Spain is the European Union’s fifth largest economy and a whopping 15 million British tourists visited the country last year, a record number and including, perhaps, some of you who are here today.

In order to better understand where Spain is today, you need to know from where it is coming from and so I will start with a brief description of how the country got into its crisis, followed by the measures taken to resolve it and where we are now. My wife tells me that I tend to overload my conferences with numbers, so I will try to heed her advice a little more this time although as a former Financial Times correspondent I do like to be precise.

The origins of the crisis, 2008-2011

Quite a lot of words in the English language can be traced to the Spanish language and one of them is “fiesta” or party. The Spanish economy enjoyed a fiesta for more than a decade, but it was largely built on the shaky foundations of the credit-fuelled property sector whose huge price bubble burst in 2008, leaving around one million unsold homes. What happened in the housing sector was sheer madness and should serve as a cautionary tale. The number of houses that began to be built during 2006, at the height of the illusionary boom and two years before the crash, was 865,000 (my first number) – more than Germany, France and Italy combined. A typical example of the property fiasco was the Residencial Francisco Hernando (name after the developer), 20 miles outside Madrid, which was intended to triple the population of Seseña in the dry plains of Castile with 13,500 flats. Billed as the Manhattan of La Mancha, the home region of Don Quixote, as deluded as the developer, only around 2,500 had been sold by the time the property bubble burst.

Spain also has several ghost airports yet to be sold, including one which was opened in 2011 by Carlos Fabra, a local political boss, or cacique (another Spanish loan word), from the conservative Popular Party even though it did not have all the permits. He justified this on the grounds that “anyone who wants can visit the runway, the terminal and the control tower and walk around them, something they could not do if aircraft were taking off.” There is a 24 metre copper statue to Fabra – who is serving a four year sentence for tax fraud – at the entrance to the airport. The Popular Party leader Mariano Rajoy lauded Fabra in 2008 as “an exemplary citizen and politician”, words he lived to regret after becoming prime minister at the end of 2011. Ryanair will began to operate the first scheduled flights in four years from Castellón in September.

The booming economy encouraged people to go on a spending spree and live beyond their means. Credit was cheap, thanks to Spain belonging to the euro zone. At one stage interest rates were even negative as Spain’s inflation was higher than the cost of borrowing. The one size fits all monetary policy of the European Central Bank was not appropriate for Spain. When the economy went into a deep recession in 2009 and jobs began to be shed, particularly in the property sector, many of the unemployed were unable to service their mortgages. The jobless rate soared from an historic low of 8% in 2007 (a high rate by UK standards) to a massive 22% at the end of 2011 when the Popular Party ousted the Socialists in the general election.

Many of Spain’s 40 savings banks, known as cajas, – their nearest equivalent in the UK would be the equally ill fated Co-operative Bank – were also left high and dry when the property bubble burst. These banks accounted for around half of Spain’s banking system. Regionally based, not listed on the stock market and run by boards packed with political appointees, they fell over one another to make loans. With the collapse of the property sector, loan defaults soared. The non-performing loans of all of Spain’s banks jumped from a negligible 0.7% of total credit in 2006 to around 13% today.

Construction-related corruption was rife among politicians, especially at the municipal level with re-zoning and building permits, fertile ground for greasing palms. The level of corruption, as we will see, has become one of Spaniards’ main concerns after unemployment.

One way to launder ill gotten gains is to win the lottery or rather I should say find someone who has won the lottery and buy their winning ticket from the lucky holder for more money than it is worth, cash in hand. One Spanish businessmen, currently in custody as part of a corruption ring, claimed he won the lottery eight times in a 16-month period, beating all the odds.

At one point during the boom Spain accounted for one-quarter of the total number of 500 euro notes in circulation in the euro zone countries, although the Spanish economy only represents around 11% of the total euro zone economy. Ordinary Spaniards referred to these notes, used in black economy transactions, as “bin Ladens” (in reference to Osama bin Laden), because everyone knew they existed and what they looked like but few had seen them or admitted to doing so.

As the economy roared along, so more and more teenagers dropped out of school at 16 when they completed their basic obligatory education to work in the construction sector. In 2008, 32% of those aged between 18 and 24 in Spain were what we call early school leavers, more than double the European Union average. This figure is now down to 22%, still very high.

