, regional policy would be directed towards reducing inter-regional inequalities on the one hand, and on the other, contributing to convergence towards the European average per capita income level. Convergence and regional development became the interdependent and mutually supporting policy goals (Martín, 1995). As a consequence of its newly-acquired responsibilities within the EU,

140 Spain in the EU

the government was required to change the nature and substance of regional policy, and thus to target regional incentives towards three groups of regions: less-developed regions, deﬁned by reference to some economic indicator such as per capita income or the level of unemployment; those regions in industrial decline as deﬁned by the European Commission; and regions with special circumstances (population, migration, income) that might qualify for regional support. In substance, regional policy emerged towards the end of the 1980s with several strands: ﬁrstly, to strengthen the growth levels of the most dynamic regions (Madrid, Ebro valley and the Mediterranean zone); secondly, to focus particular attention on reversing the decline of Galicia and Asturias, and to regenerate their traditional growth potential; thirdly, to give a strong impetus to the growth take-off in Andalucía and Murcia, bringing them both into the Mediterranean zone growth centre; fourthly, to support the other regions by investing in infrastructure and the diversiﬁcation of production systems; and, ﬁfthly, rural development. Certain policy instruments were prominent in the operation of the Spanish regional policy, principally investment in physical infrastructure (including transport, water and irrigation systems), the provision of social infrastructure (education, health and housing), and the use of ﬁnancial incentives for productive activities. Examining the distribution of regional policy (including the interterritorial compensation fund and the regional incentives measures) over the period 1983 to 1996, Andalucía was by far the largest beneﬁciary in absolute terms, receiving some 30 per cent of the total, followed by Galicia with 12 per cent. Other beneﬁciary regions were Castilla-la Mancha, Castilla y León and Extremadura, which received between 7 and 9 per cent each. On a per capita basis, Extremadura received three times the national average over this period, with Galicia, Andalucía and Castilla-La Mancha receiving double the national average. The regions that beneﬁted least under the regional policy were Madrid, Navarra, Baleares and Cataluña (Correa, 1998). National regional policy became increasingly inﬂuenced by the policy developments at the European level. Greater co-ordination of existing measures became apparent from the early 1990s, and national and regional authorities were pushed into closer co-operation in the formulation of regional development plans, which was part of the conditions for ﬁnancial support under the Structural Funds. European regional support was always intended to supplement national ﬁnancial aid, rather than substitute it, and it was generally accepted as such by

Regional Diversity and Convergence 141

the Spanish government. Nevertheless, EU regional policy played an increasingly important role in the efforts to bring about regional convergence.

The EU and the regions The First Report on Cohesion, published by the European Commission in 1996, noted that the four Cohesion Fund countries had experienced an increase in their per capita income during the period 1983–95 from an overall 66 per cent of the EU average to 77 per cent of the European average. In the Spanish case, per capita income rose from 70.5 per cent to 76 per cent of the average for the EU as a whole. However, at the regional level, large disparities continued to exist during this period. In the 25 poorest regions in the European Union (which included the three Spanish regions of Extremadura, Galicia and Andalucía) per capita income increased from 53 per cent to 55 per cent of the European average. Unemployment among the European regions showed no sign of reduction, and in the Spanish case the spatial pattern of joblessness has proved to be particularly acute. By 1998, there was a difference of 20 percentage points between the lowest and highest regional unemployment levels (Appendix 3). The EU Structural Funds were intended to reduce regional disparities, raise per capita income and lower regional unemployment. For the period 1994–99, the total funds provided amounted to 152 000 million ECUS, with two thirds going to the less-developed regions under Objective 1 status.9 Spanish receipts under the fund for this period amounted to 344 000 million ECUS. In addition, Spain received a little more than half of the total Cohesion Fund. 10 Altogether, Spain received about a quarter of the structural funds allocation for the period 1994–99, and it was estimated that by 1999 the total transfers would amount to 2.8 per cent of national GDP and permit the ﬁnancing of one tenth of total investments (Cuadrado Roura et al., 1998).11 This notable volume of ﬁnancial ﬂows raises the question of the impact on regional development, the extent to which regional disparities were reduced, and ultimately the degree of convergence and cohesion within and between the Spanish regions with the rest of the European Union.12 Critics of the system have argued that any assessment of the impact of the Structural Funds must distinguish between ﬁnancial ﬂows per capita, and receipts as a proportion of GDP (Fernández Martínez, 1997). On the former measure, the three Cohesion countries, Greece,

142 Spain in the EU Table 6.2

Macroeconomic impact of the Structural Funds*

Variables GDP Private consumption Private investment Gross capital formation National demand Exports Imports Employment Unemployment Deﬁcit/GDP

1989–93

1994–96

–0.73 –1.10 –2.20 –3.18 –1.36 1.50 –1.29 –0.53 0.44 –0.43

–0.97 –1.44 –1.53 –4.77 –2.18 2.65 –1.31 –0.55 0.42 –0.71

*The data refers to impact on each variable, and the negative sign refers to how much lower the variable would be in the absence of the Structural Funds. Source: Fernández Martínez (1997), p. 141.

Portugal and Ireland, received more on a per capita basis than Spain during 1989–93 and 1994–99. Measured as a proportion of GDP, a similar result could be identiﬁed, with the other three countries receiving Structural Funds resources equivalent to 2.8 per cent of GDP in the case of Ireland, 3.6 per cent for Greece, and 3.9 per cent for Portugal in the period 1994–99. In absolute terms, however, Spain was the largest beneﬁciary in its share of both Structural Funds and the Cohesion Fund. The impact of these ﬁnancial ﬂows may be seen in the evidence of a slow but steady convergence in the Spanish per capita income towards the EU average. There is still some way to go towards full convergence, however. Even on an optimistic prediction, convergence and the elimination of the regional disparities will require a long-term solution (Comin, 1995). The Spanish government undertook an assessment of the macroeconomic effects of the Structural Funds, the results of which are summarised in Table 6.2. According to the Economics Ministry, gross domestic product would have been 0.7 per cent less on average over the period 1989–93, and 0.97 per cent less between 1994–96 in the absence of Structural Funds. Private investment would have been 2.2 per cent, and 1.53 per cent lower in the two periods. Similarly, employment would have been lower and unemployment higher without the Structural Funds. Imports were slightly higher as a result of the EU funds, while exports were lower. The strongest effects were, according to the government’s estimates, on total national investment, national

Regional Diversity and Convergence 143 Table 6.3 Regional distribution of Structural/Cohesion Funds 1986–95 (% national total, and billion pesetas) 1986–95 (%) Andalucía Aragón Asturias Baleares Canarias Cantabria Castilla-León Castilla-La Mancha Cataluña Valencia Extremadura Galicia Madrid Murcia Navarra País Vasco La Rioja Ceuta y Melilla Non-regional Total

22.31 2.55 4.32 0.67 5.11 1.23 9.29 7.36 6.42 7.90 5.26 9.07 4.05 2.63 0.84 3.54 0.33 0.49 6.61 100

1996 (bn.) 80 13 25 2 35 13 61 33 31 58 32 93 8 20 6 28 2 4 436 978

Source: Fernández Martínez (1997), p. 142; Banco de España, Cuentas ﬁnancieras de la economía española 1988–97, p. 420.

demand, exports and imports. However, unemployment was one of the variables that was least affected by the Structural Funds, despite the stated objective of the programme to reduce unemployment in the regions most adversely affected by joblessness. The results of the government’s assessment suggest, moreover, that Structural Funds contributed a stimulus to aggregate demand, raising income and import demand, but having a limited effect on unemployment. The data in Table 6.2, above, give a very general view of the impact on the national macro-economic variables; however they say little about the geographic distribution and regional impact of the Structural Funds. Under the EU programme, Spanish regions were classiﬁed as Objective 1 (whose development was lagging behind, with a per capita income below 75 per cent of the EU average), Objective 2 (reconversion in declining industrial areas), Objectives 3 (helping long-term unemployed) and 4 (provision of training and job opportunities for young people), Objective

144 Spain in the EU

5a (adaptation and modernisation of agricultural/ﬁshing sectors), and Objective 5b (promotion of rural development). During the period 1986–95, one region – Andalucía – stood out as the recipient of over 20 per cent of total national receipts (Fernández Martínez, 1997). In absolute terms, as Table 6.3 shows, Andalucía received 22.3 per cent of the total, followed by Castilla y León (9.29 per cent), Galicia (9.07 per cent), Comunidad Valenciana (7.9 per cent), Castilla-La Mancha (7.36 per cent), Cataluña (6.42 per cent), Extremadura (5.26 per cent) and Canarias (5.11 per cent). In fact, all of these regions were classiﬁed as Objective 1 with the exception of Cataluña, which also received substantial funds under Objective 2 and then under the Cohesion Fund. Distributed on a per capita basis, the six regions that beneﬁted most from the Structural Funds over the period 1986–95 were Extremadura, Castilla-La Mancha, Asturias, the city regions of Ceuta and Melilla, Castilla y León, Canarias, Galicia and Andalucía. All six of these regions accounted for the poorest regions, with a per capita income below the national average. The most developed regions, with part of their territory classiﬁed under Objectives 2 and 5b, received fewer funds on a per capita basis. What has been the regional impact of the Structural and Cohesion Funds? There are various ways of assessing the effects, and the choice of criteria is often determined by the priorities at any given time. However, it is easier to make judgements by comparing such indicators as per capita income, employment levels and regional output levels. These variables are also the most immediate measures of prosperity levels and lend themselves most readily to a comparative analysis of the extent to which EU Structural and Cohesion Funds have met the stated objectives of reducing economic and social disparities. In November 1998, Eurostat published the regional income ﬁgures for all the regions of the European Union, data which is used by the European Commission for deciding eligibility under the Structural Funds. According to these data, a number of Spanish regions retained their Objective 1 status, thereby qualifying for the maximum support as the per capita income for each region lay below 75 per cent of the EU average (Table 6.4). Only one region, Cantabria, moved out of this category with a per capita income at just above 76 per cent of the EU average. When it comes to unemployment, the representation of regional disparities becomes more complex. Nationally, unemployment levels have remained high, and regional rates have reﬂected this fact, albeit at a more extreme level in many cases. The situation that prevailed in 1998 illustrates the picture rather well. The unemployment rate for the country

Regional Diversity and Convergence 145 Table 6.4

Average regional income, 1998

Regions

ECU p.c.

%

EU average Madrid Cataluña Baleares Navarra País Vasco La Rioja Aragón

17 379 17 311 17 050 17 028 16 924 16 074 15 471 15 416

100 99.6 98.1 98.0 97.4 92.5 89.0 88.7

Spain Cantabria

13 640 13 323

78.5 76.7

75% threshold Canarias Castilla y León C. Valenciana Asturias Ceuta/Melilla Murcia Castilla-La Mancha Galicia Andalucía Extremadura

12 992 12 973 12 925 12 736 12 416 11 823 11 398 10 819 9974 9563

74.8 74.6 74.4 73.3 71.4 68.0 65.6 62.3 57.4 55.0

Source: CES (1999), p. 178.

stood at just over 18 per cent. However, at the regional level unemployment rates varied from 10.5 per cent in Navarra to 29 per cent in Andalucía and Extremadura – a difference of 20 percentage points between the highest and lowest rates. There is no clear link between the proportion of Structural Funds received and lower unemployment levels. Andalucía consistently received over 20 per cent of funds, four times as much as Extremadura, yet both held the worst unemployment rates in 1998. In absolute terms, Castilla y León, Galicia, Castilla-La Mancha and Canarias received substantial shares of the Structural Funds during the period 1986–95, yet continued to have high unemployment rates on the point of Spain’s entry to monetary union.

Conclusion Historically, regional disparities were a feature of economic development in Spain. In the contemporary Spain, such disparities continue to exist in

146 Spain in the EU

the face of efforts from both national and European Union policies to reduce such disparities. It is worth remembering that, geographically, Spain was the second largest country in the European Union, after France, when the EU introduced the Cohesion Funds in 1994. Therefore, it is not surprising that regional economic disparities should exist in a land area of 505 992 square kilometres with a population density of 77.8 people per square kilometre (CEC, 1999b).13 Spatially, Spain contains a diversity of climatic and topographical conditions, cultural and historical traditions, four main languages, Castilian, Basque, Catalan and Galician, and distinct political traditions within its boundaries. In addition, historical conditions favoured a particular pattern of economic development, which inﬂuenced the contemporary regional conﬁguration in terms of the physical, social and productive infrastructure. Moreover, within the national political system, distinct political and cultural aspirations exist – in part operating along regional lines – which do not necessarily favour convergence at the national level. Within this large and diversiﬁed geographic area is contained a regional concentration of economic activities, the most dynamic of which are located in the Madrid region, in Barcelona and its surrounding area, in the Ebro region (including Navarra and La Rioja), along the Mediterranean coastal zone which stretches from Barcelona down to Valencia, and in the Islands of Canarias and Baleares. In the case of the island group, as has been said, growth has been concentrated in the services sector, largely connected to the development of the tourism industry. These dynamic regions succeeded in making a relatively smooth transition to the structural changes undergone by the Spanish economy since the mid-1970s, either by making the existing industrial base more competitive within the context of the European economy or by the development of new service-based activities – supported in both cases by the incorporation of technological advances. For a somewhat larger group of regions, adaptation to structural change and to the competitive pressures of the open economy proved much more difﬁcult. In the latter group – comprising regions with a historical dependence on agriculture as well as those with traditional manufacturing – structural change provoked extremely heavy job losses and rationalisation of the productive system, but without any substantive replacement of what had been lost. Neither at the national level nor at the regional level was the services sector able to generate sufﬁcient employment to ﬁll the high levels of unemployment that emerged after the economic crisis of the 1970s. Regional economies responded to the cyclical phases of the national

Regional Diversity and Convergence 147

economy, with employment and output levels reﬂecting the movements in the national indicators. However, the impact of the economic cycle was not spread evenly throughout the Spanish regions. This was perhaps most clearly evident in the dispersion of regional unemployment rates, right up to entry to European monetary union. Similarly, a study of regional productivity growth rates over the period 1980–95 showed a high degree of variety between the regions, with little evidence of particular patterns within the overall picture (Cuadrado et al., 1998). Over the longer term, national productivity has grown slowly, and for some regions has risen close to the EU average (CEC, 1999b). However, within this global picture, certain speciﬁc aspects and problems remain. Labour productivity, having risen slowly over the period of the 1980s, stabilised at around 75 per cent of the European average (Martín, 1997). Total factor productivity (capital and labour) was higher, at around 85 per cent of the European average – the difference between the two measures was explained by Martín as being due to the lower capital–labour ratio which prevailed in Spain. Again, there was a gradual increase in the capitalisation of the economic system, in part through the vehicle of greater foreign direct investment in the second half of the 1980s, but the process stopped short of bringing the capital–labour ratio up to the European average. Regionally, the outcome of these capital investments was a very heterogeneous pattern of productivity growth. Generally, the comparative advantage of the Spanish economic system lies in the low- and medium-technology production. At the regional level, after a period during which some degree of convergence in the productive systems occurred, a diversiﬁed pattern of regional specialisation emerged by the mid-1990s which encompassed distinct disparities in terms of technological intensities, competitive capabilities and entrepreneurial dynamism. Although each region carries a diversity of economic activities in primary, secondary and tertiary production, certain specialisations can be discerned. Madrid and the Islands of Canarias and Baleares have the highest proportion of tertiary production, while the Mediterranean zone, País Vasco and Asturias, contain the industrial heartland; Galicia, Castilla y León, Castilla-La Mancha and Murcia have a high degree of specialisation in agriculture, while the remaining regions remain more mixed, without an absolute specialisation. The productive sectors with the highest growth rates have shown an increasing tendency towards concentration, a feature of spatial economic development that was evident from the beginning of the 1980s, and which remained true under European integration.

