Spain’s Transition: Economic Crisis and the Moncloa Pacts
Spain’s Transition: Economic Crisis and Social Pacts
The political transition occurred amidst a severe economic crisis, exacerbated by the failure to implement timely adjustment measures.
There was a double imbalance:
- External: Contraction of external demand leading to higher deficits and debt (no pre-adjustment mechanisms worked effectively: tourism, remittances, investment).
- Internal: Domestic demand was maintained by a cheap money policy (low interest rates) resulting in very high inflation.
The Moncloa Pacts
In 1977, the first democratic elections in Spain after 41 years resulted in a center party victory. The government, recognizing its weakness, called upon the entire country to take steps to address the crisis. The leftist parties and workers bore a significant sacrifice and signed the Moncloa Pacts.
These pacts were supposed to launch an adjustment policy to curb price growth, achieved through:
- A strict monetary policy, where the state no longer provided cheap money.
- Raising interest rates.
- Reducing the money supply.
- Devaluing the currency by 20% against the dollar.
In the short term, these measures proved effective.
Tax Reform
Tax reform was also necessary to reform the treasury, as the deficit was very large and the state had to provide services to improve social welfare, aligning with European standards.
In 1975, 50% of income came from Social Security, 30% from indirect taxes, and 18.5% from direct taxes on household and corporate incomes.
There was a luxury tax, but it was more apparent than effective, as those with a Mercedes paid little more than those with a Seat.
New taxes were imposed: Income Tax, VAT, and corporation tax. This reform increased revenue.
Structural reforms aimed to solve fundamental problems, but only succeeded in liberalizing the financial system.
The results were acceptable, curbing inflation and improving production at cheaper prices. The current account surpluses were remarkable in the two years following the Covenants, and public finances improved due to the tax reform. However, the second oil crisis canceled out these positive effects. The Tejero coup attempt led to a subjective change in the population, resulting in the PSOE winning the elections with an absolute majority, granting them the authority to implement more significant measures.
The External Impact of the Crisis (1973-1985)
Growth slowed in 1974, coinciding with the international crisis. The U.S. faced economic problems, and oil prices rose.
Between 1975 and 1985, GDP growth decreased from 8% to 4%, and then to 2% between 1979 and 1985. These two stages are associated with the two oil shocks.
Macroeconomic Consequences:
- There was a global imbalance in the economy, with inflation rising from 10.9% in 1973 to 24.7% in 1977.
- The working population shrank from 13 million in 1973 to 10.6 million in 1985.
- Investment was reduced to 2.2% annually.
- The savings capacity of households and firms fell further.
- The current account recorded shortfalls, reducing foreign reserves and increasing foreign debts.
- Public spending doubled in relation to GDP.
Also, during the transition from dictatorship to democracy, Spain experienced higher inflation than Europe. In periods of growth, Spain grew more than European countries, but during the crisis, the divergence from the European average was more pronounced.
The crisis was more intense in Spain than in Europe because:
- At the beginning of the crisis, Spain was in a dictatorship and then entered a process of political transition.
- Franco’s economic policy had been very interventionist, making it difficult to implement measures to resolve the crisis.
- Political instability prevented governments from taking action on the price of oil, leading to subsidies that encouraged consumption rather than conservation.
- Interest rates were dropped to negative terms, with the state financing cheap money.
Subsidies and a monetary policy that made the price of money negative led to growing inflation. Exports and tourism revenue fell due to the international crisis, and the deficit grew. In 1976, the currency was devalued, but as no structural changes were made, it yielded no results.