Take the case of Villacañas near Toledo which became the door-making capital of Spain. At the height of the boom, this town of 10,000 inhabitants had 10 door manufacturing plants employing 6,000 people and producing 11 million doors a year, 60% of the national total. Hardly anyone stayed on at school, and those that did were regarded as idiots by those working in the door factories. One bright lad saw the writing on the wall and stopped working in one of the factories so he could complete his education. He did so well that he won a place at the London School of Economics and went on to work for the Bank of Spain, the central bank. To borrow the title of a novel by the Nobel laureate Gabriel García Marquez, Spain’s property madness was a “chronicle of a death foretold.”

Those of you who know your Spanish history will remember that the influx of silver and gold from Spain’s colonies in the 17th century ruined the economy, as it lulled the country into a false sense of financial security, stoked inflation and caused the currency to appreciate. The latter day and illusory variant of this wealth was bricks and mortar.

Over 4 million foreigners arrived in Spain between 1998 and 2008, mainly lured by the construction boom. No other country in Europe has received so many immigrants in such a short space of time. The number of Rumanians, the largest foreign community, rose from a mere 6,410 in 2000 to around 900,000 today.

When I first came to Spain in 1974 I was one of 165,000 foreigners. Today, I am one of around 5 million, and that figure excludes naturalised Spaniards. Spain’s foreign-born population represents around 11% of the total population, a little less than the UK. While immigrants continue to arrive in large numbers in the UK, in Spain they have been returning home because of the crisis. Unemployment among the immigrant population is more than 30%.

The crisis exposed a mainly passive society – apart from some lone voices – that was more interested in perpetuating the economic fiesta than in challenging the status quo and asking. When I suggested in a newspaper column that villages’ annual fiestas, which spend millions on entertainment, should be abolished until Spain’s crisis was over, it did not go down well and I was accused of being a party pooper. In the case of the village of 400 inhabitants where I have had a house for 40 years, we have a magnificent firework display on the football field, money that I lament out loud every year would be better spent on the village school.

The measures taken by the Popular Party

The Popular Party swept the Socialists out of power at the end of 2011 and began to put Spain’s economic house in order. The worst offenders as regards the property building madness were the regions with Popular Party governments, such as Valencia, ground zero of the real estate bubble, and most of the corruption cases involve that party.

The most immediate problem was in the banking sector, as it threatened the whole economy. Seven savings banks, mostly controlled by the Popular Party, particularly the largest one, Caja Madrid, had merged in 2010 to form Bankia, the fourth largest bank and the largest holder of real estate loans. Officials hoped the consolidation of these institutions into one large bank would resolve the savings bank crisis, but instead the botched merger created the biggest banking catastrophe in Spain’s history. In 2011, Bankia, led by Rodrigo Rato, the former head of the International Monetary Fund and economy minister in previous Popular Party governments, was listed on the stock market and in May 2012 it requested a €22 billion bail-out from the European Union and was partly nationalized. Bankia’s made a net loss in 2012 of €19 billion, the largest in Spain’s corporate history.

The more than 350,000 retail investors who had bought shares in Bankia in the belief they were a safe investment saw their savings virtually wiped out by a share price that plummeted over the course of a year to almost zero. There is an ongoing judicial investigation into this scandal: last month Bankia was ordered to set aside €800 million to meet possible claims from its stock market listing and subsequent turmoil. Many savers say they were misled into buying the shares. Bankia’s former management stands accused of providing false information. Rato is also accused of sanctioning and personally benefiting from an illicit expenses scheme which allowed senior management to use company credit cards to spend millions of euros on goods and services completely unrelated to the bank’s operations.

The disgraced Rato was forced out of Bankia and the governor of the Bank of Spain, the country’s central bank, left before his term of office ended after the government criticized him for not having his eye on the ball. The new Bank of Spain governor, Luis Linde, summed up the situation in the following way. “In the real estate and financial bubble years there was a sort of euphoria which led to the risks that were accumulating to not be seen, or nor wish to be seen. It was as if nobody wanted to forecast scenarios of recession, interest rate rises or collapses in funding.” Linde said in bank speak what George Orwell observed in 1946 when he wrote, “to see what is in front of one’s nose needs a constant struggle.”