148 Spain in the EU

Concentration favoured the already advanced regions, contributing to a process of cumulative causation and virtuous spiral of growth. For the less advanced regions, therefore, the possibility of catching up seemed all the more remote. Concentration of high-growth sectors, increasing dispersion of unemployment rates, and a diversity of productivity rates are all factors that suggest that the reality of inter-regional convergence is more complex than a study of trends in regional per capita income or regional per capita output might suggest. In fact, the evidence suggests a lack of convergence, or at the very least a slow-down in the convergence between regions, which is in part obscured by the country’s eligibility for European monetary union. In the long run, of course, these regional disparities may threaten the very basis of the stability and consensus built up around the continued observance of the nominal convergence criteria of the Maastricht Treaty. This point will be considered in more detail in the concluding chapter. Regional growth rates are also inﬂuenced by the technological development of each region, so that differences in growth rates can be determined, in part, by the technological gap between regions. Of course, very many factors inﬂuence a region’s growth rate, but all other things being equal, the smaller the technological gap between regions the smaller the per capita income differential, and hence the greater degree of convergence. Spain devotes fewer resources to technological development than many of the EU member states, despite efforts by government and the private sector to raise the technological base by increasing the spending on R&D and increasing the number of researchers. In the ten years following accession to the EU, R&D spending increased ﬁve-fold, while the number of researchers showed a four-fold increase over the same period. Regionally, the outcome of these efforts is a concentration of technological resources, with three-quarters of R&D spending located in four regions – Madrid, Cataluña, País Vasco, and Andalucía. These four regions also account for the bulk of researchers and R&D personnel. By contrast, Extremadura, Cantabria, La Rioja, Baleares, and Canarias each account for barely 1 per cent of the total spending on R&D. A similar regional concentration is evident in the pattern of European patent applications, and here the national technological weakness compared to other EU member states with more mature technological systems becomes apparent. As an illustration, the rate of patent applications (per million people) for Spain over the period 1994–96 was 12, compared to 94.6 for France (Appendix 7).

Regional Diversity and Convergence 149

How has European integration affected regional convergence? The answer depends on how one wants to deﬁne convergence in the sense of what variable is under examination (per capita income, employment, unemployment or some other real variable such as human capital or technological capital), and how one wishes to measure convergence, either as a movement of the variable under examination towards some average or as the reduction in the dispersion of the variable. A common approach is the choice of either per capita income or per capita gross value added (as a proxy for output). Taking the (in this case, regional) per capita income as the variable, and measuring it against the EU average, has the merit of both simplicity and transparency. The data for the period 1986–96, for example, suggest convergence of regional per capita income towards the European average (Appendix 7). The European Commission’s sixth periodic report of the regions revealed its conﬁdence that output per head in the poorer regions was converging towards the EU average (CEC 1999b). Taking a somewhat contrary position, the review of the Single Market, which examined the impact on regional growth and convergence, concluded that it was poorer countries that improved their position after 1987, while faster convergence within countries was not apparent. 14 The Spanish experience would appear to bear this out. From the early 1970s up to the early 1980s, there was a gradual process of convergence with a reduction in the gap between the richest and poorest regions, to be followed by a slow-down in convergence and even a widening of the gap in the nineties (Mancha and Cuadrado, 1996). When national growth was strong, the faster growing regions were pulled along at a more rapid rate, leaving the less-developed regions lagging behind, unable to attain similar growth rates. European integration has brought a more immediate impact for Spain and its regions in the ﬁnancial ﬂows received through the EU Structural and Cohesion Funds. Since 1986, receipts from the Guidance section of the Common Agricultural Policy rose to 170 billion pesetas in 1999; the receipts under the ERDF rose more than twelve-fold, from 40 billion pesetas to 541 billion; ESF receipts also rose more than ten-fold, from 23 billion to 296 billion pesetas (CES, 1999, p. 188). On top of these ﬁnancial ﬂows, Spain is also a beneﬁciary under the Cohesion Fund (Appendix 5). In every year, except 1986, Spain has been a net beneﬁciary of the EU budget, and particularly of the Structural/Cohesion Funds. Regions included in Objective 1 status contain almost 60 per cent of the national population, while a further 20 per cent live in regions

150 Spain in the EU

classiﬁed under Objective 2. Effectively, these inﬂows have acted to raise the per capita income of the recipient regions towards the EU average (Table 6.4; Appendix 7). This conclusion is further borne out by a comparison of the output and income indices, set out in Table 6.1, above, which show that the divergence between the regions is less when measured in income terms, highlighting therefore the hugely important redistributive of ﬁnancial ﬂows, both from the state and from the EU budget. As a redistributive mechanism, the Structural Funds undoubtedly play a vital role in promoting regional convergence. However, several questions arise concerning the nature and durability of this convergence. For one thing, the distinction between the output and income indices referred to above brings into sharp relief the real capability of individual regions to secure and maintain sustainable growth, based upon productivity, competitiveness and technological capability. Rising per capita incomes do not necessarily reﬂect the underlying strength and capability of the regions concerned; this chapter has identiﬁed the disparities in real indicators, such as technological capability, or the quality and stock of human capital, which can limit potential for development. The EU funds have addressed these disparities but only to a limited extent so far. Indeed, over the past decade, Structural and Cohesion Funds have been invested largely in Spanish physical infrastructure, which was very unevenly distributed throughout the country. The impact of this investment on the region’s growth potential is, inevitably, to be found in the long-term. Yet, the technological gap between Spain and the EU is clearly evident from the statistics on R&D spending, the smaller share of this spending by the private, business sector, and the number of patent applications and researchers. To date, the Structural Funds have made a small, but limited, impact on the technological base of recipient regions. Given the real disparities in human and technical capital (the factors that contribute most to long-term economic growth) it seems somewhat shallow to portray convergence merely in terms of the per capita income indicator. The EU average is itself a moving target, and, as such, using it as a benchmark for convergence presents problems for regions, where no account is taken of the particular, individual economic and social conditions prevailing on a regional basis. Moreover, the benchmark can move upwards, with the growth of the richer regions in the EU, or downwards, with the enlargement of the European Union to take in new, and poorer, member states from Eastern Europe. Enlargement will, in all likelihood, lower the EU

Regional Diversity and Convergence 151

average, and convergence under this situation becomes something entirely different. Of course, the real implications of enlargement are likely to revolve around a redistribution of the funds away from beneﬁciary states such as Spain towards the poorer Eastern European states. In conclusion, convergence is a slow process for Spain, as it has been for the more advanced countries. It is a process that becomes more complex with changing economic structures, combined with pressures from European integration and globalisation. The greater complexity of the convergence process requires a multi-level response, on the part of regional and national governments, as much as at the European level. Future developments in European integration, however, reinforce even more than in the past the need for regional and national initiatives and policies to foster independent capability for development and regional growth. But, European integration has itself imposed constraints on national policy through the limitations on deﬁcit spending set out in the Maastricht Treaty. The pursuit of real convergence and cohesion therefore places Spain in a ‘Catch-22’ situation, and the choices are not made any easier by the internal political system in which authority and competencies have been unevenly distributed. The concluding chapter examines the options for the national government in the light of the challenges posed by monetary union and enlargement, and the internal challenge of balancing regional politics with the national commitments of EU membership.

7 Spain in the EU: 2000 and Beyond

Membership of the European Union brought distinct economic and political beneﬁts for Spain. Each successive stage of European integration produced new opportunities and challenges for the country, raising expectations and at the same time exacerbating the burden of adjustment to the demands of membership. Many of the expectations of membership have been met, while an equal number remain as yet unfulﬁlled. The entry to monetary union was itself an important milestone in the evolution of Spain’s participation in European integration, marking the maturity of its political development both at home and abroad. The success in meeting the Maastricht Treaty’s convergence criteria proved in its own way an endorsement of the policies conducted over the previous decade, and a reﬂection of the Spanish authorities’ commitment to integration. Yet, the full extent of convergence with the European Union remains to be realised. This chapter offers a review of improvements in Spain’s economic welfare over the period of EU membership, and an assessment of the degree of convergence and divergence discernible at the point of entry to monetary union. The chapter then goes on to identify the limitations on convergence, and the future challenges posed by the membership of monetary union and introduction of the single currency in 2002, the proposals for reform of the EU budget and the implications for existing policy areas, and the enlargement of the European Union with the accession of new countries from Eastern Europe. It is certain that the EU stands at a crucial point in its own development, with the next steps in European integration offering some of the greatest challenges to the whole project of European unity, while prompting greater scrutiny and evaluation of the costs and beneﬁts on the part of the existing member states. For Spain, these future developments could exacerbate divergence as much as promote convergence. 152

Spain in the EU: 2000 and Beyond 153

Convergence – past problems and current issues On the whole, the period of Spanish membership of the European Union has witnessed a successful endeavour with respect to nominal convergence. The country succeeded in meeting all of the Maastricht Treaty convergence criteria well ahead of the qualifying period. The national Stability and Convergence Programme which Spain, like all member states, was required to submit to the Council and European Commission under the conditions of the Stability and Growth Pact as part of the multilateral surveillance of national budgetary positions, was approved by the EU authorities in March 1999. 1 The only recommendation offered by the EU authorities was to advise the Spanish government of the need to take measures to address the issue of an ageing population, advice which was also offered to Germany and Finland (CEC, 1999c). The ﬁrst national Stability Programme to be presented under monetary union set out objectives for budgetary discipline up to 2002, based upon an average annual growth rate of 3.3 per cent over the period, with a provision for a slight budget surplus in 2002 (Table 7.1). Inﬂation was predicted to hold steady at an average of under 2 per cent for the period 2000–2002. The programme anticipated a gradual convergence of per capita income, with the government predicting a rise in the Spanish per capita income to 82 per cent of the European average by the end of 2002.2 The most crucial factor in contributing to the fulﬁlment of the nominal convergence criteria was the development of the public ﬁnances in the second half of the 1990s. The government succeeded in reversing the trend of the previous decade, halting the expansionary phase launched by the Socialist government with the aim of putting in place a public sector comparable to that existing in the other European states. Even before this task was accomplished, the provisions of the Maastricht Treaty demanded a reversal of the public sector growth, and a reduction in government spending, the public deﬁcit and national debt. Within a very short period, the government was forced to implement budgetary consolidation measures, supplemented by large-scale privatisations, and liberalisation of the telecommunications and energy sectors. However, the biggest reduction was made in current government spending (Table 7.2). One of the principal challenges facing the Spanish government over the ﬁrst ﬁve years membership of monetary union will be to maintain the levels of economic growth set out in the Stability Programme, and

154 Spain in the EU Table 7.1

Stability and Convergence Programmes 1999–2002 1999

2000

2001

2002

GDP growth (annual % growth) Spain France Germany Italy UK EU-11 EU-15

3.8 2.4 2.0 2.5 1.0 2.6 2.4

3.3 2.5 2.5 2.8 2.5 2.7 2.6

General government surplus (+)/deﬁcit(–) (% GDP) Spain –1.6 –1.0 France –2.3 –2.0 Germany –2.0 –2.0 Italy –2.0 –1.5 UK –0.3 –0.3 EU-11 –1.8 –1.6 EU-15 –1.4 –1.2 General government debt (% GDP) Spain 66.4 64.3 France 58.9 59.0 Germany 61.0 61.0 Italy 114.6 110.9 UK 46.7 45.4 EU-11 72.4 71.3 EU-15 68.4 67.0

3.3 2.5 2.5 2.9 2.75 2.7 2.7

3.3 2.5 2.5 – 2.5 2.7 2.7

–0.4 –1.6 –1.5 –1.0 –0.1 –1.1 –0.8

0.1 –1.2 –1.0 – 0.2 –0.8 –0.5

61.9 58.8 60.5 107.0 43.7 69.9 65.3

59.3 58.3 59.5 – 42.0 68.3 63.5

Source: CEC (1999c).

if possible to secure even higher rates of growth. Anything less will place additional strain on the public ﬁnances, especially as current receipts have a tendency to grow at a much slower pace. Just prior to entry into monetary union, the government undertook reform of the taxation system, with the aim of reducing the weight of direct taxes on labour and capital, and substituting indirect taxes. At the end of 1998, the government approved a new personal income tax, introduced in the following year, which reduced the ﬁscal burden on households by lowering the minimum and maximum marginal rates. However, ﬁscal reform is unlikely to make a signiﬁcant impact on current receipts in the short term, although stronger control over tax evasion would certainly improve revenues. Higher growth rates in the future are thus essential to maintain the stability of public ﬁnances, and hence to preserve the government’s

Spain in the EU: 2000 and Beyond 155 Table 7.2

Development of Spanish public ﬁnances 1993–2002 (% GDP)

Outturn

1993

Government deﬁcit Current receipts Total expenditure of which: interest investment Primary surplus/deﬁcit Government debt GDP growth

–7.0 42.3 49.3 5.2 4.2 –1.8 60.0 –1.2

Convergence programme

1997

Government deﬁcit Government debt GDP growth

–2.6 68.9 3.5

(…)

1996

1997

1998

1999

2000

–4.7 40.3 44.9 5.1 3.2 0.4 70.1 2.4

–2.6 40.8 43.3 4.5 3.2 1.8 68.9 3.5

–2.1 40.8 42.9 4.2 3.2 2.1 67.7 3.8

–1.6 40.8 42.4 4.0 3.2 2.3 66.0 3.6

–1.3 40.8 42.1 3.8 3.3 2.5 63.6 3.5

1998

1999

2000

2001

2002

–1.9 67.4 3.8

–1.6 66.4 3.8

–1.0 64.3 3.3

–0.4 61.9 3.3

0.1 59.3 3.3

Source: CEC (1999) European Economy, Annual Report (Brussels).

position with regard to nominal convergence within European monetary union. But there are other reasons why continued high growth rates are essential. One of these reasons relates to the position of the regions in the national economy. The previous chapter highlighted the continuing disparities that exist both within and between regions. After a period of inter-regional convergence between the years 1970–85, there was a stagnation of this trend after 1985, with a slight reversal of convergence in the early 1990s. With the resumption of growth from 1994, certain regions beneﬁted while others showed little improvement in income and output levels. The regions are closely intertwined with the national economy, and therefore regional growth moves in tandem with the upswings and troughs that are a feature of the national economic cycle. It seems clear from the experience of the past two decades that inter-regional convergence depends very closely on high levels of economic growth in the national economy. Any slowdown in economic growth, therefore, will have an adverse effect on the process of regional convergence. In Spain, any such reduction in the process of regional convergence has negative political and economic consequences. For one thing, more regional transfers have to be made by the national government, thereby putting pressure on public ﬁnances, ﬁnances that from now on are themselves the subject of scrutiny by the EU authorities. Similarly, regional disparities are the subject of inter-regional transfers under the Inter-territorial

156 Spain in the EU

Compensation Fund, and also the target of the national regional policy. But beyond these ﬁnancial implications, there are potentially serious political implications that arise from the slow rate of regional convergence. Chapter 5 noted the difﬁculties inherent in the national political system, where a decentralised system of government operates on the basis of an unequal distribution of competencies and of ﬁnancial autonomy between the 17 regional autonomous communities. The guiding principles underlying the ﬁnancing of the autonomous communities were set out in the 1978 Constitution, and remained undisturbed throughout the period of European integration. These principles still adhere even within the changed environment for national public ﬁnances under monetary union. The principles – ﬁnancial autonomy, solidarity and co-ordination with the central government – incorporated the desire to establish a new democracy based on national unity and equality among the regions. Since then, the national government has been guided by similar intentions, as it sought to distribute regional competencies and allocate ﬁnancial autonomy. However, the system has an in-built tendency to exacerbate divergence, despite the constitutional guarantees of solidarity and co-ordination with central government. Firstly, the very fact of establishing a system of decentralised government with different competencies delegated to individual regions opens the possibility of divergence in regional government spending. Similarly, differentiated levels of ﬁnancial autonomy exacerbate this situation, making it difﬁcult for the government to co-ordinate regional government spending. Regions retain freedom to raise debt ﬁnance, and growing regions are a more attractive prospect for potential lenders. In addition, dynamic regions can raise more revenue through taxation of rising incomes. Moreover, regional competence over areas of industrial, investment and development policy enable regional governments to shape policy according to the regional conditions and political objectives. Secondly, the central government was under a constitutional obligation to treat each region equally, and to ensure that no region should experience a deterioration in its provision of public services after decentralisation. For some time after the creation of the regional autonomous communities, this obligation was reﬂected in central government’s ﬁnancial ﬂows to the regions, without taking account of changing economic, social and demographic conditions within and between the regions. Eventually, however, some effort was made to redress the balance, but inevitably political considerations and the

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negotiating skills of individual regional and central authorities tended to dominate the outcome. This constitutional restriction was mirrored in the guarantee of solidarity, with its implication of unity and common interests. However, the solidarity principle was frequently interpreted in practice by the regions as an opportunity for launching competitive demands directed at the central government, calling for greater ﬁnancial and/or political autonomy. This type of inter-regional competition is an inevitable outcome of the decentralisation model, which started out with an unequal distribution of autonomy among the regions, partly as a result of the historical legacy and partly emanating from the constitutional provisions. Moreover, since the latter part of the 1980s, the Socialist party and, more recently, the Partido Popular, was unable to command a majority in the national elections and therefore obliged to rule with the support of minority parties, especially the Catalan CiU (Convergència i Unió) party (Ross, 1997). Minority parties used these opportunities to extract favourable concessions for their respective regions, something that other regions were excluded from. Thirdly, European integration exerted a very unequal impact at the regional level with respect to economic growth, trade patterns and investment levels. Instead, European integration made its deepest impact through the redistributive effects of the EU Structural and Cohesion Funds. The European regional policy, together with national regional policy, were instrumental in raising the per capita incomes of the poorer regions. As yet, these policies have made little impact on the productive capability and growth potential of the less-developed regions. Moreover, participation in the EU programmes has activated additional regional spending, since many of the projects supported by the EU are conditional on co-ﬁnancing by the regional governments. All regional government spending is subject to review and co-ordination by the central government, and even more so with monetary union. Consequently, the regional participation in EU-funded projects raises additional administrative and co-ordination responsibilities for the central government. However, even the co-ﬁnancing requirement of the EU programmes can tend to favour the richer regions, with additional resources to undertake projects that demand a high level of technological expertise and human or physical capital. Hence, regions that pursued particularly active strategic industrial and education policies to develop the internal infrastructure, the resources, and entrepreneurial environment of the region, were better placed to pursue aggressive development programmes in the context of European integration.

