The economy is improving, but it still has a long way to go

A TOLL road snakes west out of Madrid, offering a fast alternative to the jammed motorway alongside. Hailed a decade ago as a cure for congestion, the road’s operator is now likely to be nationalised, as are those running three other loss-making roads into the capital. This is expected to cost taxpayers some €2 billion ($2.7 billion), adding to a soaring national debt and on top of a €50 billion bill for rescuing Spain’s banks.

Toll roads were designed as a response to Madrid’s breakneck expansion, but a burst housing bubble stopped that in 2008. Spaniards, struggling with falling household incomes and loans, have become more tight-fisted. Traffic on the four toll roads has almost halved. That alone demonstrates that, even as it recovers, Spain is still suffering from the aftershocks of a double-dip recession that shrank GDP by 6.4% in total.

In Brussels these days Spain is hailed as a prodigal son of the euro zone’s troubled southern periphery. The economy returned to growth in the third quarter of 2013, with rising exports compensating for weak consumer and public spending. The Madrid stockmarket is booming, foreign investors are back, the current account is in surplus, bond yields have hit eight-year lows and new jobs are being created. It adds up to big progress in a country that once threatened to break apart the euro.

What saved Spain? The pledge in July 2012 by Mario Draghi, president of the European Central Bank, to be a true lender of last resort removed immediate doubts about the euro’s survival. But reforms by the centre-right government of Mariano Rajoy have also helped Spain to achieve an “internal devaluation” by lowering costs. Because it is in the euro, the alternative of currency devaluation is not available.

Measuring internal devaluation is tricky, but unit labour costs dropped in Spain for four years until a small uptick in late 2013, helping to boost exports. Labour reforms have let employers offer wage cuts rather than sackings, further driving down pay bills that began falling in 2010. Even so, Akos Valentinyi, of the German-based think-tank CESifo, says that Spain needs deeper labour market reform if it is to regain 3m lost jobs.

Spain also has some of Europe’s highest income-tax rates, but puny overall tax revenue. A report commissioned by Cristobal Montoro, the tax minister, proposes a shift from income tax and social-security contributions to consumer taxes while closing business-tax loopholes. The current system is as hole-ridden as a Gruyère cheese, says the report’s co-author, Fernando Fernández. But the budget deficit of 6.6% of GDP means that any cuts must be matched by tax rises elsewhere. And Mr Montoro refuses to increase sales tax.

As jobs return, a virtuous cycle of improved confidence, consumer spending and faster growth could begin. Analysts are raising their projections, with some seeing GDP growing by 1.3% this year. Even so, unemployment, now standing at almost 26%, will take a decade to fall substantially. And as it is, the budget deficit barely fell last year, as public spending grew. The public debt has hit 94% of GDP.

Rafael Doménech of BBVA, a bank, says Spain should aspire to more than being the best of the worst and, instead, measure itself against Europe’s most successful economies. On this basis, it does badly. Research, technology and skills all lag. An education system that fails a section of the young will take years to fix. Spain’s plethora of small companies may make productivity gains harder to achieve. Younger workers needed for the survival of the welfare state have emigrated or are jobless.

Moreover, Spanish institutions are weak and often sclerotic in their actions. Spaniards may dream of a corruption-free country with minimal political interference. But short-term ambitions are more modest: a stable job is the most that many can hope for.