As well as getting tough with the banks, the Popular Party has implemented the severest austerity measures in Spain’s post-Franco democracy and raised income tax and VAT rates, in order to reduce the budget deficit. As in this country, spending cuts are weakening the welfare state. The annual rise in pension payments is no longer linked to inflation and the retirement age is gradually being put back from 65 to 67.

This is a sensible reform: Spaniards are living longer (83 years on average, one more than the Brits).

The government introduced labour market reforms in 2012 in a bid to make it easier for companies to create jobs, particularly for young people, and less onerous to fire people. Youth unemployment is 55% and around half that including those in education and training which is the more accurate way to measure it.

One major reason why unemployment is so high in Spain is the lopsided economic model, excessively based on the construction and real estate sectors. Their collapse had a huge knock on effect. Of the 3.5 million jobs lost since 2007, 1.6 million came from these sectors and that figure excludes those people who lost their jobs in areas related to these sectors, such as the door makers I mentioned earlier on.

Tourism, another cornerstone of the economy, has survived, indeed flourished, but it, too, does not create jobs on a sustained basis. Take the example of the Canary Islands, which receives more than 10 million tourists a year (five times their population) and yet has an unemployment rate of more than 30%.

Spain today

Corruption and nepotism flourished during the boom and since the crisis hardly a day passes without a new scandal being unearthed in the press or more details regarding ongoing cases. Spain’s justice system moves at a snail’s pace. I mentioned Carlos Fabra earlier on: it took a staggering 10 years for his case to come to trial. The backlog of all cases was highlighted last year by photos in the Spanish press showing files piled up in the toilets of courts. More than 800 town halls (10% of the total) today are under investigation and several thousand people have been accused in corruption cases. The judiciary is finally cranking into action and cleaning out the Augean stables.

The ongoing case that has hit the headlines the most is the slush fund scandal run by Luis Bárcenas, the former Popular Party treasurer, involving secret cash payments to the party’s leaders over 18 years, including allegedly to Prime Minister Mariano Rajoy, and donations to the party from companies, mainly construction ones, in return for favours. Investigators found €22 billion in Swiss bank accounts held by Bárcenas. He was jailed pending trial in June 2013 and released on bail last January.

In 2013, Spain slipped 10 places in the annual corruption perception ranking of Transparency International to 40th position out of 177 countries. Its score of 59 was six points lower. The nearer to 100, the cleaner the country. It improved a little in the 2014 ranking.

As a result of the crisis, Spain has seen a huge change in public attitudes to corruption. This is a long overdue and healthy phase in Spain’s transition from Franco’s authoritarian state to democratic accountability. Spain finally fell into line with the rest of the European Union at the end of last year when its first ever Transparency Law came into effect. The new law – almost 40 years after the end of the Franco dictatorship – only operates at the state level (it will be be extended to municipal and regional levels, where most corruption occurs, this December).

The economy is finally growing and the banks sailed through the health tests imposed on them by the European Central Bank. The bail-out programme for banks was exited last year and Spain’s multinationals continue to do well. Santander, Spain’s and the euro zone’s largest bank, has branches in Oxford and Banco de Sabadell made a takeover offer this month for Lloyds TSB’s 630 branches.

Thanks to impressive growth in exports and a recovery in domestic demand the economy will grow by more than 2.5% this year, the fastest rate among the large European economies including the UK.

Average house prices rose marginally last year for the first time since 2008, and the number of housing starts, which peaked at an absurd 865,500 in 2006, was a mere 35,000. House prices are around 35% lower than in 2008, and there are still around 500,000 unsold new homes, roughly the equivalent of two years’ shortfall in the UK. Whereas the UK has a dearth of houses, Spain has a glut. Perhaps a deal could be struck between the two countries, under which Spain would ship its empty homes to the UK in return for the UK returning Gibraltar to Spain.

Unemployment is finally beginning to decline, but will remain above 20% until 2017, according to all the forecasts, and 60% of the 5.4 million jobless have been unemployed for two years or more.