158 Spain in the EU

In the absence of regionally-based initiatives appropriate to regional conditions, some regions were ill-prepared to avail themselves of the opportunities presented by European integration or to manage the competitive pressures which the latter brought with it. The regional economies needed to formulate and implement strategic programmes of development in the context of the new open trading environment, to develop the entrepreneurial capability, improve the capital, physical and technical infrastructure, and raise the quality and skill of the local labour force. All of these plans needed, moreover, to be based on a objective and strategic assessment of future goals and objectives, in the light of the opportunities and constraints offered by European integration and national politics. However, many regions relied on the redistributive policies of the national and European regional policies to bring about regional development – based essentially upon a raising of per capita income. It is only very recently that European regional policy has begun to make an impact on regional productive infrastructure. At the national level, the formulation of regional policy has belatedly become the joint responsibility of national and regional authorities, again at the instigation of the European Commission which now requires applications for support under the Structural Funds to form part of a comprehensive regional development plan. For much of the time since accession to the EU, national policy gave priority to macro-economic concerns with price stability on the one hand, and liberalisation, reconversion and restructuring (with mixed success), and more recently, privatisation (Oporto del Olmo, 1997) on the other. These priorities were essentially determined by the EU agenda itself, and also the Spanish government’s keen desire to be a founder member of the single currency. Regional development was undoubtedly important, but it became secondary in the policy portfolio to macro-economic policy and the fulﬁlment of the Maastricht Treaty convergence criteria. Under this situation, the redistributive function of EU and national ﬁnancial ﬂows became more important in promoting some form of convergence (in income terms) and compensating for continuing disparities in growth, wealth and prosperity.

Real convergence – an assessment European integration was the catalyst for fundamental changes in the Spanish institutional system. These changes were most noticeable in the opening up of the economy to European competition, in the liber-

Spain in the EU: 2000 and Beyond 159

alisation programme adopted by the government, latterly in the rapid escalation of the privatisation programme, and ﬁnally in the macroeconomic stability programmes – all of which involved a ‘europeanisation’ of the national institutional system. Further effects ﬁltered through into the legal, administrative and socio-political framework, but in these areas the process more often took the form of a silent revolution in comparison with the more obvious institutional changes associated with liberalisation. Similarly, real convergence in output, income, employment and unemployment lagged behind nominal convergence and the ‘europeanisation’ of the institutional system. Accession to the European Union was immediately followed by the need to implement the Single Market Programme, and the combined effect of the two produced an unprecedented degree of liberalisation in Spain, one that was unparalleled in other member states (Appendix 11). Before long, exports and imports from the EU began to rise, with a particularly strong import demand (Appendix 12). According to the orthodox theory of economic integration, which draws upon the neoclassical international trade model of Heckscher-Ohlin-Samuelson and on its extension to factor mobility by Robert Mundell, economic integration should not only improve the efﬁciency and economic wellbeing of the countries as a whole but also the real convergence among them (Baldwin and Venables, 1995). However, the predictions of the theory rested on assumptions of perfect competition in the goods and factor markets, together with a given level of technology and consumer preference, and constant returns to scale. From these, trade and factor mobility in an integrated area will raise welfare and lead to convergence of prices and income levels. Once the assumptions are relaxed, to reﬂect the real world conditions prevailing under integration, then the predictions relating to the impact of integration on real convergence become much more uncertain. In the European single market, the presence of increasing returns to scale and externalities, and of different technological capabilities between the member states, as well as differences in product markets and in the quality of the productive factors, allow for increases in efﬁciency and proﬁtability. At the same time, these differences imply that real convergence is neither automatic nor certain. Earlier chapters referred to the contributions of new growth theory which emphasised the important role played by investment in education and in research and development (Lucas, 1988; Romer, 1994; Grossman and Helpman, 1994).

160 Spain in the EU

Combining the insights from new growth theory with recent models of integration, there is an inescapable conclusion that real convergence is very much dependent upon the policy portfolio and the productive capability of the lagging country. This fact is even more evident, given the equally inescapable fact that the international economy exhibits many diversities and imperfections which lead to cumulative processes of growth in countries and regions with higher initial levels of growth and income, leaving the less-developed countries struggling to catch up. The conclusion is borne out by an examination of the trade and foreign direct investment patterns within the single market. Integration did not bring about a specialisation of Spanish trade patterns based upon comparative advantage and the eventual equalisation of incomes and factor rewards, in other words convergence. Instead, it brought about a deterioration in the sectors that traditionally enjoyed a comparative advantage (textiles and clothing; food) and an increase in the volume of intra-industry trade. Specialisation vis-à-vis the rest of the European Union was in lower quality product areas, while imports displaced nationally-produced products in the domestic market, since local ﬁrms were unable to meet the competitive pressures or to change their production towards higher quality.3 As a result, the adjustment costs of the new trade patterns were high, and fell disproportionately on labour, with high and persistent levels of unemployment. The manufacturing sector also experienced high levels of bankruptcies in comparison with the total economy. Foreign direct investment grew signiﬁcantly in the years after Spain’s entry to the EU, and the country attracted a growing share of the total direct investment within the EU. Part of the attraction which Spain presented for direct investment was its low labour costs and, for nonEU investors, the opportunity of access to the European market. However, the literature on foreign direct investment would seem to suggest that there are very many reasons driving the decisions of multinationals, beyond issues of cost and market access (Dunning, 1993; Thomsen and Woolcock, 1993; Molle and Morsink, 1991). Many ﬁrms seek to invest in locations that offer highly skilled labour, and for these organisations, low wages are less relevant than the productive capability and technical skills of a prospective workforce. Similarly, certain economic sectors depend on rapid technological change and diffusion, and seek to locate where there is easy access to new technology, whether incorporated in the knowledge skills of the workforce or in

Spain in the EU: 2000 and Beyond 161

the local environment. Likewise, ﬁrms are attracted by the favourable business climate, corporate taxation policies, and enterprise incentive schemes which governments are increasingly using to lure the ever more mobile global capital and multinational corporations. Foreign direct investment inﬂows rose spectacularly from a very low base in the early 1980s to reach a peak in the years between accession right up to 1990, and thereafter stabilised. Even during the most buoyant years, the high inﬂows never matched the volume of inﬂows to France, the United Kingdom, Germany and Holland. From 1990 onwards, Spanish inﬂows began to stagnate and ultimately to decline. By the time Spain entered the single currency, outﬂows of investment exceeded inﬂows as Spanish ﬁrms sought investment opportunities in Latin America. Moreover, some of the German investment (German and French enterprises have tended to dominate the investment inﬂows) is seeking new opportunities in neighbouring Eastern European countries that are now applicants to the European Union. Foreign direct investment was, however, signiﬁcant to the national economy both in terms of the contribution to total investment (gross ﬁxed capital formation) and measured as a percentage of gross domestic product, with both indicators registering levels above the EU average.4 Despite this increased activity, the bulk of the European Union foreign direct investment ﬂows were concentrated in the core countries, with Spain remaining a peripheral location as far as corporate location strategies were concerned. The conclusion of peripherality in location decisions is further supported by the extent of the technological activity of the multinational corporations. There has been no signiﬁcant increase in the high technology intensity of corporate output and exports over the decade of the 1990s. In addition, Spain had much less success in attracting investment by the leading ﬁrms in information and communications technology than did Ireland, another Cohesion country. During the 1980s, the ﬁnancial and commercial services sectors were the preferred target of foreign investment. In the 1990s, there was a sectoral switch as more of the investment ﬂowed into the manufacturing sector once more. To what extent has foreign direct investment contributed to real convergence? The evidence is mixed, to say the least, and the conclusion is therefore ambiguous. Certainly, Spain exhibits a high degree of capital mobility, one of the requirements laid down in the theoretical literature on optimum currency areas (De Grauwe, 1992; Melitz, 1995). And the investment has played no small part in the Spanish economy

162 Spain in the EU

since the mid-1980s. However, as Spain entered the twenty-ﬁrst century, there was no overwhelming evidence that direct foreign investment would move rapidly to close the income gap with the European Union. Indeed, the volume and impact of foreign direct investment on the Spanish economic sector was not enough to avoid the rather dismal conclusion offered in the CEC, 1997a Review of the Single Market concerning ‘the lower capacity of industry to produce at the standard levels of productivity and product quality of the most developed EU countries (sic), a weakness that is very much due to the traditionally low industrial spending on R&D’.5 Somewhat less ambiguous was the conclusion by Martín (1997). In a comprehensive and detailed study of the impact of European integration, the author concluded that Spain’s success in matching the imperatives set by the Maastricht Treaty was not replicated with respect to real convergence. She based this conclusion on an evaluation of certain indicators: per capita income; the level of unemployment; the level of human capital (measured in terms of the proportion of 15–64 year-olds with third level education); the stock of technological capital; and, ﬁnally, the level of social security spending as a percentage of GDP. On each indicator, Spain fared less well than the European average over the ten-year (1986–96) period studied. Since accession to the European Union, Spain had made some progress in terms of real convergence, but at the end of the period studied, there was still some way to go. The conclusion made by Martín was that Spain ranked 13 in 1986, and retained the same ranking ten years later, with Greece and Portugal remaining below Spain. The level of per capita income in comparison with the EU average generates perhaps the greatest level of interest among policymakers, politicians and the general public alike. It is the clearest indicator of rising living standards and improved prosperity, the measure of how far Spain has progressed since entry to the European Union. Moreover, it is a quantitative indicator of the extent to which a whole range of aspirations have been met. This is not to suggest that other indicators – education levels, health standards, international reputation, social equality and justice, or other economic indicators – are not considered. Rather, it may be considered as an abbreviated measure of where Spain stands in relation to the rest of the European Union. When Spain joined the European Union in 1986, the per capita income was 69 per cent of the EU average, and the highest of the

Spain in the EU: 2000 and Beyond 163

four Cohesion countries. In 1999, it stood at 79 per cent of the European average. However, compared to the other three Cohesion countries – Greece, Portugal and Ireland – the rate of convergence was relatively slow. Only Greece showed a similar rate of convergence over the period 1986–99, from 59 per cent to 69 per cent of the European average. From the initial starting point in 1986, Portugal witnessed an increase in per capita income of 16 percentage points (Appendix 10). Irish growth rates, consistently well above the EU average, resulted in per capita income rising from 60 per cent in 1986 to a projected 105 per cent of the European average in 1999 (CEC, 1999b). In the case of Ireland, above average growth rates were a necessary, but not sufﬁcient, condition to the country’s convergence. Equally important was the combination of strategic policies in the area of education and industrial development, the development of a highly skilled labour force, and the success in attracting particular kinds of foreign direct investment, as well as the provision of a favourable climate for business (Sweeney, 1999). The unemployment rate continued to be the most prominent indicator of Spain’s slow rate of convergence towards the European average. From an unemployment rate of 20 per cent in 1986, twice the European average rate, joblessness actually rose in the early 1990s with the economic recession. Spain joined the single currency with an unemployment rate just over 18 per cent, the highest among both the EU-11 and within the European Union as a whole. Unemployment emerged as a serious problem towards the end of the 1970s, and has remained an intractable feature of economic development throughout the period since then, while unemployment rates in other countries were beginning to fall slowly. What, therefore, are the prospects of a convergence in Spanish unemployment rates? The evidence suggests that unemployment rates began to decline towards the end of the 1990s. One year into monetary union, the data showed that unemployment fell 3 per cent in the 12-month period to 15.4 per cent, still well above the EU-11 average of 9.8 per cent. National policy remains ﬁrmly rooted in the pursuit of structural change and greater ﬂexibility within the labour market. An additional development is the requirement to submit a National Employment Plan under the co-ordination of the European authorities, but devised to meet the domestic economic conditions and regional disparities (see Chapter 3). While it remains too soon to make an effective assessment of the results from unemployment policy, some observations are possible.

164 Spain in the EU

Bright future or bleak prospects? Firstly, the national employment institute has witnessed a strong increase in the number of contracts registered, the effect of which has been to lower the unemployment ﬁgures. However, many contracts have been of extremely short duration and often less than one month. In some sectors, contracts as short as several hours, one day, or one week have been reported. If this is the result of government efforts to increase the ﬂexibility of the labour market, it has also produced greater insecurity in the tenure of employment. So far, the more durable impact is difﬁcult to discern, even with seasonal employment levels in areas such as the tourism industry. Without the creation of sustainable and long-term employment opportunities, Spain will continue to experience problems of unemployment given the country’s historical tendency to higher unemployment during a cyclical downturn compared to the rest of the European member states. Secondly, current policy is directed to the provision of employment opportunities for young workers and for the long-term unemployed, two categories with above average rates of joblessness. In the case of the former, the policy is centred upon education and training programmes with the objective of improving the employability of workers in the 16–25 age groups. Policy includes a variety of measures, including training, a combination of work experience and formal training, and subsidised employment, all of which are directed to vocational education for the workplace. The approach adopted by the employment authorities has been to identify the training needs of each individual and determine the most suitable training programme. This move to active labour market programmes rather than the traditional passive approach of providing unemployment beneﬁt reﬂects a general shift of emphasis in employment policy throughout the European Union. Inevitably, it takes time for the effects of training programmes to be reﬂected in improved employment statistics. However, training programmes designed to promote employability will be effective only to the extent that the training provides the skills and knowledge that are demanded by potential employers. In order to ensure a match between demand and supply in the labour market, this area of policy has to form part of a strategic long-term approach to education and industrial development more generally. Something more than a focus on the supply-side is called for, and this involves a coherent and co-ordinated programme of development to achieve economic growth, encompass-

Spain in the EU: 2000 and Beyond 165

ing education, research and technological development, together with a strategic industrial policy. The National Employment Plan also gives attention to the long-term unemployed, which has risen to startling levels in Spain. This aspect of unemployment has generated concern both at the national and at the European level. However, the European Commission’s guidelines on the national action plans actively discriminate against long-term unemployment by recommending action for those groups with oneyear unemployment (CEC, 1999e). As a result, people who have been unemployed for two years or more are effectively marginalised from the programme. And, if unemployment falls only slowly, even more people may become marginalised as the period of time without work lengthens. The conclusion to be drawn from these observations is that convergence of unemployment levels may take some time, given current economic conditions and the existing policy framework. Martín (1997) considered technological capability to be among the indicators of real convergence. The evidence points to continued divergence from the European average and a massive technological deﬁcit as represented by the technological balance of payments shortfall. Despite the enormous increase in the number of researchers throughout the 1980s, mainly in the public sector but also in the private sector, total spending on Research and Development remains at 0.8 per cent of GDP, way below the European average (CEC, 1999d). The ratio of the stock of technological capital to GDP is only 34 per cent of the European average. Business spending on research and development increased slightly from the mid-1980s, but by the end of the 1990s it had not risen to match the level of public sector R&D spending. Unlike many of the other European governments, the Spanish authorities were unable to shift the ﬁnancing of technological development to the private sector. The insufﬁcient level of investment in R&D therefore acted as a constraint on improving the international competitiveness of Spanish industry and prohibited industrial catch-up with more dynamic sectors in other member states (Pampillón, 1996). By 1992, the level of business R&D spending had stagnated, in part owing to the economic recession of the early 1990s when research spending was curtailed generally. However, it recovered only marginally with the return to economic growth a few years later. The low investment in technology left the Spanish economic sector ill-prepared for international competition, and also without the foundations for continued growth. The innovation system generally lagged behind that of the other core member

