Peter Franklin

Peter Franklin is Associate Editor of UnHerd. He was previously a policy advisor and speechwriter on environmental and social issues.

August 5, 2019

Back in January, I speculated that the advent of cheap solar power would redraw the economic map of Europe – to the benefit of one country in particular:

“…Spain, with its vast, sunbaked and largely uninhabited interior (and geographical proximity to Western European markets) would be well-placed to benefit from a solar-driven manufacturing revolution.”

Suggested reading
Is Spain's day in the sun dawning?

By Peter Franklin

I’m not the only one who sees a bright future for the nation. Bryan Caplan, who is Professor of Economics at George Mason University, has just returned from a five week stay in the country:

“The quickest way to explain Spain to an American: Spain is the California of Europe.  I grew up in Los Angeles, and often found myself looking around and thinking, “This could easily be California.”  The parallel is most obvious for geography – the deserts, the mountains, the coasts…”

It’s an intriguing comparison. In both land area and population, Spain is about a fifth bigger than California. The Golden State is much richer though. If it were an independent country, California would easily be one of the top ten global economies. Indeed, the latest estimates would put it in the top five. Spain, meanwhile, comes in 13th or 14th – with a GDP per head of $31,000 as opposed to California’s whopping $76,000. I dare say the likes of Mark Zuckerberg skew the Californian average somewhat, but that’s still quite a gap.

What could Spain do to start catching up? Caplan has nothing to say about energy resources, but he does think that Spain holds another trump card:

“Spain has more to gain from immigration than virtually any other country on Earth. There are almost 500 million native Spanish speakers on Earth – and only 47 million people in Spain… due to the low linguistic and cultural barriers, the migrants are ready to hit the ground running. You can already see migration-fueled growth all over Spain, but that’s only a small fraction of Spain’s potential.”

There’s certainly plenty of room for an expanded population – “you can see vast unused lands even ten miles from Madrid.” In fact, if you divide up the country into square kilometers, 87% of Spain is unpopulated.

Suggested reading
You’ll never guess which is the most densely populated country in Europe

By Peter Franklin

Caplan argues that Spain could unlock massive potential for growth by liberalising its immigration controls (though, of course, its borders are already open to migrants from other EU countries) – as well as by loosening up its labour market and its planning system:

“The trinity of ‘deregulate immigration, employment, and housing’ is vital in almost every country, but this formula would do more for Spain than nearly any other country.  Wise policy would make Spain the biggest economy in Europe in twenty years flat.”

Caplan does express some doubt as to whether the Spanish would ever take such a libertarian path. The renewed popularity of the Socialist Party would suggest not. However, the country’s membership of the European single currency may leave it with no choice.

When an economy is hit by a crisis, the conventional response is to cut interest rates and devalue the currency. But, for Spain, which swapped its Peseta for the Euro twenty years ago, those things are decided in Frankfurt not Madrid. So what could the country do, should it find itself in economic trouble? Assuming that a bailout from German taxpayers is not forthcoming, the one remaining option is internal devaluation. This refers to a combination of austerity, wage restraint and deregulation, all designed to restore confidence and competitiveness by cutting costs.

That’s what happened earlier this decade when the Eurozone crisis hit the countries of southern Europe. Spain made an impressive recovery – in many ways outshining the economies of northern Europe. However, as I’ve argued previously, a lot of this was achieved by squeezing workers, and there are limits to how much more they can take.

Over the last few years, we’ve seen surges of support for protest parties of the Left (Podemos), Right (Vox) and centre (Ciudadanos). At the moment, the volatile electorate has swung back to the Socialists – who look set to do well in the impending general election (the fourth in the space of five years). Should the next Government find itself strapped for cash, a deregulating dash-for-growth may be more palatable to voters than everlasting austerity and wage restraint.

Suggested reading
Will Spain’s working poor take revenge?

By Peter Franklin

Indeed, if a renewed Eurozone crisis breaks out elsewhere and spreads its contagion across southern Europe, then such a strategy could be Spain’s only way out. It carries it own risks of populist backlash, but no other member state has a better chance of pulling it off. If anywhere in the Eurozone has the potential to become a high growth frontier economy, it is Europe’s California.

The most obvious objection to this theory is that while the Golden State is home to several of the world’s biggest tech companies, Spain isn’t. However, neither is the rest of Europe, which in this vital economic sector is hopelessly outclassed by America, China, Japan and South Korea.

So within the context of the Eurozone, this doesn’t leave Spain at a special disadvantage. Meanwhile, the country’s special advantages are there waiting to be fully unleashed – with the potential to disrupt the EU’s economic pecking order. The German masters of the Eurozone should think carefully before backing Spain into a corner again.