Spain and Italy

Paola sent me this interesting link from the Charlemagne columnist at the Economist a couple of weeks back and I didn't have the time to comment on it. The comparison between the evolution in the political system in the two countries is an interesting and valid one. Spain has made great strides forward in terms of political maturity in recent years. Unfortunately the same cannot be said about Italy, and this is one of the reasons I am just not optimistic about Italy's capacity for addressing and resolving its substantial economic problems.

BOTH have centre-left coalition governments. Both are committed to European integration. Both are firm supporters of the draft European Union constitution. Both have low fertility, high immigration and declining competitiveness. And both are Latin, Mediterranean and used to taking siestas.

But now Spain and Italy are converging in a new way. For much of the past decade Spain's economy has been growing at around twice the EU average. At this rate, officials beam, Spain will surpass Italy in terms of GDP per head by 2009. If you account for the black economy (Italy does, Spain does not), Spaniards might be richer already. Yes, such claims should be treated with scepticism: in the mid-1980s, Italy boasted loudly and prematurely of overtaking Britain. But Spain's economy is already as big as Canada's (which is, like Italy, a G8 member). And if you add in demographic trends—an immigration boom is more than offsetting a shrinking native population—then the prime minister, José Luis Rodríguez Zapatero, is surely right to assert that Spain will soon join Britain, France, Germany and Italy in the club of Europe's big five countries............

The contrast is especially sharp right at this moment. Both Spain and Italy are in the process of pushing their annual budgets through parliament. But in Spain, says Francisco Fernández Marugán, the Socialist deputy whose job it is to shepherd the budget through the lower house, the coalition partners will add no more than €500m ($625m) to a budget of around €300 billion. In Italy the government agreed a spending plan unanimously at cabinet level. But when it went to parliament, there were 7,000 amendments, of which no fewer than 3,000 came from the ruling coalition. In Italy party and budget discipline alike seem unknown. In Spain they reinforce each other.

Of course, not everything is rosy in the garden of Spain. The fiscal situation is worse than it looks because two-thirds of public debt, attributable to regional governments, is not accounted for. Compared with Italy, Spain has few internationally competitive small firms. It is overly dependent on construction and is “enjoying” a housing boom. As a result, says José Luis Feito, at the employers' federation, the economy is highly vulnerable to higher interest rates, which are likely to be on their way.

Like Italy, Spain is stuck with high-cost, low-productivity businesses that are vulnerable to Chinese competition; poor schools; and low spending on research and development.............

Overall, however, economic success has produced a change in the public temperament of a country comparable only with that of Germany after the second world war, says Pedro Schwartz, a professor at the San Pablo CEU University in Madrid. For most of the 20th century, after defeat in the Spanish-American war of 1898 (known in Spain as “the disaster”), everybody's favourite topic was “the problem of Spain”. Italy was the model of a modernising Mediterranean state. “Spain is different”, as a tourist slogan of the 1960s used to put it.

Now Spain has self-confidence on steroids. Spanish companies are on acquisition sprees, first in Latin America, now in Europe. Two of Europe's top ten business schools are in Spain; Zara, one of the world's fastest-growing retailers, is based in Galicia. Spaniards no longer feel different; they want to be European. They showed it by being the first to vote for, and overwhelmingly approve, the EU constitution.

Of course Paris will undoubtedly want to wax long and lyrical on Spain's housing boom, but I would just point out that this is itself a direct product of the difficulties of managing a 'one size fits all' interest rate policy for the eurozone, and as such can hardly be blamed directly on the Spanish administration itself. Ironically though it is this boom which has produced the huge and unprecedented immigration is Spain (nearly 5 million people in 6 years) and this in and of itself has corrected the population pyramid problem substantially, at least for the time being. Call it the law of unintended consequences if you will. Now everything depends on how well Spain can leverage its comparative advantage vis-a-vis Latin America as the construction boom slows. This may not be easy, but at least it is still all left to play for, and of course Mr Bush has given Spain an enormous LA boost by agreeing to build that wall to 'separate' the US from Latin America.

I might also mention that Claus Vistesen had a relevant post on Spain's construction boom here.