166 Spain in the EU

states of the European Union, creating a distinct technology gap with the rest of Europe.6 The technology gap existed within Spain also, between the most advanced regions with high levels of investment in R&D and the lagging regions (Castillo Delgado, 1998). Much of the research was, and still is, conducted in public laboratories and university research centres, with limited diffusion throughout the regional economy since industry–university collaboration is still at an early stage of development. As a result, many lagging regions with an insufﬁcient level of technological development face serious obstacles to economic growth and higher per capita income levels. The role of public policy, regional, national and European, remains vital to the development of the innovation system and to the improvement of the technological capacity, but equally important is the development of diffusion and innovation mechanisms on the broadest possible basis throughout the economy. The fourth convergence indicator examined by Martín (1997), the quality of human capital, is intimately connected to the technological capability, since the innovation system is largely dependent upon the availability of highly skilled people with a variety of technical skills and the knowledge to apply and absorb new technologies. Martín deﬁnes human capital in terms of the proportion of the active population (15–64 year-olds) with third level education, taking into account the quality of the education. The comparison with the rest of Europe suggested that some convergence has taken place in respect of this indicator. However, there is some difﬁculty in assessing the real outcomes here, since educational attainment is no guarantee of employment. Rather, there has been a mismatch between the skills developed through the education system and those required by potential employers. The ﬁnal real convergence indicator was the social security spending as a percentage of GDP, which rose from 74 per cent of the EU average in 1986 to 82 per cent in 1996, stabilising thereafter.7 In 1995, the total social security spending amounted to 22.7 per cent of national GDP while the EU average was 28.4 per cent. Spain spent less on social security, as a percentage of GDP, than did Germany, France, Italy or the United Kingdom (CES, 1999, p. 527). However, since 1993, the amount spent on social security payments has been falling in Spain, in large part due to the requirements of the Maastricht Treaty and the pressures to cut public spending. From the foregoing discussion, it would appear that while some convergence has taken place, there is still some way to go before Spain

Spain in the EU: 2000 and Beyond 167

converges with Europe. From the mid-1990s, there was actually a slowing down of convergence, which may in part be explained by the slower economic growth rates of the early part of the decade, and the sluggish recovery evident by looking at some of the economic indicators. Inter-regional convergence also slowed down, and there is evidence that the gap between the richest and poorest regions is actually growing. There is some irony in the fact that convergence of income levels, economic development and public sector growth occurred up to the early 1990s – although this stopped short of the European average – before the convergence trend was halted, and even reversed, with the Maastricht Treaty and its criteria on government debt and public spending deﬁcits. This latest stage of European integration poses a challenge to Spain’s ability to continue with the process of real convergence. The difﬁculty lies in the fact that further real convergence is conditional on increased investment in human and technological capital. These are the areas where public investment has to be undertaken, since the country has never managed to develop private sector investment to any great extent. But, since the Maastricht Treaty and the Stability and Growth Pact have imposed stringent limits upon public spending and budget deﬁcits, national and regional governments have very limited room to decide on higher investment. In the pursuit of real convergence with the European Union, Spain is left pursuing a moving target. The implication of the foregoing suggests the enormous potential for conﬂict between the objectives of nominal and real convergence. In the context of monetary union, the mechanisms for ensuring the operability and the stability of the system could actually produce divergence rather than convergence. In the future, the achievement of economic and social cohesion must depend more on measures undertaken within Spain, and which assist the national and regional ability to invest more, and to do so more efﬁciently. A second implication suggests that a faster rate of convergence is conditional on much higher rates of economic growth than experienced so far, a point well made by the case of Ireland. The question in the minds of Spanish policymakers must be how long before Spain converges to the EU average? Pessimistic views estimate that on the basis of the rate of convergence since 1986 it would take 35 years to attain the European per capita income level. And on the basis of the projections made in the government’s Convergence Programme for the period 1997–2000, convergence might take as long as 55 years (Martín, 1997, p. 18). However, the past is not always an accurate guide to the

168 Spain in the EU

future if the ceteris paribus condition is dropped, and it may be that national conditions and/or the international context produce more favourable growth opportunities.

The future EU – implications for convergence To-date, European integration has produced mixed results for Spain in the European Union. The country’s successful efforts in meeting the Maastricht Treaty nominal convergence criteria took Spain into European monetary union as a founder member of the single currency in January 1999. Real convergence, measured in terms of per capita income, unemployment levels, the quantity and quality of human and technological capital, has so far proved to be more elusive. The previous section suggested that there may even be a conﬂict between maintaining the nominal convergence criteria and the attainment of real convergence. Moreover, the suggestion raises a further question concerning the future developments in the European Union, and how these might impact upon real convergence. At the time of writing, among the most prominent issues of European integration are the ﬁnal stage of monetary union when the euro replaces the national currencies of the EU-11 in 2002, the proposed enlargement of the European Union to bring in applicant states from Eastern Europe and Cyprus, and changes to the EU budget and the policy areas that are ﬁnanced from European Union resources. Currently, Spain receives signiﬁcant support under the Structural Funds, the Cohesion Fund, and the Common Agricultural Policy (CAP), all policy areas which are likely to come under pressure with the proposed EU enlargement. This latest proposed widening of the EU, and of the extension of membership to countries with large agricultural sectors, lower levels of economic development than the European Union generally, and per capita incomes well below the European average, imply a likely diversion of funds from west to east, in what might potentially be the largest redistribution of the budget since the Treaty of Rome. However, despite the support of the supranational authorities for widening the community, there remains a long period of negotiation before each member state remains convinced enough of the beneﬁts outweighing the costs to give the ﬁnal consent. An immediate challenge facing the Spanish government rests with the discipline imposed by monetary union and the Stability and Growth Pact. Over the years leading up to ﬁnal entry to the single currency, the national authorities cut public spending drastically and

Spain in the EU: 2000 and Beyond 169

speeded up the privatisation programme in order to establish eligibility, following a policy stance and programme that was greatly facilitated by economic recovery and the growing dynamism of the national stock market. The necessary decisions were made by government and the central bank, reﬂecting a unity of objectives and a joint commitment to economic stability and ﬁscal rectitude. Moreover, there was a ﬁrmly held view that economic growth could only be sustained on the basis of price stability, and that the short-term adjustment costs were outweighed by the long-term beneﬁts of improved prosperity and growth, and the increased competitiveness in the international market consequent upon successful eradication of inﬂationary pressures. Unity of purpose was further strengthened by the long-standing process of social dialogue and partnership built up since the 1980s, and renewed regularly, and continued under the Partido Popular government, led by José María Aznar. Without entirely eliminating tension and discord between the trade unions and the employers, the national social partnership agreements served to reduce the industrial unrest evident towards the end of the 1980s and to limit the inﬂationary pressures from wage settlements. More broadly, the social partnership broadened the base of consensus around the government policy towards monetary union. However, once inside monetary union, the focus of concern shifts to maintaining consensus and commitment to a balanced budget. But this time the unity of purpose is less clear cut, and it is no longer a question of sovereign political authorities making a decision upon which future action ﬂows. In the past, nominal convergence was based upon political decisions of the national authorities. In the immediate future under monetary union, the behaviour of economic agents and regional autonomous communities may play a more decisive role likely to impinge upon the national commitments under the Stability and Growth Pact. Economic agents are expected to engage more actively in promoting competitiveness and in effecting the structural reforms and sectoral liberalisation that are crucial to economic ﬂexibility under monetary union. No longer does the question revolve around whether the European Union is an optimum currency area. Instead, European and national policymakers have concurred on the need for greater ﬂexibility of the economic systems within the monetary union. The Spanish government has made many of the political decisions and governmental decrees to initiate the liberalisation of economic sectors. It remains for the enterprises and industrial sectors, the employers, trade unions,

170 Spain in the EU

and workers, to see it through in a practical way, and to establish greater competition at the national level, improved competitiveness in the international economy, and a sustained increase in employment levels. However, the outcome of myriad decisions at the level of the market is not the kind of tidy result that is possible when matters rest upon one or two decisions by the political authorities. Regional autonomous communities are increasingly affected by European integration, directly through the receipts under the Structural and Cohesion Funds, and indirectly through the constraints imposed on the national government by the conditions of the Stability and Growth Pact. Limitations on national government spending, on the size of the budget deﬁcit and the level of government debt, inevitably reverberate upon the ﬁnancial position and scope of policy at the regional government level. Regional governments are, however, one step removed from deﬁcit and debt constraints, and more directly focused on the provision of services and matters of governance at the level of the regional community. As the national government brought down its spending, deﬁcit and debt levels, there was an upward movement in debt levels for virtually all the regional governments (CES, 1998, p. 129). The growing level of regional debt jeopardises the national government commitment under the Stability and Growth Pact. As we saw in Chapters 5 and 6, regional disparities are a feature not only of the levels of economic development between the regions but also of the ﬁnancial autonomy and resources available to each one. It has been suggested earlier in this book that such disparities – in economic development and in ﬁnancial autonomy – are likely to continue due to the institutional and historical conditions of the different regions. However, in Spain, both high-growth advanced regions and lagging regions have shown rising debt levels. For instance, in Andalucía, Extremadura, Asturias, and Cataluña, debt levels rose in 1997 on average 15 per cent above the previous year. In the case of Andalucía and Cataluña, each region’s level of debt as a proportion of the total debt of the regional communities was 23 per cent and 22 per cent respectively – even though they differ with respect to the degree of ﬁnancial autonomy in each, as well as in growth potential and level of development and the level of ﬁnancial receipts under both national and European regional policy. The implications are that ﬁnancial issues will continue to be central to national/regional relations well into the future, perpetuated by the regional differences in negotiating power and escalating regional com-

Spain in the EU: 2000 and Beyond 171

petition on the one hand and, on the other, the national government responding to the pressure from the European authorities to limit its spending and to exert control over the ﬁnances of the regional governments. The ability of the national government to contain regional debt levels and regional spending will come under threat with changes to the European Union budget, and the consequent reduction in the ﬁnancial receipts under the various European programmes that have in the past helped to preserve some degree of inter-regional cohesion. The European Union is committed to maintaining the EU budget at 1.27 per cent of EU GDP and funding for economic and social cohesion at 0.46 per cent of community GDP, as set out in the Agenda 2000 proposals, so that when enlargement brings in new member states there will be no increase in the funding of the major programmes such as the CAP, Structural Funds, and the Cohesion Fund (CEC, 1997b). This means a smaller slice of the cake for existing members, when the new members avail themselves of the rights of membership to receive their entitlement under the European programmes. One of the priorities of the Agenda 2000 proposals is to contain the level of CAP expenditure, and to instigate further reforms to the policy through reductions in price support and more direct payments to farmers. Although, in practice, such reforms will take time and depend on the ability of the European Commission to persuade all the national governments to accept the reforms, Spanish farmers are likely to receive fewer transfers under the Common Agricultural Policy and to be forced to make additional structural adjustments and to bear the brunt of any costs entailed by the necessary adjustments. The southern regions, heavily dependent upon agriculture, would be adversely affected by such reforms to the CAP. A second priority of the Agenda 2000 proposals is to concentrate any increase in structural spending (likely as a result of economic growth rather than by a political decision to raise such expenditure) on the newly acceding member states. According to the Commission, structural spending should rise by 75 billion euros in the period 2000–2006, with 45 billion of the increase to be allocated to the new members (Begg and Grimwade, 1998, p. 77). Under these proposals, it is intended that structural operations should account for 42.8 per cent of the EU budget in 2006, with 30 per cent of the total going to the new member states. The Cohesion Fund would continue to support member states whose per capita GDP remained below the European average, but all countries would have to show that they were aiming

172 Spain in the EU

for convergence under the Maastricht Treaty – and would then receive ﬁnancial support that was exclusively conﬁned to environmental and transport projects. Spain will therefore have to compete, like the other EU-15 member states, for a declining share of the EU budget. In the future, its position as a major beneﬁciary of EU resources is likely to be considerably weakened, although it will be some time before the country becomes a net contributor. Even with the existing level of EU receipts, however, it is difﬁcult to suggest that the EU budget acts as a redistributive mechanism in the same way that national budgets do. For one thing, the small size of the European Union budget rules out any effective inﬂuence as a redistributive mechanism. In the Spanish case, receipts amount to no more than 2 per cent of national GDP. It is fair to say that EU impact on the economy is likely to be through the use of regulation, the decisions and directives, the rules on competition and other aspects of economic activity, rather than through the budget. The latest EU initiative on employment essentially involves a co-ordination role for the European Commission, setting guidelines for national policies to implement through National Employment Plans devised by domestic authorities to take account of local economic conditions. But no additional spending is envisaged under the European programmes to counter the level of unemployment. Spain may also ﬁnd itself in competition with applicant member states from Eastern Europe as a location for foreign direct investment. The location advantages which Spain offered in the 1980s, particularly those of low wages and access to the enlarged European market, are now available in Eastern Europe. German ﬁrms, which were among the major investors in Spain, are increasingly turning to the east as a low-cost location for investment and production. The east has the added advantage of being a new market for German producers, one which offers strong growth potential in the future. The challenge for Spain remains to develop new sources of competitive advantage, including a highly skilled labour supply, greater levels of technological intensity, and an improved infrastructure. These new competitive advantages have been slow to emerge, in part due to policy failure on the part of a government which gave priority to macro-economic stability and inﬂation control.

Conclusion The foregoing discussion surrounding the future developments in the European Union suggests that the path towards convergence will con-

Spain in the EU: 2000 and Beyond 173

tinue to be a difﬁcult one and that the rate of convergence will be slow. Even the optimism and conviction displayed by the European Commission in the sixth Periodic Report of the Regions (CEC, 1999b), that output per head in the poorer regions is converging towards the EU average, is tempered by the acknowledgement that convergence is not automatic. Studies on the impact of the Structural Funds over the period 1989–99 suggest a cumulative effect which increased the GDP of Greece, Portugal and Ireland by close to 10 per cent in each case. In the case of Spain, this increase was just over 4 per cent (CEC, 1999f). Many reasons account for the lower aggregate impact in the Spanish case, including larger geographic area and population, larger economic sector with a preponderance of traditional industry that exhibited a limited capacity for modernisation and competitiveness in the international economy, and large regional disparities. Although grouped with the other three countries in the ‘Cohesion group’, Spain differs from them in these respects; it is much larger geographically, with distinct climatic, environmental and ecological patterns existing throughout the various regions, and the particular economic history of the country contributed to distinct contemporary economic structure, with the huge inter-regional disparities that exist at the economic and political level (Tortella, 1994; Prados de la Escosura, 1992). These local conditions and the disparities created by them present a formidable challenge to the achievement of convergence. It would seem that future convergence depends on the policies conducted at the national level, and not simply on the European Union’s Structural and Cohesion Fund. While the latter made a positive contribution to reducing the income disparities of the Spanish regions, there is less evidence regarding a real impact on the future productive capacity and growth potential of the lagging regions. The European Commission recognises this fact in the Periodic Report of the Regions, saying that ‘the effectiveness of the Structural Funds depends on other factors, such as sound macroeconomic and other policies at the national level and the structure of economic activity in the region concerned’ (CEC, 1999b, p. 12). In the future, the responsibility for convergence, for economic and social cohesion, will lie much more with the national and regional authorities, and with national economic agents. Certainly, strong growth rates continue to be an extremely decisive factor in real convergence. But, as has been said, there is a strong sense that Spain’s pursuit of convergence places the country in the position of following a moving target, with all the frustration that that entails. Therefore, the

174 Spain in the EU

Spanish response to the challenge of future convergence is perhaps best made at two levels: the national and the European Union level. At the national level, the government and regional authorities must adopt a strategic approach to the formulation and implementation of policies regarding investment in human and technological capital. To the extent that it is possible, it may be advisable to stop aiming at a movable target and instead to focus on identifying the domestic strengths and weaknesses of the economic system. In the European Union, Spain is the second largest country in geographic terms and ﬁfth largest in output terms. However, its enthusiasm to embrace ﬁrst of all membership of the European Community and, more recently, monetary union, has seen the country exercise a restraint in many of the negotiations and political processes of integration that belied its economic strength. One exception to this reluctance to take a more trenchant position in representing its interests was the successful negotiation of the Cohesion Fund by the former Socialist leader, Felipe Gonzalez. In the future, Spain will be forced to adopt a more strategic view of the national interest within the European Union and in extra-EU relations, and must aim for a pivotal role in EU policymaking and decisions. The long-term scenarios around the future shape of the European Union make this inevitable for Spain, while the demands of convergence serve to reinforce the need for this dual strategy.

