Spain is not facing up to the severity or singularity of its financial crisis, largely caused by its property bubble
Spain is facing a credibility crisis. Property prices are crashing, wiping out a large part of many families' wealth and leaving banks with billions of euros in loans, which look increasingly risky in a country where up to 1.5 million houses appear unsaleable.
Unemployment is more than 4 million and rising sharply. It's clear that what once appeared to be solid public finances were nothing of the sort but were in fact an illusion based on bloated and unsustainable revenues from a property boom.
But Spain's credibility problem isn't just economic – it's political. For if it is to win back the trust of the markets it needs to show that it can diagnose the extent of its financial problems, take the necessary measures to correct them and find the national willpower to carry them out.
Up to now none of these things has happened because the government in Madrid has been unable to face up to its obligations or even accept that there is a uniquely Spanish set of problems here – preferring to blame the global financial crisis instead of understanding that it has simply highlighted and accentuated our country's specific economic weaknesses.
So the financial markets, which demand a credible plan for the future, have seen only a government paralysed by fear and incomprehension.
The government argues that foreign banks and media don't understand Spain and are envious of what they argue are relatively healthy finances. They point out, for instance, that forecast debt to the end of 2010 is only 66% of GDP and that Spanish banks have needed almost no public funds to rescue them.
So it sounds superficially plausible to argue that Spain is over the worst of the crisis – but this ignores some deeper truths. One is the cost of getting the financial sector back on track after it has absorbed the cost of defaulted loans. The next is, of course, unemployment – which could quite feasibly, on recent experience, reach 5 million in Spain and stay at that level for a decade.
Over the last two weeks, spurred by the Greek crisis, the government has started to come to grips with these problems. It has announced some serious plans to tackle public spending, particularly by cutting pensions over the medium term. It has announced plans to cut short term deficits by reducing infrastructure and civil service expenses.
The next steps should be to set the economy on a new long-term growth path, based on increased productivity. This will need educational reforms which lead more students to graduate from high school (skills were superfluous in the old, construction and tourism-driven growth model), and create institutions of international excellence. Spain must also eliminate the harmful split between permanent and temporary workers, which destroys any incentive for professional development.
The good news is that the country still has the borrowing capacity to finance these reforms – Moody's has recently reaffirmed its AAA rating, and public debt ratios remain among the lowest in Europe.
At the moment the Spanish economy is akin to someone trying to work with one hand tied behind their back. Spain will have to act decisively and restructure its entire system in order to rediscover its full muscle.
But that can only happen when unions, government and opposition parties accept the problems we are facing.
Copyright Speakers Corner 2016