Not only is unemployment still very high, but around one-quarter of those aged between 15 and 29 are not in employment, education or training. These people – many of whom dropped out of school for the construction sector during the boom years – form a “lost generation”. Not only are they jobless, but they are so poorly qualified that their prospects of finding meaningful employment are slim.

This year will be a hectic one for the Spanish electorate. It kicked off a week ago with elections in Andalusia, which were won by the Socialists who have ruled the region for 33 years. More significantly, these elections confirmed the change in the mould of politics in post-Franco Spain, dominated at the national level by the Socialists and the Popular Party. Two new upstart parties, the anti-austerity Podemos and the centrist Ciudadanos, took away votes from both the Socialists and the Popular Party and gained 15% and 9%, respectively, of votes. The Popular Party and the Socialists gained between them 62% of the vote, down from 80% in 2012.

The Andalusian election will be followed by more regional and nationwide local elections in May, an early election to elect a new parliament in Catalonia, which is moving ahead with its push for independence, and a general election in December.

If the opinion polls are to be believed Spain’s essentially two-party system since the end of the Franco dictatorship in 1975 is set to take a beating in a four horse race. Podemos (which means “We can” – reminiscent of Barack Obama’s slogan “Yes, we can”) is forecast to win the general election. I have my doubts.

Podemos is a fascinating phenomenon. You should not draw too many parallels with its ally Syriza, which won Greece’s election in January. For a start, Spain’s crisis is nowhere near as profound as that in Greece, which is the nearest we have to a failed state in Europe.

There is a lot of anger in Spain and Podemos is successfully channeling it. The outrage at the rate of unemployment, austerity measures, the collapse of savings banks, etc, came to a head on May 15, 2011 when tens of thousands of mainly young people occupied the Puerta del Sol square in the heart of Madrid and set up camp for a month. This grassroots movement, known as 15-M and articulated through mobile phones and the Internet, quickly gathered supporters around Spain and, incidentally, inspired the Occupy Wall Street movement. Supporters ranged from anti-capitalists, workers who had lost their jobs, and pensioners hit by cuts to their payments, to homeowners whose properties had been repossessed because they could not pay their mortgages and university students who saw no future.

The movement of los indignados (the indignant ones) had no particular ideology at that time and caught the political class by surprise. Its supporters were united by their rage at the two main political parties, the Socialists and the Popular Party. Opinion polls regularly show politicians as the least respected group and part of Spain’s problems instead of the channel to solve them.

The most memorable slogan to come out of this movement was the one shouted in front of Congress when protestors waved loaves of bread above their heads and screamed: “There isn’t enough bread for so many chorizos!” A chorizo is a swindler or cheat and not just a spicy sausage, often sliced and served in a bocadillo.

Podemos, which became a political party just over a year ago, stunned the status quo last May by winning 1.2 million votes (8% of the total) and five seats in the European elections. For the first time since the re-establishment of democracy, the Popular Party and the Socialists captured between them less than 50% of the total votes in an election. Like Britain, Spain’s political landscape is changing, but, unlike this country, Spain does not have a UKIP style party – which is quite remarkable given the influx of immigrants who have been successfully absorbed.

Podemos is attracting voters from across the political spectrum: mainly from the Socialists and the United Left but also from the Popular Party who are fed up with a political establishment that Podemos calls a “cast”. To be called part of the “cast” has become the greatest insult that anyone can receive.

Ciudadanos is a Barcelona-based centre-right party opposed to the movement in the region for a separate Catalan state. The party’s influence is beginning to spread outside Catalonia, particularly among those who previously voted for the Popular Party and are looking for an alternative.
Its leader Alberto Rivera summed up the differences between Ciudadanos and Podemos by saying that whereas his party wants justice, Podemos wants revenge.

If the voter intention polls turn out to be correct at the general election then no party would be able to form a government on its own and the options would be a minority government, a coalition or gridlock which is what worries many people. Spain has had two experiences of minority governments in the last 30 years, but never a coalition. I believe I am right in saying it is the only country in the European Union not to have had a coalition government.