Appendix 1 The Spanish Public Sector, 1975–95 (% GDP) 1975

1985

1995

Public spending: by economic category 1. Non-ﬁnancial spending 2.Current transfers 3. Public consumption 4. Public investment 5. Capital transfers

26.07 11.89 10.45 2.72 1.01

42.58 21.89 14.71 3.71 2.27

47.25 25.03 16.51 3.66 2.05

II Public spending: by functional category 6. Social security and welfare state social security education, health, housing 7. Traditional public goods 8. Public enterprises

16.15 9.25 6.90 4.60 5.34

24.76 14.33 10.43 6.75 11.85

27.75 15.99 11.76 6.30 12.72

I

III 9. 10. 11.

Public employment Public sector (‘000) Public administration (‘000) Dependency ratio

– 995 0.60

1789 1401 0.93

2122 1790 1.09

IV 12. 13. 14. 15. 16.

Public revenues Taxation burden Social security contributions Personal taxation Business taxation Expenditure taxation

21.35 10.28 4.86 10.05 6.45

31.14 12.98 10.23 11.45 9.46

35.34 13.63 12.79 12.48 10.07

V 17. 18. 19. 20.

Budgetary imbalance Public administration surplus Effective deﬁcit Primary deﬁcit Revisions to original budget projections (%)

3.13 –0.35 0.12 17.9

–1.37 –6.93 –3.49 18.0

2.07 –2.07 –1.29 7.9

VI Debt 21. Debt 22. Interest payments

13.23 0.47

45.08 3.44

65.91 5.37

VIII 23. 24. 25. 26.

2.45 1.70 –0.35 1.53

9.13 4.32 –0.64 3.22

11.57 4.62 –0.93 9.97

Regional sector Public spending Public tax revenues Effective deﬁcit Debt

Source: V. Valle (1996) ‘La Hacienda Pública de la Democracia Española’, Papeles de Economía Española, 68, p. 3.

175

137.4 68.8 68.5 0.0 0.1 176.3 87.3 2.8 48.2 37.5 0.0 0.2 38.9

I Spanish contribution to EU: 110.9 Traditional own resources 27.3 VAT 83.6 GNP resource 0.0 Others 0.0

II Receipts from EU: FEOGA-Guarantee FEOGA-Guidance ERDF ESF Cohesion funds Others Net receipts (II–I)

Source: CES (1998) España 1997, p. 201.

102.5 37.9 0.0 40.5 23.9 0.0 0.2 –8.4

1987

1986

385.0 259.1 9.6 69.6 38.7 0.0 8.1 162.0

223.0 84.7 138.3 0.0 0.0

1988

474.8 248.4 36.4 115.7 64.3 0.0 10.1 187.4

287.4 83.2 152.7 43.8 7.7

1989

501.0 271.6 26.6 138.2 53.1 0.0 11.5 126.4

374.6 81.9 280.3 1.6 10.8

1990

1992

1993

942.1 423.9 82.1 283.2 134.3 0.0 18.6 396.2

979.3 457.5 84.6 313.4 107.0 0.0 16.8 331.5

1136.5 595.3 111.7 280.0 105.5 32.4 11.5 395.9

549.9 647.8 740.6 100.9 101.6 89.0 359.6 444.1 485.3 72.4 87.6 150.7 13.0 14.4 15.6

1991

1155.2 694.1 51.8 259.6 77.3 60.6 11.8 351.8

803.4 93.9 432.3 259.6 17.5

1994

1756.0 733.8 143.4 447.7 244.9 170.3 15.9 1140.0

615.9 118.5 358.1 123.7 15.7

1995

1653.3 647.6 156.8 419.5 211.4 210.5 7.5 914.1

739.3 99.8 411.7 218.8 8.9

1996

1732.1 754.6 122.0 423.8 120.3 120.3 9.3 831.7

900.4 104.8 456.8 327.0 11.7

1997

Appendix 2 Financial Flows between Spain and the EU, 1986–97 (bn pesetas)

176

36.6

Spain

24.2

36.8 10.4 32.5 17.8 22.8 24.3 21.7 21.8 16.1 19.3 36.5 25.6 21.4 17.6 13.6 26.1 11.8

20–24

10.9

19.6 5.1 10.6 6.6 10.7 10.7 8.8 8.4 7.0 8.7 19.2 10.9 9.6 9.9 4.4 9.2 5.5

25–54

Source: El País (1999) Anuario. Economía y Finanzas, p. 113.

47.9 22.5 38.6 23.8 45.2 39.0 25.9 36.6 39.3 29.4 56.4 29.6 31.6 21.4 10.7 15.7 5.3

16–19

Men

9.7

17.9 5.6 6.2 8.3 4.9 6.5 6.6 5.9 9.2 9.1 15.5 7.2 10.9 8.6 2.7 5.7 6.6

55+

13.1

22.8 6.1 13.1 8.6 12.8 12.7 10.8 9.9 9.4 10.7 22.2 12.4 11.6 11.2 5.2 10.6 6.2

Total

53.9

67.7 43.8 44.0 37.0 55.2 54.8 43.3 58.2 50.1 44.8 68.3 42.6 49.1 52.6 36.0 69.3 70.8

16–19

39.7

55.6 34.3 50.0 31.2 42.4 43.0 38.1 49.0 27.3 28.9 57.8 43.1 34.5 36.8 42.8 38.8 23.2

20–24

23.6

36.3 16.4 22.6 13.0 19.5 20.7 25.6 27.6 17.6 20.4 38.2 23.7 20.7 24.5 15.9 21.5 17.8

25–54

Women

10.8

20.2 6.8 9.6 0.0 7.8 14.7 10.3 8.7 9.8 12.5 27.4 5.0 9.0 11.4 10.7 10.1 0.0

55+

26.0

40.2 18.8 25.3 15.3 23.7 23.8 27.5 29.3 19.5 22.3 41.7 23.4 23.0 27.1 19.0 23.5 18.7

Total

18.2

29.3 11.0 17.8 11.4 17.2 16.6 16.7 17.3 13.6 15.3 29.4 17.0 16.3 17.2 10.5 15.9 10.7

Total

Spanish Regional Unemployment (%), 1998

Andalucía Aragón Asturias Baleares Canarias Cantabria Castilla-La Mancha Castilla y León Cataluña C. Valenciana Extremadura Galicia Madrid Murcia Navarra País Vasco La Rioja

Appendix 3

177

1975 35 515 21 517 12 439 – 57.8 na 21.0 na na 22.1 38.3 39.7 60.5 579.5 4.4 na na na na 17 381 10 561

Total population (000) Population of working age (15–64) Total employment (000) Annual change in employment (%) Employment rate (%) FTE employment rate (%) Self-employed (%) Employed part-time (%) Employed ﬁxed-term (%) Share of employment – agriculture (%) Share of employment – industry (%) Share of employment – services (%) Activity rate (%) Total unemployed (000) Unemployment rate (%) Youth unemployment (% of 15–24) Long-term unemployed (%) 15–19 in education/training (%) 20–24 in education/training (%)

Men Total population (000) Population of working age (15–64) 18 851 11 830

38 420 24 102 10 641 1.5 44.1 42.8 22.6 5.8 15.6 16.2 31.9 52.0 56.3 2940.2 21.6 22.0 12.6 na na

1985

19 032 12 421

38 851 25 289 12 579 3.4 49.7 48.4 20.9 4.9 29.8 12.0 33.6 54.5 59.4 2435.5 16.2 15.3 8.9 na na

1990

19 060 12 467

38 920 25 359 12 609 0.2 49.7 48.4 20.4 4.7 32.2 10.9 33.0 56.1 59.5 2476.4 16.4 14.2 8.5 na na

1991

19 165 12 757

39 149 25 770 11 730 –2.4 45.5 43.7 22.1 6.9 33.7 9.9 30.1 60.0 60.0 3732.0 24.1 19.4 12.7 78.4 39.7

1994

19 215 12 977

39 270 26 253 12 396 2.9 47.2 45.1 21.5 8.0 33.6 8.6 29.4 62.0 60.7 3529.4 22.2 17.2 11.7 80.7 44.6

1996

Spain – Key Employment Indicators

Total

Appendix 4

19 235 13 020

39 323 26 282 12 765 3.0 48.6 46.3 20.9 8.2 33.6 8.3 29.9 61.8 61.3 3357.9 20.8 16.1 10.8 80.8 45.0

1997

19 253 12 993

39 371 26 302 13 205 3.4 50.2 47.9 20.2 8.1 32.9 7.9 30.4 61.7 61.8 3056.4 18.8 14.6 9.4 na na

1998

178

1975 8 985 – 85.1 na 23.0 na na 22.7 42.6 34.7 89.5 470.3 5.0 na na na na 18 134 10 956 3 454 – 31.5 na 15.8

Total employment (000) Annual change in emp. (%) Employment rate (%) FTE employment rate (%) Self-employed (%) Employed part-time (%) Employed ﬁxed-term (%) Share of employment – agriculture (%) Share of employment – industry (%) Share of employment – services (%) Activity rate (%) Total unemployed (000) Unemployment rate (%) Youth unemployed (% of 15–24) Long-term unemployed (%) 15–19 in education/training (%) 20–24 in education/training (%)

Women Total population (000) Population of working age (15–64) Total employment (000) Annual change in employment (%) Employment rate (%) FTE employment rate (%) Self-employed (%)

(continued)

Total

Appendix 4

19 568 12 272 3 088 –1.1 25.2 22.6 17.5

7 553 –1.7 63.8 63.9 24.7 2.4 14.4 17.2 38.1 44.7 80.0 1906.7 20.2 24.3 0.0 na na

1985

19 820 12 868 4 003 5.3 31.1 28.1 16.0

8 576 2.6 69.0 69.3 23.2 1.6 27.8 12.8 41.0 46.3 78.4 1161.8 11.9 13.7 5.6 na na

1990

19 860 12 892 4 078 1.9 31.6 28.8 15.6

8 531 –0.5 68.4 68.7 22.7 1.6 29.3 11.7 40.9 47.4 78.0 1197.4 12.3 13.1 5.3 na na

1991

19 984 13 013 3 990 –0.7 30.7 27.2 16.7

7 740 –3.2 60.7 60.6 24.9 2.6 31.4 11.0 38.2 50.8 75.6 1908.7 19.8 19.3 9.2 75.9 35.5

1994

20 055 13 276 4 327 4.2 32.6 28.6 16.7

8 069 2.3 62.2 62.0 24.1 3.1 31.9 9.8 37.9 52.3 75.4 1721.9 17.6 16.1 8.1 78.5 39.1

1996

20 088 13 262 4 498 4.0 33.9 29.6 15.8

8 267 2.5 63.5 63.4 23.6 3.2 32.4 9.5 38.7 51.8 75.6 1582.1 16.1 14.9 7.4 78.2 40.8

1997

20 118 13 309 4 681 4.1 35.2 30.6 15.2

8 524 3.1 65.6 65.6 22.9 3.0 32.1 9.2 39.5 51.3 76.1 1362.2 13.8 13.1 6.1 na na

1998

179

na na 20.5 26.8 52.7 32.5 109.2 3.1 na na na na

Employed part-time (%) Employed ﬁxed-term (%) Share of employment – agriculture (%) Share of employment – industry (%) Share of employment – services (%) Activity rate (%) Total unemployed (000) Unemployment rate (%) Youth unemployment (% 15–24) Long-term unemployment (%) 15–19 in education/training (%) 20–24 in education/training (%)

Source: (CEC) Employment in Europe 1999, p. 132 (Brussels).

1975

(continued)

Total

Appendix 4

13.9 18.4 13.9 16.8 69.3 33.6 1033.5 25.1 19.7 16.2 na na

1985 12.1 34.2 10.2 17.7 72.1 41.0 1273.7 24.1 16.8 14.8 na na

1990 11.2 38.2 9.2 16.6 74.2 41.6 1279.0 23.9 15.4 14.4 na na

1991 15.2 37.9 7.9 14.4 77.7 44.7 1823.3 31.4 19.5 18.7 80.9 44.1

1994 17.0 36.7 6.4 13.6 79.9 46.2 1807.5 29.5 18.3 17.6 83.0 50.2

1996

17.4 35.8 6.1 13.6 80.3 47.3 1775.8 28.3 17.3 16.2 83.5 49.3

1997

17.2 34.4 5.6 13.8 80.7 47.9 1694.2 26.6 16.2 14.5 na na

1998

180

Appendix 5 Structural and Cohesion Funds Receipts, 1992–99 (bn pesetas) 1992

1993

1994

1995

1996

1997

1998

1999

Structural funds: ERDF ESF EAGGF guidance Cohesion funds

505 313 107 85

497 280 106 112 32

389 260 77 52 61

836 448 245 143 170

788 420 211 157 211

848 424 302 122 120

918 450 302 165 166

1007 541 296 170 182

Total

505

529

450

1000

999

968

1084

1189

Source: Ministerio de Economía y Hacienda (1999) Presentación del Proyecto de Presupuestos Generales del Estado 1999, p. 226.

181

Share in GDP Openness1 Interdependence3 GFCF4 of which public5 Wage/employee6 Productivity7 Unit labour costs8 Tax burden9

1998 3.9 25.62 39.3 18.2 1.5 123 116 105 48.3

B 33.0 12.6 10.2 19.5 1.8 109 111 98 42.2

D 8.6 8.7 11.5 21.1 3.0 74 71 104 36.9

E 22.2 10.2 10.9 17.1 2.8 110 112 99 47.6

F 1.3 38.7 19.6 19.3 2.5 94 106 90 32.3

IRL 18.1 10.3 9.2 16.8 2.3 90 93 98 42.9

I 0.3 – – 22.7 5.0 127 125 102 42.5

L 5.9 24.2 29.9 20.0 2.5 112 116 97 44.5

NL

3.3 11.4 19.0 24.1 2.0 103 110 94 46.5

A

1.7 9.6 19.0 25.7 4.1 43 41 105 36.5

P

1.9 20.5 9.9 17.5 2.7 100 106 95 46.5

FIN

100 12.9 13.1 18.8 2.3 100 100 100 43.4

EU11

Appendix 6 European Union Macro-Structural Features: Similarity and Diversity

182

10

B 9.7 61.8 55.7

D 18.9 48.6 46.3

E 11.7 60.1 55.4

F 8.7 57.8 53.7

IRL 12.0 51.3 49.8

I 2.4 60.6 58.1

L 4.0 66.7 53.0

NL

A 4.4 69.9 65.0

Source: CEC (1999) European Economy, Annual Report, p. 19 (Brussels). 1 Average of extra-euro area exports and imports, as percentage of GDP. 2 Data for Belgium and Luxembourg. 3 Average of intra-euro area goods’ exports and imports, as percentage of GDP. 4 Gross ﬁxed capital formation at current prices, as percentage of GDP. 5 General government, as percentage of GDP. 6 Compensation per employee, in current ECU, EU 11=100. 7 Nominal GDP per person employed, in current ECU, EU 11=100. 8 Ratio of two preceding rows. 9 Sum of direct taxes, indirect taxes and social security contributions, general government, as percentage of GDP. 10 Eurostat deﬁnition: rate as percentage of civilian labour force. 11 Employment as percentage of population of working age, 1997 data. 12 Employment rate; full-time equivalent; 1997 data.

