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Spain’s Troubles Run Deeper Than Economic Improvement

Spain’s troubles started long before the abdication of King Juan Carlos, and it will take more than a change on the throne to relieve them.

Spain has had a tough time. It was one of the countries driven to seek a bailout in the wake of the financial crisis; the collapse of its real estate bubble sent it looking for help for its banks in 2012. Unemployment soared, particularly among young people; budget cuts resulted in widespread strikes and demonstrations, and the country’s credit rating fell.

One might think that Spain is now firmly on the road to recovery, since it exited recession last October and its economy is growing at the fastest pace in three years. The country even managed to exit its bailout program in January, and it just launched a major stimulus package at the beginning of June in the hope of creating jobs and increasing competitiveness.

But its troubles are far from over. Not only does it still have high unemployment and 15 years of debt payments from that bailout to look forward to, but a combination of corruption in the royal family and the abdication of the king, not to mention the drive for secession and independence in Catalonia, still roil the country’s daily life.

Despite the fact that Spain is a constitutional monarchy in which Parliament holds all the governing power, the corruption scandal was, and is, no small matter. After all, it led to the abdication of King Juan Carlos I in favor of his son, King Felipe VI, in early June.

There had been rumblings for some time that the king and the royal family were insensitive to the plight of the people of Spain. In 2012 Juan Carlos had to be airlifted back home after he broke his hip on an elephant hunting expedition in Botswana—a jaunt that cost the country many times the salary of the average Spaniard, and at a time when unemployment was at record levels. His companion on the trip, in another public embarrassment, turned out not to be his queen, but a German heiress.

The expedition also justifiably cost the king his position as honorary president of the World Wildlife Fund—perhaps not a major blow to the Spanish economy, but certainly an indication of his tin ear with regard to his position and his country’s image.

However, in its latest installment, the situation is far more serious. Iñaki Urdangarin, duke of Palma and husband of Juan Carlos’s daughter Princess Cristina, has been accused of overcharging two regional governments millions of euros via public contracts with a nonprofit organization that he set up. The outrage of Spaniards over the theft of public money at a time when the economy was in such poor condition has not restricted itself to Urdangarin.

Cristina, sister of King Felipe, had pleaded ignorance of what her husband had done. However, she has since been hauled into court and named as an official suspect in the case, as well as being charged with tax fraud and moneylaundering—the first member of the royal family to be so charged. An appeal has been filed, but as it stands the matter is a grave embarrassment to the new king, who will have his hands full trying to address Spain’s other problems.

On the plus side, the country announced at the beginning of June that it would be launching a new 6.3-billion-euro ($8.6 billion) stimulus package, aimed at bolstering research and development, industry, energy conservation and transportation. The news was somewhat overshadowed by the king’s abdication, but it is hoped that the move will also improve Spain’s unemployment situation. That, coupled with a sudden influx of outside investor funds into the Spanish real estate market, could be the means by which the economy keeps moving in the right direction.

But while the country’s economic woes are lessening, they are perhaps at present taking a back seat to the question of whether Catalonia will vote to declare its independence. It has scheduled a referendum for November, perhaps encouraged by the Scottish vote scheduled for September on the question of leaving the U.K. While Felipe has spoken out in favor of a unified Spain—and has the added advantage of being able to speak Catalan—the restored monarchy in Spain holds less power, and certainly less respect, than in its pre-Republic days.

Not only that, but there are many in the country as a whole who believe that the time has come for Spain to abandon monarchy altogether. That’s another challenge Felipe must face. While his father, invited back to the throne after the death of dictator Francisco Franco in 1975, was hugely popular in the early days of his rule, and was even credited with preventing a coup in 1981, prior to his abdication he was regarded more as an outdated drain on the Spanish economy, fragile in health and out of touch with his people.

Charles Sizemore, a portfolio manager on Covestor, an online marketplace for investing, pointed out that there is likely not much the new king can do to improve the situation, either politically or economically.

Sizemore said, “The crowning of a new young king does give Spain a fresh start of sorts, though we have to keep a few things in perspective. Felipe VI has just inherited a very different Spanish crown than the one his father Juan Carlos inherited back in 1975. In 1975, Spain was still essentially an emerging market, only recently having opened its economy and reformed its political system. Though there were setbacks along the way, the country was on an upward trajectory.”

He added, “Today’s Spain is a developed country suffering from the lingering effects of a debt-fueled property and consumption bubble. As we’ve seen in Japan over the past 20 years, shaking a developed market out of a debt-deflation hangover is no easy task. And Felipe lacks the executive authority his father had at the beginning of his reign. Juan Carlos was crowned as a ruling monarch, with real-life executive power. Felipe is a constitutional monarch with very little practical authority. His influence is really limited to his ability to be an inspirational figure: a cheerleader with a crown.”

However, Sizemore is at least somewhat optimistic about the country’s future. “All of that said, Spain’s economy appears to have bottomed out last year and has since returned to growth. And after years of austerity, Spain will be lowering both personal and corporate taxes starting next year, something the government expects to add an additional half percent to GDP growth. Spain reached that point last year when things stopped getting worse. The economy's condition is far from good, mind you, with more than a quarter of Spaniards out of work or working in the gray economy. But Spain does appear to have turned a corner,” he said.

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