You should not read too much into this opinion poll because the rules of the proportional electoral system need to be taken into account. A complex formula ensures that any party that does not reach 25% of the votes will be under-represented in parliament, while the rules ensure that regionalist parties are well represented at the national level. These factors could constrain Podemos and Ciudadanos. Most of their supporters live in big cities: if they cannot boost their rural vote they will not do as well on election day as the polls suggest.

Podemos is led by the 36-year-old pony-tailed and media-savvy Pablo Iglesias, a political science lecturer at Madrid’s Complutense University, where the 15-M movement was born. The faculty of political sciences is well known for its long standing commitment to far-left ideology.
He was a member of the Communist Youth Union of Spain, part of the anti-globalisation movement and an admirer of Venezuela’s autocratic and economically populist Hugo Chávez.

The party’s economic programme, more a wish list than anything else, began with radical demands for a 35-hour workweek, a guaranteed basic income for the needy, retirement at 60, laws to prevent profitable companies from firing people, a fairer distribution of wages, abolishing private hospitals in order to have a fully state-controlled health care system and a restructuring of Spain’s debt with its international lenders.

Realising that much of this is not practical and potentially alienating some voters, Podemos has softened its programme and moved it toward Nordic style social democracy.

Juan Carlos Monedero, the party’s chief ideologue, refers maliciously to Spain’s transition to democracy as the “regime of 1978”, in allusion to the constitution of that year. For Spaniards the term regime is associated with the Franco regime, and to equate the transition with the dictatorship is dangerous and confusing for those with no memory of it.

As someone who lived through and reported on Spain’s remarkably smooth transition, between 1975 and 1978, there is no question that it has given Spain its longest period of prosperity, freedom and peace in its history. There were very real fears at the time of a right wing backlash by the armed forces – indeed there was an attempted and bloodless coup in 1981 in an attempt to turn back the clock.

Of course, the transition was not perfect. The deal negotiated by Francoist politicians and the democratic opposition left in place the bulk of civil servants, the judiciary and the security forces, as one would expect since the transition was negotiated and not a rupture with the past. With hindsight it is easy to criticise the transition, particularly those who, like Podemos’ leaders, were either not born at the time or were teenagers.

We should not forget, however, that unlike say Chile and South Africa, which also moved to democracy, Spain’s transition came out of not only a dictatorship, which lasted 36 years, but also an horrendous civil war between 1936 and 1939. The blame for Spain’s ills such as corruption, massive unemployment and a poor education system cannot be laid at the door of the transition.

One of the main defects of Spain’s democracy is the colonization by the two main parties of institutions, including the governing body of the judiciary and the Court of Auditors. This has deprived Spain of an effective system of checks and balances and led to a considerable degree of impunity.

Hardly anyone in Spain accepts their political responsibilities and resigns. My Spanish friend were gobsmacked when Chris Huhne, the former Liberal Democrat minister, resigned from the Cabinet and his seat in parliament after it was discovered that his then wife had taken his speeding points. Nothing remotely approaching that happens in Spain, and for far worse offences.

If you think I am too critical of my adopted country, you should listen to Spaniards. As the great poet Antonio Machado said, in the mouth of Juan de Mairena, “Hay que ser español para decir las cosas que se dicen contra España/You have to be a Spaniard to say the things that are said against Spain.”

Political reform is badly needed, particularly of the closed-list system in elections that gives so much power to a party’s apparatus at the expense of accountability, and makes politicians sycophantic. Whereas the UK has a first passed the post system in elections, Spain has proportional representation. Under the closed-list system, as opposed to the open list, voters vote for the party, and not a particular candidate, and therefore the list as a whole. Candidates are elected in the order they appear on the list (as decided by the party) until all the seats have been filled. Closed party lists parties stifle independent and minority opinion within their ranks. As all the power over who gets seats lies with the party machine, so too does the power to voice opinions. Closed party lists offer very little in the way of voter choice: all the power, save that of choosing a party for government, resides with the party.

As well as the transition, the institution of the monarchy is also under scrutiny in some quarters. The abdication of King Juan Carlos last year triggered demonstrations in favour of restoring the republic that was defeated in 1939 at the end of the Civil War. The republic had been declared in 1931 when Juan Carlos’s grandfather, Alfonso XIII, went into exile after municipal elections showed widespread support for a republic. General Franco, who won the Civil War, skipped a generation and appointed Juan Carlos his successor and he admirably piloted Spain’s transition to democracy.