8.3 57.3 53.0

(continued)

Unemployment Employment rate11 FT equivalent12

1998

Appendix 6

5.7 67.5 64.6

P

11.6 63.9 60.7

FIN

11.0 58.0 53.6

EU11

183

Appendix 7a Economy

Regional Indicators –

Economy Per capita growth (EU 15=100)

Employment by sector (% of total) 1997

Av. 1994–96 Agriculture Industry Services

EU patents per million people

1986

1996

Spain 69.8 Northwest 60.3 Galicia 55.0 Asturias 70.4 Cantabria 67.0 Northeast 84.5 País Vasco 89.5 Navarra 84.8 La Rioja 83.3 Aragón 75.9 Madrid 85.9 Centre 57.4 Castilla y León 65.0 Castilla-La Mancha 54.5 Extremadura 44.2 East 78.7 Cataluña 82.3 Valencia 70.9 Baleares 90.4 South 54.8 Andalucía 52.8 Murcia 67.3 Ceuta y Melilla 63.6 Canarias 69.3

78.7 67.3 63.0 73.6 76.9 91.8 92.3 98.1 89.0 88.9 100.6 68.4

78.5 66.8 62.3 73.3 76.7 91.8 92.5 97.4 89.0 88.7 99.6 67.8

8.3 18.4 22.2 11.1 11.3 6.1 2.7 8.9 9.2 10.1 1.2 13.8

29.9 28.5 27.6 30.2 30.1 36.7 36.9 40.0 39.0 34.2 26.5 29.2

61.8 53.1 50.2 58.7 58.6 57.2 60.4 51.0 51.9 55.8 72.3 57.0

12.0 3.9 2.9 6.6 3.6 14.6 14.9 27.8 6.7 10.3 21.8 3.2

75.9

74.6

14.0

28.4

57.6

4.2

65.9 54.6 89.6 99.1 73.8 97.0 58.7 57.2 67.2

65.6 55.0 89.4 98.1 74.4 98.0 59.0 57.4 68.0

12.1 16.3 4.2 3.2 6.4 2.3 12.1 12.4 12.1

33.2 24.5 35.8 38.4 33.8 24.4 22.3 21.7 26.9

54.7 59.3 60.0 58.4 59.8 73.3 65.6 65.9 61.0

3.1 1.6 21.6 28.7 13.7 5.1 5.3 3.2 3.8

72.3 74.3

71.4 74.8

0.3 8.4

6.9 17.8

92.6 73.8

– 5.2

Source: CEC (1999) 6th Periodic Report of the Regions, p. 236 (Brussels).

184

Spain Northwest Galicia Asturias Cantabria Northeast País Vasco Navarra La Rioja Aragón Madrid Centre Castilla y León Castilla-La Mancha Extremadura

20.8 15.4 13.4 19.7 18.8 18.5 23.2 15.1 13.2 12.7 16.3 18.5 17.6 15.1 25.9

1987

Appendix 7b

21.1 19.9 19.2 21.2 21.1 16.0 18.8 10.0 11.8 14.4 18.4 21.6 19.9 19.1 29.5

1997 51.5 61.1 58.7 65.6 64.3 54.9 61.2 42.0 52.0 44.5 57.5 46.4 52.5 40.9 41.9

Long-term, 1997 28.3 25.9 24.8 27.5 28.9 23.7 26.0 15.0 17.6 24.4 22.6 31.9 30.3 28.1 41.4

Female, 1997

Unemployment rate (%)

39.8 40.9 37.1 50.3 45.1 34.5 39.4 29.9 26.5 30.0 36.8 41.6 43.8 37.8 43.9

Young, 1997 48.3 47.7 49.9 43.2 45.9 52.0 49.7 56.1 54.0 54.0 49.4 46.6 47.7 47.8 41.8

Total

33.7 35.4 38.3 29.8 32.0 36.6 36.5 39.8 37.4 35.0 35.5 28.6 30.1 28.7 24.9

Female

Employment rate (% of population 15–64),1997

Regional Indicators – Labour Market

63.1 60.5 61.8 57.4 60.0 67.3 62.9 72.2 70.3 72.7 63.8 64.2 65.0 66.9 58.2

Male

185

18.5 17.4 21.4 12.2 30.0 32.0 18.3 26.4 20.9

1997 51.3 57.7 44.1 39.4 47.6 47.3 46.2 71.6 48.9

24.9 23.5 29.1 15.7 39.6 41.8 26.9 36.2 26.3

Female, 1997

Unemployment rate (%) Long-term, 1997

Source: CEC (1999) 6th Periodic Report of the Regions.

20.7 21.8 20.1 13.4 29.8 31.1 21.4 – 25.5

1987

(continued)

East Cataluña Valencia Baleares South Andalucía Murcia Ceuta y Melilla Canarias

Appendix 7b

35.5 33.3 40.4 26.5 48.1 50.8 28.6 58.4 39.0

Young, 1997

53.3 55.3 49.4 58.5 40.8 39.5 48.6 42.2 47.6

Total

39.1 41.6 34.3 46.0 26.3 25.2 33.4 26.7 34.5

Female

Employment rate (% of population 15–64),1997

67.8 69.0 65.2 71.4 55.7 54.3 64.2 58.7 61.1

Male

186

Appendix 7c Regional Indicators – Demography and Education Demography

Educational attainment 25–59 year olds 1997

Population Population density (nos./ (‘000) 1996 sq. km) 1996 Spain 39 270 Northwest 4 322 Galicia 2 724 Asturias 1 071 Cantabria 527 Northeast 4 037 País Vasco 2 069 Navarra 527 La Rioja 261 Aragón 1 180 Madrid 5 016 Centre 5 279 Castilla y León 2 510 Castilla-La Mancha 1 694 Extremadura 1 075 East 10 708 Cataluña 6 066 Valencia 3 913 Baleares 730 South 8 346 Andalucía 7 128 Murcia 1 084 Ceuta y Melilla 133 Canarias 1 563

% population age <15 15–64 65+

Low Medium

77.8 95.4 92.5 101.4 99.4 57.4 285.0 50.5 51.7 24.8 627.4 24.6 26.6

16.4 14.0 14.4 12.8 14.7 13.7 13.4 14.5 14.3 13.8 15.8 16.0 14.0

68.2 67.8 67.5 68.3 68.1 69.4 71.6 68.7 67.4 66.3 70.4 65.2 66.1

15.4 18.2 18.1 18.9 17.1 16.9 15.1 16.8 18.2 19.9 13.7 18.8 20.0

65 67 70 65 62 57 53 59 64 61 55 69 63

15 14 13 15 16 17 19 15 13 16 17 13 15

21.4 25.8 177.7 190.0 167.9 145.5 84.6 81.7 95.8 4296.8 215.9

17.5 18.5 15.7 14.9 16.6 17.6 19.8 19.7 19.7 23.1 19.0

64.2 64.8 68.7 69.0 68.4 67.5 67.3 67.3 67.2 65.9 70.3

18.2 16.8 15.6 16.0 15.0 15.0 12.9 12.9 13.1 11.0 10.7

74 75 65 63 67 69 70 71 66 61 68

11 10 17 17 15 16 13 13 15 20 15

Source: CEC (1999) 6th Periodic Report of the Regions (Brussels).

187

Appendix 8a Spanish and European Regional Policy, 1983–96 Region

Andalucía Aragón Asturias Baleares Canarias Cantabria Castilla y León Castilla-La Mancha Cataluña Extremadura Galicia Madrid Murcia Navarra País Vasco La Rioja Valencia Ceuta, Melilla Total

EU Regional policy 1986–96 (bn pesetas)

Spanish regional policy 1983–96 (bn pesetas)

Structural funds (bn)

%

Per capita Regional (Spain=100) funds (bn)

%

Per capita (Spain=100)

692 90 141 24 168 44 310

22.1 2.86 4.51 0.76 5.38 1.39 9.91

124 94 160 42 140 103 151

621 39 58 13 112 17 185

29.74 1.86 2.78 0.60 5.35 0.82 8.87

167 60 98 33 140 60 134

232 234 173 340 131 89 31 124 11 279 16

7.43 7.47 5.52 10.85 4.19 2.86 0.99 3.96 0.37 8.92 0.52

173 48 201 154 33 106 74 73 54 90 161

159 123 159 262 79 56 9 67 8 116 7

7.59 5.88 7.62 12.55 3.78 2.66 0.45 3.20 0.37 5.54 0.35

176 38 276 176 30 99 33 59 55 56 109

3129

100

100

2090

100

100

Source: Correa and Manzanedo (1998).

188

Appendix 8b Total Regional Funds, 1983–96 Region

Total funds (bn pesetas)

%

Per capita (Spain=100)

Andalucía Aragón Asturias Baleares Canarias Cantabria Castilla y León Castilla-La Mancha Cataluña Extremadura Galicia Madrid Murcia Navarra País Vasco La Rioja Valencia Ceuta and Melilla

1 313 129 199 37 280 61 495 391 357 332 602 210 145 40 191 19 395 23

25.16 2.46 3.82 0.69 5.37 1.16 9.50 7.49 6.84 6.36 11.53 4.03 2.78 0.77 3.66 0.37 7.57 0.45

142 80 134 39 141 86 144 174 44 230 162 32 104 58 67 55 77 140

Total

5 219

100

100

Source: Correa and Manzanedo (1998).

189

Appendix 9 Member States’ Share of EU Operating Expenditures Relative to Their Share of EU GNP Country

Belgium Denmark Germany Greece Spain France Ireland Italy Luxembourg Netherlands Austria Portugal Finland Sweden UK

% share of operating expenditure, 1997

% share of EU GDP

2.6 2.2 14.2 7.7 15.8 17.1 4.7 11.9 0.2 3.5 1.9 5.3 1.5 1.7 9.8

3.1 1.9 26.0 1.5 6.6 17.2 0.8 14.2 0.2 4.5 2.6 1.2 1.4 2.7 16.1

Source: Begg and Grimwade, 1998, p. 84.

190

GNP at current prices per person as % of EU average, 1997 115.3 112.5 109.4 69.0 77.7 104.3 82.4 102.6 176.2 106.0 112.6 69.6 96.4 93.7 100.3

Appendix 10 GDP Growth in the Cohesion Countries, 1986–99 EL Annual average % change in GDP:

Projections Annual average % change in population:

Projections GDP per head, EU15= 100

Projections Projections Projections

E

IRL

P

EU4

EU11

EU15

1986–96

1.6

2.8

6.2

3.5

2.9

2.0

2.1

1986–91 1991–96 1996–99 1986–96

2.2 1.0 3.8 0.5

4.3 1.3 3.6 0.3

5.3 7.1 9.2 0.3

5.1 1.8 3.8 –0.1

4.1 1.7 4.1 0.3

2.8 1.5 2.6 0.4

3.0 1.5 2.8 0.4

1986–91 0.5 0.2 1991–96 0.4 0.4 1996–99 0.5 0.1 1986 59.2 69.8

–0.1 0.6 0.9 60.8

–0.3 0.1 0.1 55.1

0.2 0.4 0.2 65.2

0.4 0.4 0.4 0.4 0.3 0.3 107.7 100.0

71.5 62.5 72.5 63.8 73.1 66.3 74.1 71.1 78.7 74.7 77.0 78.4 78.1 82.5 78.1 90.7 78.6 96.8 78.7 96.5 77.8 96.4 78.6 102.1 79.6 105.1

56.7 59.2 59.4 58.5 63.8 64.8 67.7 69.5 70.1 70.5 70.7 70.1 71.8

66.3 67.6 68.3 68.8 73.1 72.7 74.5 75.3 76.3 76.6 76.3 77.1 78.2

107.4 107.1 106.9 106.8 105.5 105.6 105.2 105.0 104.8 104.8 104.8 104.7 104.5

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

57.4 58.3 59.1 57.4 60.1 61.9 64.2 65.2 66.4 67.5 69.2 68.6 69.3

Key: EL – Greece; E – Spain; IRL – Ireland; P – Portugal. Source: CEC (1999) 6th Periodic Report of the Regions, p. 199 (Brussels).

191

100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Appendix 11 EC Trade Liberalisation Index, 1985–93,* (Selected Countries) Country

1985

1986

1987

1988

1989

1990

1991

1992

1993

Spain Germany Greece Italy Ireland Portugal

1.00 1.00 1.00 1.00 1.00 1.00

5.25 1.71 2.76 2.02 3.34 1.00

7.85 2.34 4.54 2.40 5.12 1.41

10.95 3.13 6.09 4.01 7.48 1.83

19.63 4.77 7.00 5.05 10.97 2.85

24.22 7.29 9.96 6.02 12.98 4.49

35.44 8.82 13.75 10.64 18.79 5.86

51.19 14.06 21.14 20.99 31.91 9.84

60.10 14.73 23.57 23.74 35.00 11.41

* The trade liberalisation index was calculated on the basis of the number of trade liberalisation measures introduced in each category under the Single Market Programme, with a weighting for each category (the three categories of trade liberalisation related to the abolition of physical, technical, and ﬁscal barriers). Source: CEC (1997) Single Market Review, subseries VI, vol. 3, Trade, Labour and Capital Flows: the less-developed regions, p. 51.

192

Appendix 12 Spain–EU Trading Relations, 1985–98 (bn pesetas) Year

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

Imports

Exports

Cover rate

Value (bn pesetas)

% total

Value (bn pesetas)

% total

EU

Total

1986 2607 3482 4240 5074 5602 6092 6486 6308 7915 9363 10227 11736 13290

39.1 52.7 57.7 60.2 60.4 62.8 63.0 63.6 62.3 64.1 65.4 66.3 65.3 67.0

2219 2375 2768 3172 3534 4029 4549 4846 5348 6917 8265 9238 10681 11661

54.1 62.4 66.0 67.7 68.8 71.4 73.1 73.4 69.0 70.6 72.3 71.4 70.0 71.6

111.8 91.1 79.5 74.8 69.6 71.9 74.7 74.7 84.8 87.4 88.3 90.3 91.0 87.7

80.8 76.9 69.6 66.6 61.2 63.3 64.4 64.7 76.5 79.3 79.8 83.8 85.0 82.1

NB: Cover rate is the extent to which imports are covered by exports. Source: CES (1999) España 1998, p. 83.

193

–9.4 –1.3 3.4 –6.0 –12.5 –2.7 –11.6 –10.6 4.6 –5.1 –3.7 –6.5 3.4 –1.2 –2.9 –4.3

–7.6 –1.9 2.4 –3.1 –11.7 –1.9 –11.0 –8.5 2.9 –5.9 –4.3 –5.6 1.0 4.2 –1.4 –3.6

1987 –6.8 –2.2 0.6 –3.4 –11.9 –1.7 –10.7 –4.5 – –4.6 –3.0 –3.5 4.1 3.5 0.7 –3.2

1988 –6.2 0.1 –0.5 –3.7 –14.4 –1.2 –9.8 –1.8 – –4.8 –2.8 –2.4 6.3 5.4 1.0 –2.2

1989 –5.5 –2.1 –1.5 –4.3 –16.1 –1.6 –11.1 –2.3 5.0 –5.1 –2.4 –5.1 5.4 4.2 –0.9 –3.5

1990 –6.3 –3.1 –2.1 –4.5 –11.5 –2.1 –10.0 –2.3 1.9 –2.9 –3.0 –6.0 –1.5 –1.1 –2.3 –4.1

1991 –6.9 –2.6 –2.1 –4.1 –12.8 –3.9 –9.6 –2.5 0.8 –3.9 –2.0 –3.0 –5.9 –7.7 –6.2 –5.1

1992 –7.1 –3.2 –2.8 –7.0 –13.8 –5.8 –9.5 –2.7 –1.7 –3.2 –4.2 –6.1 –8.0 –12.2 –7.9 –6.1

1993 –4.9 –2.4 –2.8 –6.3 –10.0 –5.8 –9.2 –1.7 2.8 –3.8 –5.0 –6.0 –6.4 –10.3 –6.8 –5.4

1994 –3.9 –3.3 –2.4 –7.3 –10.3 –4.9 –7.7 –2.2 1.9 –4.0 –5.2 –5.7 –4.7 –6.9 –5.5 –5.1

1995

–3.2 –3.4 –0.7 –4.6 –7.5 –4.1 –6.7 –0.4 2.5 –2.3 –4.0 –3.2 –3.3 –3.5 –4.8 –4.2

1996

–2.1 –2.7 0.7 –2.6 –4.0 –3.0 –2.7 0.9 1.7 –1.4 –2.5 –2.5 –0.9 –0.8 –1.9 –2.6

1997

Convergence in Public Spending, 1986–97

Key: B – Belgium; D – Germany; DK – Denmark; E – Spain; EL – Greece; F – France; I – Italy; IRL – Ireland; L – Luxembourg; NL – Holland; A – Austria; P – Portugal; FIN – Finland; S – Sweden; UK – United Kingdom; EU – European Union. Source: 1986–90 EC Economic Data Pocket Book; 1991–94 Money and Finance (Eurostat), 1995; DGII, April 1998.

