Spain's internal devaluation: the adjustment that saves the debt and kills the future

Spain paid for the crisis by freezing wages and debt, not by reforming its economy

Spain did not go bankrupt in 2012 because Europe refused to let it. It went bankrupt de facto in 2008, when European interbank credit dried up after years of financing the residential bubble that began in 2002. What came next was not a rescue under a flag, but a three-way operation: the ECB intervened in the sovereign bond market, the North of the Monetary Union de facto guaranteed Spanish debt, and a banking rescue was arranged for the former public savings banks. In return, Spain committed to financing itself with current revenues and not spending a single euro more than it takes in. The adjustment was carried out. And that is where the problem begins.

The three ways out, and the one the elite chose

There were three paths. The first, classic monetary devaluation, was ruled out: without sovereignty over the currency, devaluation is impossible. The second, internal devaluation —cutting real wages to gain external competitiveness— was the most damaging in the long run. The third, rebuilding the institutional architecture to raise productivity, was the hardest at first and the only one that guaranteed future income.

The second was chosen. Since 2012 the Spanish economy has lived on current revenues, with a positive current account and balance of payments, but at the cost of a sustained loss of purchasing power and a business fabric increasingly geared to the low end of the market. The private sector did its homework —bankruptcies, layoffs, credit shutdowns— while the public sector kept financing itself with debt. Net external debt fell from nearly 100% of GDP to 60%, but that money did not return to the economy: it went to amortizing liabilities frozen at low interest rates.

Tourism, carmaking and productivity that never takes off

The model rests on two pillars. The automotive sector endures amid uncertainty, and tourism pulls the cart with abundant employment and low productivity. The extra revenue comes from there, not from high value-added sectors. The result is a country that competes on costs, not on innovation, and that drags along a productivity stagnation that does not date from 2012: it goes back much further.

Some argue that the problem is not internal devaluation itself, but the ruling class that perpetuates it. They point out that the structure of closed electoral lists and clientelism prevent new, better-adapted elites from replacing the current ones. The result: an extractive circle that protects its status and blocks any reform that threatens its position.

AI as a mirror of backwardness

Artificial intelligence may be the technological paradigm that definitively separates countries that bet on knowledge from those that keep competing on low wages. With a business class used to cheap, poorly trained labor, and a closed-minded state, Spain has every incentive to end up on the wrong side of history. The few well-trained professionals emigrate. Those who stay adapt to a market that does not reward qualifications.

The jarring statistic: several small-population countries already surpass Spain in per capita income at purchasing power parity. When Poland does so, it will be the definitive sign that internal devaluation achieved its initial goal —saving those responsible for the bankruptcy— at the cost of killing the country's future.

The adjustment that never reached the public sector

While the private sector deleveraged through closures and layoffs, public debt kept growing. Local governments are the exception; the rest live on issuing debt to survive. The comparison between the two adjustments is the clearest picture of the model: those who cannot print, adjust; those who can, wait.

The question hanging over the whole analysis is not whether Spain can pay its net external debt within the Monetary Union —it is not a critical problem as long as it stays in— but how much longer it can sustain an internal devaluation that drives out talent and degrades the productive fabric. The most reasonable prediction, with reservations: the adjustment will keep working as long as Europe does not tighten the screws, and the bill will be paid by those not yet born.