The corruption scandal in the royal family, involving the king’s son-in-law and daughter, and Juan Carlos’s ill-timed elephant-hunting trip to Botswana at a time of national austerity and after saying he was kept awake at night worrying about youth unemployment, tarnished the monarchy’s image. Juan Carlos’ health is also ailing.

His daughter Cristina is charged with two counts of being an accessory to tax fraud and her husband is alleged to have embezzled €5.8 million in public funds. The couple are in the process of selling their mansion in Barcelona, which was bought for €6 million (plus another €3 million in renovations) and raised questions of where the money came from.

When I interviewed Juan Carlos in 1977 at a time when he was still referred to as Juan Carlos el Tonto (Juan Carlos the Stupid) and Juan Carlos el Breve (Juan Carlos the Shortlived), he joked about himself. “Why was I crowned in a submarine? Because deep down, I am not so stupid.” The king showed his astuteness again by abdicating, although it can be seen as a humiliation as he had always insisted he would not do so, and, like Franco, die with “las botas puestas” (with his boots on).

Spain has far more important problems to resolve than the form of its state. Furthermore, parliamentary monarchies are generally cheaper to maintain than republics. The budget of Spain’s royal’s household is £6.4 million, that of France’s Élysée presidential palace is £100 million. A Felipe González or a José María Aznar, former prime ministers, would, as presidents, not be above the political fray in very partisan Spain as much as a Juan Carlos was or his son Felipe VI is proving to be.

Felipe VI, whom I know a little as he is the honorary chairman of the think tank for whom I work, is very well prepared and already we are seeing a different and more inclusive style and greater transparency in the royal household. His approval rating has risen since assuming the throne.

Lastly, there is the problem of Catalonia, Spain’s economic powerhouse, which unlike Scotland was barred from holding an referendum on the issue because it is unconstitutional. Nevertheless, the Catalan government defied the Constitutional Court and went ahead last November with a pseudo non-binding referendum, manned by volunteers, in which 2.3 million people voted out of 6.3 million eligible voters. 1.8 million people voted in favour of independence and 500,000 against. Supports of independence hailed it as a victory, although the voter turnout was only 37%. Artur Mas, Catalonia’s premier, faces charges related to the holding of this illegal referendum.

Catalonia, with its own language, history and culture, has long had secessionist aspirations, but they did not come to a head until a landmark ruling in 2010 by the Constitutional Court which struck down parts of a new statute setting out the relationship between Catalonia and Spain. The statute, which would have further bolstered Catalan autonomy, had been approved by the Spanish and Catalan parliaments, and was backed by a referendum in the region. Catalan nationalists felt betrayed and the independence movement took off. The push for a separate state has also been intensified by Spain’s crisis which has highlighted the perceived unfairness of Catalan tax transfers to the rest of the country and led, so pro-independence supporters say, to tougher spending cuts in the region than otherwise would be the case.

The central government in Madrid and Catalonia remain on a collision course. Mas has called an early election to be held in September which is intended to serve as a plebiscite on independence. This is a gamble. The last time he called an early election, it backfired on his centre-right CiU coalition which lost 12 seats. The more radical and historically pro-independence Republican Left of Catalonia won 11 more seats and this time round is forecast to win the election. Mas had hoped to persuade the Republican Left to field a joint list of candidates, but it rejected the idea.

Catalan independence would put an end to Spain. Not only is its contribution, in terms of people and economic output, far greater than that of Scotland, but were it to secede from Spain it could have a domino effect, particularly in the Basque Country, traditionally the main focus of secessionist tensions in Spain.

Some of you may be wondering, Catalonia apart, what holds Spain together. To a significant extent, this is due to the wonderful extended family-based network, effectively a cornerstone of the welfare state, where parents and grandparents play a key role in times of crisis, and Spaniards’ tremendous capacity of resistance and innate common sense. A crisis of Spain’s proportions with a UK-style family structure would have produced considerably more social conflict than has been the case. Long may the family thrive in Spain.