B D DK E EL F I IRL L NL A P FIN S UK EU

1986

Deﬁcit (–), surplus (+) % GDP

Appendix 13

194

129.1 41.6 63.7 45.1 54.1 31.4 86.3 114.9 12.4 73.5 54.9 61.1 17.3 63.5 52.0 54.5

133.2 42.6 59.6 45.5 60.3 33.6 90.5 116.0 10.9 76.1 58.7 64.0 18.4 56.2 49.5 55.7

1987 128.9 43.1 62.7 41.4 65.8 33.7 92.8 112.4 8.8 79.4 59.5 65.0 17.4 50.4 43.9 54.9

1988

Source: CEC, Eurostat; DG II, April 1998.

B D DK E EL F I IRL L NL A P FIN S UK EU

1986 125.7 41.8 60.7 42.9 69.2 34.4 95.8 102.7 7.2 79.4 58.7 63.3 15.0 45.3 38.2 54.1

1989 125.7 43.8 60.8 44.8 90.1 35.5 98.0 96.0 4.7 79.2 57.9 65.3 14.5 43.3 35.5 55.2

1990 127.5 41.5 65.5 45.5 92.3 35.8 101.5 95.3 4.2 79.0 58.1 67.3 23.0 52.8 35.6 56.0

1991 129.0 44.1 69.7 48.0 98.8 39.8 108.7 92.3 5.1 80.0 58.0 60.1 41.5 66.8 41.8 60.4

1992 135.2 48.0 81.6 60.1 111.6 45.3 119.1 96.3 6.1 81.2 62.7 63.1 58.0 75.8 48.5 65.9

1993 133.5 50.2 78.1 62.6 109.3 48.5 124.9 89.1 5.7 77.9 65.4 63.8 59.6 79.0 50.5 68.0

1994 131.3 58.0 73.3 65.2 110.1 52.7 124.2 82.3 5.9 79.1 69.2 65.9 58.1 77.6 53.9 71.0

1995

Appendix 14 Convergence in Government Debt, 1986–97 (% GDP)

126.9 60.4 70.6 70.1 111.6 55.7 124.0 72.7 6.6 77.2 69.5 65.0 57.6 76.7 54.7 73.0

1996

122.2 61.3 65.1 68.8 108.7 58.0 121.6 66.3 6.7 72.1 66.1 62.0 55.8 76.6 53.4 72.1

1997

195

Appendix 15 Macroeconomic Indicators: Output, Employment, Productivity and Labour Costs in the EU and Spain, 1975–98 Annual average % change European Union

1975–85

1985–90

1990–98

1990–94

1994–98

GDP No. employed Av. hours worked GDP/no. employed GDP/total hours worked Consumer prices Average earnings Average real earnings Average real labour costs Real unit labour costs

2.3 0.1 – 2.1 – 10.1 11.5 11.5 1.4 –1.2

3.2 1.4 –0.3 1.8 2.0 4.3 6.5 6.5 1.6 –0.8

1.8 0.0 –0.2 1.8 2.0 3.2 4.4 4.4 1.0 –0.9

1.3 –0.7 –0.2 2.0 2.1 4.1 5.5 5.5 1.4 –0.8

2.4 0.7 –0.2 1.7 1.9 2.3 3.2 3.2 0.8 –1.0

Spain GDP No. employed Average hours worked GDP/no. employed GDP/total hours worked Consumer prices Average earnings Average real earnings Average real labour costs Real unit labour costs

1.7 –1.5 – 3.3 – 15.3 17.2 1.7 2.1 –1.1

4.5 3.4 0.0 1.1 1.0 6.5 8.0 1.4 0.5 –0.7

2.1 0.6 –0.2 1.4 1.6 4.1 5.0 0.8 0.7 –0.7

1.0 –1.7 –0.2 2.8 3.0 5.3 7.3 2.0 1.7 –0.4

3.1 3.0 –0.1 0.1 0.2 3.0 2.7 –0.3 –0.3 –1.1

Source: CEC (1999) Employment in Europe, p. 143.

196

Appendix 16 Council Opinion on Spanish Stability Programme, 1998–2002 COUNCIL OPINION of 15 March 1999 on the stability programme of Spain, 1998 to 2002 (1999/C 124/01) THE COUNCIL OF THE EUROPEAN UNION, Having regard to the Treaty establishing the European Community, Having regard to Council Regulation (EC) No 1466/97 of 7 July on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies, and in particular Article 9 (1) and (2) thereof, Having regard to the recommendation of the Commission, After consulting the Economic and Financial Committee, HAS DELIVERED THIS OPINION: On 15 March 1999 the Council examined the stability programmme for Spain which covers the 1998–2002 period. The Council notes that the programme reafﬁrms the two-handed strategy adopted in the April 1997 Convergence Programme: promoting non-inﬂationary employment-oriented growth through budgetary consolidation and structural reform. The Council welcomes the programme’s objective of turning the general government deﬁcit into a surplus of 0.1 per cent of GDP in 2002, while the gross debt ratio is expected to decrease to 59.3 per cent of GDP. Moreover, the Council notes with satisfaction that the programme builds on the continuation of the budgetary consolidation based on expenditure containment. The programme is built upon a macroeconomic scenario which assumes output growth to decelerate from its present high rate (3.8 per cent in 1998) towards close to trend over the period 2000–2002 (3.3 per cent on average). Although output growth in 1999 could be lower than assumed in the programme mainly due to the current international environment, the Council considers that the medium-term macroeconomic scenario appears realistic. Indeed, a continuation of the strategy adopted, based on structural reforms along with the stable monetary framework under EMU and sound budgetary consolidation, should allow the Spanish economy to develop in line with the medium-term macroeconomic scenario. The Council welcomes the Spanish budgetary strategy which relies on the restraint of primary current expenditure, and allows for a reinforcement of government investment and for a reduction in the tax burden. Interest payments as a share of GDP are expected to decrease moderately while primary current expenditure would carry the bulk of the adjustment. The Council also welcomes the envisaged increase in government investment given the catching-up 197

198 Appendixes needs of Spain. In addition, this will strengthen the compliance with the golden rule which Spain satisﬁes since 1997. The underlying budgetary position of the targeted surplus of 0.1 per cent of GDP in 2002, under the central macroeconomic scenario, would provide sufﬁcient room to prevent the deﬁcit from breaching the 3 per cent of GDP threshold during a normal cyclical downturn and would allow for an additional safety margin in case of unforeseen developments. The Council therefore considers that the medium-term budgetary target of the Stability Programme is in conformity with the provisions of the Stability and Growth Pact. Nevertheless, the Council recalls that the long-term problem of population ageing must be addressed in the near future, and additional reforms will then be required. In this framework, the Council notes the government’s commitment to take further steps with a view to greater rationalisation of the social security system. The foreseen budgetary adjustment is to be made mainly by the State, although all the general government sectors are committed to the budgetary effort. Social security accounts are expected to be in balance in the year 2000. The territorial government accounts, in the framework of the existing internal stability pact between the regions and the State, are targeted to be in balance in the year 2001. The Council stresses that the increasing role of the territorial governments in various categories of expenditure requires the continued functioning of the present inter-governmental co-ordination mechanisms. The Council considers that the programme is consistent with the Council Recommendation of 6 July 1998 on the Broad Guidelines of the Economic Policies of the Member States and the Community. The Council notes with approval the programme’s emphasis on structural policies in the EMU context. Structural reforms have indeed played an important role in increasing the potential output of the Spanish economy, keeping a growth differential with respect to the EU area in a framework of low inﬂation and high employment creation. Therefore, the Council encourages the Spanish government to implement the structural measures envisaged in the programme. Source: CEC (1999) European Economy, Supplement A, no. 3, March 1999.

Notes 1

From EC to EMU: the Challenges for Spanish Convergence

1 Cited in Manuel Ramírez (1996) Europa en la conciencia Española y otros estudios (Madrid: Editorial Trotta). 2 Rodrigo Rato (1999) ‘Balance de la política económica en España’, España 1998. Un Balance (Madrid: Colegio de Economistas). 3 The Treaty of Rome was signed in 1957, setting up the European Community with six member states: Belgium, France, West Germany, Italy, Holland, Luxembourg. In 1973, three new members were admitted: Denmark, Ireland and Britain; in 1981, Greece was admitted in the second enlargement. At the beginning of 1995, three new members – Finland, Sweden and Austria – brought the total member states of the European Union to 15. 4 The Act of Accession was signed by Spain in June 1985, with a seven-year transition period for industrial goods, and ten years for the agricultural sector; the ﬁshing sector was granted a 17-year transition period (the longest ever granted under any enlargement). See Elorza, 1997. 5 Harrison (1993) noted that it would take ten years for the most competitive sectors of Spanish farming (fresh fruit, vegetables, olive oil) to be phased into the Common Agricultural Policy. Furthermore, EC rights on the free movement of labour was not extended to Spanish workers until seven years after accession. 6 The Treaty on European Union, popularly referred to as the Maastricht Treaty, came into effect on 1 November 1993, and provided for deeper integration through political and economic union. It set out the commitment to economic and monetary union by 1999 for countries which fulﬁlled the prerequisite economic criteria, and the establishment of the European monetary institute as the forerunner to the European Central Bank (ECB); it also announced the setting up of a Cohesion Fund to help poorer countries. These commitments projected the European Community to deeper levels of political integration, and henceforth to become the European Union. The remainder of this chapter, and successive chapters will use the term European Union (EU) throughout, even though, strictly speaking, the term refers only to developments from November 1993. 7 The Maastricht Treaty (more formally referred to as the Treaty on European Union) was agreed at the Maastricht summit in December 1991, and adopted a three-stage plan for monetary union, basing it on the Delors Report published two years earlier (see CEC, 1989). Stage I involved the free movement of capital in the EU and closer monetary and macroeconomic cooperation between the member states. Stage II involved the establishment of the European Monetary Institute (EMI) under the European System of Central Banks to monitor and co-ordinate national monetary policies; Stage III envisaged the establishment of irrevocably ﬁxed exchange rates and the transfer 199

200 Notes of monetary sovereignty to the European Central Bank, which would replace the EMI.

2

The Europeanisation of the Spanish Economy

1 Between 1978 and 1990, there was actually a reduction in the relative importance of the large and medium-sized ﬁrms. In 1978, ﬁrms employing more than 500 workers accounted for 33.2 per cent of the total employed; by 1990, this proportion had fallen to 23.8 per cent. In the case of the mediumsized ﬁrms (those employing between 100 and 499 people) the percentage employed fell from 23.4 per cent to 19.7 per cent over the same period (Buesa and Molero, 1998, p. 72). 2 In December 1989, the Council adopted the merger regulation, which effectively provided for the prior authorisation by the European Commission of any proposed merger – where the proposed merger has a clear European dimension, the involved ﬁrms have an aggregate worldwide turnover of more than 5 billion euros and each of at least two of the ﬁrms involved has an aggregate EU-wide turnover of more than 250 million euros. Council Regulation 4064/89, 21 December 1989, OJ L 395, 30 December, 1989 (corrected version: OJ L 257, 21 September 1990). 3 These ﬁgures on net investment outﬂows are taken from data published in the Financial Indicators section, The Economist 7 August 1999. 4 CEC (1997) The Single Market Review, Subseries VI: Aggregate and Regional Impact, vol. 4: Employment, trade and labour costs in manufacturing, p. 144. 5 The process of establishing an open economy, as required by the 1985 treaty of accession to the European Community, was described by an eminent Spanish economist, Enrique Fuentes Quintana, as the culmination of the initiative which ﬁrst inspired the Stabilisation Plan in 1959. However, the latter initiated only partial liberalisation and experienced difﬁculties in both external and internal liberalisation efforts from 1964. See Enrique Fuentes Quintana, 1995. 6 El País Anuario, Economía y Finanzas 1999, p. 99. 7 The Ricardian theory of comparative advantage explained that trade took place on the basis of differences in relative costs of production, due to differences in labour productivity, which made it beneﬁcial for countries to engage in trade – even for a country with an absolute advantage, that is where it could produce all goods more cheaply than a potential trading partner, it was still beneﬁcial and welfare-enhancing to specialise in the production of products for which it had a comparative advantage and trade the surplus for the goods which possessed a comparative advantage. Later theoretical formulations of comparative advantage based the differences in relative costs on different factor endowments, and more recently on differences in the quality of human or technological capital. The index of revealed comparative advantage (RCA) may be deﬁned as the ratio of the trade balance to the total volume of trade – so the RCA of sector x in period y reﬂects the deﬁcit or surplus of the sector as a percentage of the total trade for this category of product or service. The index is positive for sectors which exhibit a comparative advantage compared to other countries

Notes 201 (provided there are no serious distortions due to the existence of trade barriers), and a negative index indicates a comparative disadvantage (see Brenton et al., 1997).

3

The Labour Market, Unemployment and Divergence

1 The participation rate refers to the percentage of a given group of the population of working age who decide to enter the labour force. 2 This section is based on data and account in Toharia (1997). 3 Regional development and convergence is examined in detail in Chapter 6. 4 F. Brouwer (1999) ‘European Integration and the Development of Trade Union Strategies in Spain’, Journal of Southern Europe and the Balkans, vol. 1, no. 1, pp. 49–63. 5 M. Malo and L. Toharia (1999) ‘Costes de despido y Creación de Empleo en España’, España 1998. Un Balance, pp. 308–16 (Colegio de Economistas, Madrid). 6 The Intergovernmental Conference which opened in Luxembourg in September 1985 discussed the proposed Single European Act and, following several months of negotiations, the Act was signed by nine of the member states in Luxembourg on 17 February 1986. The three remaining member states, Denmark, Italy and Greece, signed on 28 February. The SEA ﬁnally came into effect on 1 July 1987. 7 In 1991, the average rate of unemployment for the EU stood at 9.2 per cent, rising to 10.9 per cent in 1996, when there were 18 million people unemployed.

5

The Public Sector and European Integration

1 It was argued by one expert on the Spanish public sector development that the government relied on imaginative improvisation on a day-to-day basis, rather than long-term planning to meet the management needs of the growing public sector. See Valle (1996). 2 According to Sevilla (1997) the weight of the public sector in the economy by the 1980s was around 12 per cent, compared to the European average at that time of 15 per cent, but nonetheless much more diversiﬁed than elsewhere. It was said that Spain was the only country where the private sector made the roads, under contract to the government, and the public sector (through the state-owned SEAT) made the automobiles which travelled on them (Sevilla, 1997, p. 40). 3 Chapter 3 examines the features of the Spanish labour market and issues surrounding unemployment and the policies adopted by the government. Here, we are concerned with the broader implications as these relate to public sector reform. 4 The text of the Toledo Pact is published in the annual bulletin, Boletín Oﬁcial de las Cortes Generales (1995). 5 The Article 143 regions (with reduced competencies and excluding education and health) included Argón, Asturias, Baleares, Cantabria, Castilla-La Mancha, Castilla y León, Extremadura, La Rioja, Madrid, Murcia.

202 Notes 6 The indicators (with respective weightings) used to determine the distribution of funds to the regional autonomous communities to ﬁnance the decentralised responsibilities were population (59 per cent), area size (16 per cent), administrative units (24.3 per cent), relative poverty (4.2 per cent), ﬁscal capacity (5 per cent), and a weighting of 0.7 per cent for island regions. 7 The 1992 reform revised the weighting attached to each indicator, with population allocated a weighting of 64 per cent, area 16.6 per cent, administrative units 17 per cent, relative poverty 2.7 per cent, ﬁscal capacity 1.82 per cent, island regions 0.4 per cent, and a new dispersion indicator, with a weighting of 25 per cent. For any individual region, not all indicators would be relevant in negotiating the ﬁnancial transfers to be determined. 8 The ﬁnancing of the autonomous communities was recognised in Article 156 of the Constitution, which declared that the autonomous communities should have ﬁnancial autonomy so as to develop and exercise their competencies in accordance with two key principles – co-ordination with the state exchequer and solidarity among all the Spanish people. Previous ﬁve-year ﬁnancing arrangements attempted to incorporate these principles through the variety of bilateral arrangements between the state and each region, but few regions in practice had tax raising powers (except País Vasco and Navarra), and depended on transfers from the state. The size of the transfers depended essentially upon the negotiating powers of the regional authority, even with the use of the effective cost provision. The solidarity principle was implemented through the Inter-territorial Compensation Fund (Fondo de Compensación Interterritorial) which effectively redistributed funds from the richer to the poorer regions. 9 In view of the reform which ceded some proportion of income tax to the regional communities, this required a change to the existing legal instrument covering the ﬁnancing system, the LOFCA, since it expressly excluded income tax among the taxes which could be ceded. 10 With a top marginal rate of tax set at 56 per cent, the tax yield in relation to GDP was still lower than that of the UK, where the top rate stood at 40 per cent. In 1998, Spain lowered the top marginal rate to 48 per cent and reduced the number of bands from eight to ﬁve. 11 The regional heterogeneity is expressed in many ways and at different levels – historical, cultural, economic, and linguistic. Even in terms of the ﬁnancing system, three different models of decentralisation were in operation in 1999: (a) the new ﬁnancing arrangement for 1997–2001 which was adopted by Argón, Asturias, Baleares, Canarias, Cantabria, Castilla y León, Cataluña, Galicia, La Rioja, Madrid, Murcia, Valencia; (b) three communities which did not adopt the new system operate under the old ﬁnancing arrangements: Andalucía, Castilla-La Mancha, Extremadura; (c) the forales, ﬁnanced under territorial system of taxation – País Vasco and Navarra. 12 In 1996 there were in fact three agencies dealing with privatisation, all newly created. SEPI (Sociedad Estatal de Participaciones Industriales) was created in 1995 with the disappearance of the long-standing state holding companies INI and INH, and took responsibility for the management of the proﬁtable public industrial enterprises; the AIE (Agencia Industrial del Estado) took over the management and disposal of the loss-making enter-

Notes 203 prises in sectors subject to restructuring and reconversion, often the subject of public subsidy. A third agency, SEPPA (Sociedad Estatal de Participaciones Patrimoniales) was created in 1996, to manage the privatisation of enterprises that had operated under the department of state, Patrimonio (which included heritage within its area of responsibility). These three agencies were responsible for the conduct of the privatisation programme, and for deciding the form and extent of each privatisation. One of the agencies, AIE, proved to be short-lived and was disbanded in 1997, and its remaining activities were taken over by SEPI. 13 The European Union revenues are derived from the following sources: agricultural duties, and sugar and isoglucose levies; customs duties on goods imported from outside the EU; VAT resources – from 1999, 1 per cent of each member state’s harmonised base; the ‘fourth resource’ based upon each member state’s GNP. Together these ‘own resources’ form the revenue of the EU, out of which the various European Union policies are ﬁnanced. See Begg and Grimwade (1998) for a detailed account of the EU’s ﬁnancing system.

6

Regional Diversity and Convergence

1 The city authorities of Ceuta and Melilla were granted autonomy in 1995, with the approval of the Statutes of Autonomy in March of that year. These city communities are ﬁnanced partly from the budget of the Autonomous Communities, with some resources from the allocation to local and provincial entities. 2 This section draws heavily upon Cuadrado, Mancha and Garrido (1998), one of the most detailed and extensive studies of regional growth by leading experts in Spain. 3 Chapter 2 considers these changes in trade patterns and the integration of the Spanish economy in much more detail. 4 The discussion that follows is centred upon ␴ convergence, which measures the dispersion of the variable (here, output per capita) between the regions. The reduction of the dispersion between the highest and lowest per capita output indicates ␴ convergence. See also Chapter 1 for a more detailed discussion of approaches to convergence in the literature. 5 The regions included in the Objective 1 category are Andalucía, Asturias, Canarias, Cantabria, Castilla y León, Castilla-la Mancha, Ceuta and Melilla, Extremadura, Galicia, Murcia, and Valencia. Eligibility for funding under this category depends on a region having a per capita income lower than 75 per cent of the EU average. 6 See R. Lucas (1988); and P.M. Romer (1994); G.M. Grossman and E. Helpman (1994). 7 See OECD (1996) Science and Technology Policy: Review and Outlook (Paris). 8 See Castells (1995). 9 Appendix 5 details the transfers to Spain under the EU Structural and Cohesion Funds for the period 1992–99.

204 Notes 10 Spain was allocated 7900 million ECU from the Cohesion Fund over the period 1994–99, with Greece and Portugal each receiving 2600 million ECU, and 1300 million ECU going to Ireland. In addition, a further 26 300 million ECU under the Objective 1 category and 2200 million ECU from other European Commission initiatives resulted in total Spanish receipts of 364 000 million ECU up to 1999. 11 Fernández Martínez (1997) estimated a more conservative contribution by EU ﬂows to national income, at 1.4 per cent over the period 1994–99, compared to 0.7 per cent between 1989 and 1993. 12 In 1998, the Structural Funds accounted for 34 per cent of the total EU budget and this proportion was expected to rise to 42 per cent by 2006 (Begg and Grimwade, 1998). 13 By contrast, France has a population of 58 million people, and a population density (measured as the number of people per square kilometre) of 107.3. 14 CEC (1997) The Single Market Review. Subseries VI: Aggregate and Regional Impact, vol. 1: Regional Growth and Convergence (London: Kogan Page/Earthscan).

7

Spain in the EU: 2000 and Beyond

1 Prior to this, national governments submitted convergence programmes to the European Commission, setting out the strategy for meeting the Maastricht Treaty convergence criteria. These were voluntary in nature and there was no direct legal basis for requiring their submission. As a result of the Growth and Stability Pact, national governments were legally required to submit stability and convergence programmes, showing how they plan to meet the medium-term objective required by the Pact of a budgetary position ‘close to balance or in surplus’. 2 When presenting he Stability Plan to the Spanish Parliament in December 1998, the Economics Minister, Rodrigo Rato, suggested that Spain could attain a per capita income equal to 90 per cent of the EU average by 2006, ‘if the Partido Popular was returned to government’ (El País, 24/12/98, ‘Rato prevé que el empleo crezca al 2.3 per cent hasta el 2002 y el PIB al 3.3 per cent’, p. 56). 3 See the Single Market Review, subseries IV: Impact on Trade and Investment, vol. 2: Trade Patterns Inside the Single Market. Part 8 offers a detailed case study of Spain in the single market, the adjustments in trade and direct investment, and the implications for real convergence (CEC, 1997). 4 See subseries IV, vol. 1: Foreign Direct Investment, pp. 64–5. 5 This conclusion is made in the case study on Spain in subseries IV, vol. 2. See note 3, above. 6 The term innovation system is deﬁned here to include the set of institutions whose interactions deﬁne the innovative performance of national ﬁrms. Using the interpretation put forward by Nelson (1993), the innovation system thus includes industrial ﬁrms, public laboratories, and, more broadly, ‘the character and effectiveness of a nation’s system of schooling, training and retraining (sic) not only determine the supply of skills from engineer to

Notes 205 machine tender, but also inﬂuence the attitude of workers towards technical advance’. 7 Social security spending includes here unemployment beneﬁt, illness and maternity beneﬁts, pensions, housing subsidies, accident payments, employment subsidies and any other current expenditure associated with social security.

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Index accession, 1, 3, 6, 18, 20, 28, 29, 33, 55 activity rate, 74, 103 Agenda 2000, 171 Agencia Estatal de Administracion Tributaria, 113 agglomeration economies, 15, 26 agriculture, 22, 23, 25, 55, 133 Austria, 13 automobiles, 36 Aznar, José Maria, 116, 169

indicators, 13 labour market, 74–7 among member states, 13 in public spending, 194 programmes, 90–2, 153–6, 168 real, 14–16, 17–18, 159–62, 166–7 regional, 128–31, 132–7, 139, 142 currency instability, 85–7

balance of payments, 31, 34, 40, 41, 42 banking, 30 bargaining power, 52 Belgium, 13 brewing, 26 Britain, 6, 13, 28–30, 119

decentralisation regional government, 109–12 public sector, 95, 110 democracy, 4, 51, 54, 63, 66 Denmark, 13 dependency rate, 57, 98, 103 Deutschmark, 82 divergence 10, 15, 18, 21, 37, 39, 47, 74, 121, 129, 167

central bank autonomy, 6, 87 policy, 81–4, 87 see also independence chemicals, 30 Cohesion Funds, 7, 41, 119, 120, 123, 138, 141, 142, 144, 146, 149, 157, 168, 170, 171, 174 see also Structural Funds Cohesion countries, 141, 173 GDP growth, 191 collective bargaining, 52, 64 Common Agricultural Policy, 120, 149 common external tariff, 33 comparative advantage, 37 Constitution, 5, 63, 95, 103, 108, 113, 120, 138 construction, 23 convergence, 7–8, 11, 12 criteria, 7–8, 11, 12 with EU, 131–2, 168–70, 173–4 in government debt, 195

ECOFIN, 92 economic boom, 52, 124 economic crisis, 53, 79, 124–5 economic growth and inequality, 18 economies of scale, 14, 21, 27, 31 education, 16 electrical goods, 30 emigration, 10 employment European employment strategy, 69–71 by group, 59 key indicators, 178–80 National Plan, 70–1 policy, 65–71 sectoral, 23–5 EMU, 92–4 endogenous growth, 15, 124 European Central Bank, 8, 79, 92, 93 European Commission, 26, 32, 39, 49, 56, 63, 68, 144 European Community, 20, 21, 33, 35

213

214 Index European integration, 3–4, 47 beneﬁts, 3–4, 39–40 economic, 6 employment policy, 68–71 ﬁnancial ﬂows, 41–2 public sector, 102 regional convergence, 149–51 trade ﬂows, 33–7, 39–40, 43–4 European Monetary Institute, 8 European Regional Development Fund, 149 European Social Fund, 68, 120, 149 European Union, 10, 12, 14, 16, 41, 42 ﬁnancial ﬂows 1986–97, 176 ﬁnancial ﬂows 1992–99, 119, macro-structural features, 182 member states’ share of expenditure, 190 mergers and acquisitions, 27 regional policy 1983–96, 188 trading relations with Spain, 193 europeanisation, 6, 18, 41, 42, 73 Exchange Rate Mechanism, 2, 8, 41 ERM crisis, 86–7 Spanish entry, 79, 83–7 exchange rate, 83–7 external economies, 14–5 external sector, 34, 40 fertility rates, 57 ﬁnancial deregulation, 81 Finland, 13 ﬁring costs, 52 ﬁscal responsibility, 5, 112–16 ﬁscal system, 104–5, 115 ﬁxed-term employment, 58 food, 36 forales regions, 111, 122 foreign direct investment, 28–9 impact, 31–3, 42–3, 160–2, 172 origins, 29–30 outﬂows, 30 sectoral distribution, 28–31 France, 6, 13, 28–30, 36, 96, 119 Francoism, 3, 53, 96 French franc, 85

Germany, 6, 11, 13, 28–30, 36, 85, 96, 97, 119 globalisation, 21, 31, 45 Gonzalez, Felipe, 174 government budget, 98, 100–1 government employment agency, 65–7 Greece, 3, 13, 119, 163 gross capital formation, 34 Gross Domestic Product deﬁcit and debt contribution, 100 growth in Cohesion countries, 191 intra-EU FDI inﬂows, 33 public ﬁnances 1993–2000, 155 regional output, 130 sectoral contribution, 22 Holland, 13, 30 human capital, 15, 16, 17 hysteresis, 48, 53 increasing returns, 15 industrial relations, 51, 54, 63–5 industrial restructuring, 54–5 INEM see government employment agency inﬂation, 2, 51, 54, 80–1 ERM membership, 87 monetary union, 87–9 trends, 89 Instituto Nacional de Empleo (INEM), 65–7 Instituto Nacional de Hidrocarburos (INH), 99 Instituto Nacional de Industria (INI), 99 insurance, 26 interdependence, 19 internationalisation, 20, 21, 56 international integration, 31 inter-regional convergence, 128–31 inter-territorial compensation fund, 138 interventionism, 54 investment ﬂows, 31–2 Ireland, 13, 119, 161, 163 Italy, 13, 28, 30, 36, 96, 119

Index 215 Japan, 36, 49 labour market, 47, 57–60 and monetary union, 75–6 policy, 65–8 reform 55–6, 62–5 regional, 59–60 and technological change, 49 Latin America, 31 Law of Reconversion and Reindustrialisation, 5 liberalisation economic, 28, 33–5, 63, 73 LOFCA, 109, 113 Luxembourg, 13 Luxembourg Accord, 1 macroeconomic indicators, 196 Maastricht Treaty, 6–8, 11, 12–13, 16, 19, 95–6 and convergence criteria, 7–8 machinery, 30 manufacturing sector, 21–5, 54–5 mergers, 21, 26–7 Merger Regulation, 26 migration inter-regional, 10, 60, 72, 126 minimum wage, 51 modernisation economic system, 5, 54–5 and European integration, 4 political system 3, 55 public sector, 4 Moncloa Pacts, 80 monetary union, 8, 9–11 see also convergence monetary policy, 8 ERM, 83–7 exchange rate stability, 82 inﬂation control, 82–3 monetary union, 87–9 see also Spain motor vehicles, 30 Mundell, Robert, 9–10 multinationals, 31–4 NAIRU, 49, 63 neo-classical growth, 14, 124 new trade theory, 38

OECD, 49, 63 oil crisis, 53 openness coefﬁcient, 35 optimum currency areas, 9–10 participation rates, 58, 61, 72 part-time work, 58–9 Patrimonio de Estado, 99 pensions, 105–7 permanent employment, 59 pharmaceuticals, 26 political community, 35 portfolio investment, 29 Portugal, 1, 3, 13, 30, 36, 119, 162, 173 post-fordism, 21, 45 privatisation, 91, 116–8 professional development, 51 protectionism, 54 public sector, 4, 97–101 deﬁcit, 100–1 employment, 99 pensions, 105–7 privatisation, 116–8 reform, 102–19 spending, 97–100 see also regional government recession, 32, 54, 57, 60, 85, 124 reform see labour market see also public sector regional autonomy, 5, 108–16 regional debt, 170 regional development, 124, 145–7 convergence, 128–31, 132–7 and EU, 131–2 growth, 124–8 policy, 138–41 technology, 149–50, 165–6 regional funds total 1983–96, 189 regional government, 108–16 ﬁnancing, 109–13 see also inter-territorial fund regional indicators demography and education, 187 economy, 184 labour market, 185

216 Index regional policy, 137–41 research and development, 16, 18 retailing, 26 revealed comparative advantage, 39 Rome, Treaty of, 1, 139 SEPI, 117, 118 single currency, 8, 13, 25, 30 Single European Act, 2, 7 Single Market programme, 2, 10, 26, 32, 34, 43, 68, 73 SMEs, 26 social security contributions, 52 Socialist government, 11 Spain balance of payments, 40–2 and EMU, 93–4 EU ﬁnancial ﬂows, 119–20 monetary policy, 80–3 productive system, 21–31 public sector, 4 regional policy, 138–41 Stability Programme 77, 91–2, 117, 153–6 unemployment, 50–1, 60–2 Stabilisation Plan, 1, 28 Stability and Growth Pact, 11, 16, 75, 91, 97, 102, 108, 121, 153–4, 168 Stability Programme 1998–2002 Council Opinion, 197 Stability and Convergence Programmes 1999–2002, 154 stagﬂation, 35, 69, 124 Structural Funds, 7, 119–20, 123, 137, 141–5, 149, 157, 168, 170, 171, 173 macroeconomic impact 142 receipts, 181 regional distribution, 143 see also Cohesion Funds

structural change, 22–6, 29, 43, 45, 47–8, 56, 133 Sweden, 13 tax evasion, 104 technological capital, 16, 17 technological development, 15, 16, 48, 134–7, 147, 148, 165 technological intensity, 36, 54 telecommunications, 30 tertiarisation, 22 Toledo Pact, 106–7 tourism, 28, 41 trade creation, 5, 33 trade deﬁcit, 34, 36, 40, 44 trade dependency, 36 trade liberalisation index, 192 trade specialisation, 39, 44 trade unions, 54 training, 16, 51, 67–70 transport equipment, 30 transport infrastructure, 120 tributes cedidos, 111 UGT, 106 unemployment, 46–7 convergence, 74–7 regional, 185 White Paper on Growth, Competitiveness and Employment, 69 unemployment beneﬁt, 55, 64, 67 United Kingdom see Britain United States, 36, 49 urbanisation, 18 welfare system, 103 Workers’ Statute, 63, 64