Cry, The Beloved Country, or How I Spent My Weekend
There is now solid evidence that three out of four members of a band of brothers known as the “Peugeot Crew” engaged in graft, influence-peddling and other forms of corruption during Pedro Sánchez’spremiership.
These three amigos helped Sánchez get elected as leader of the Spanish Socialist Party for the second time in 2017, as it turns out with the help of some ballot stuffing. Some people including Sánchez’ many admirers outside of Spain, may have been surprised by the findings of the Guardia Civil special unit’s investigation of José Luis Abalos, Santos Cerdán, Koldo García Izaguirre and their accomplice, Victor de Aldama, a deal broker. It turns out that Abalos, a former Transport Minister, and Cerdán, co-chair of the Socialist Party, two of President Sanchez’s closest political allies, had been running a racket to extract payments in exchange for favours.
The “Peugeot Crew” is a great metaphor of contemporary Spanish politics. Four mediocre people devoid of any experience in business or academia, but full of political ambition, tour the country in a midsize sedan in a campaign to recruit militants for Sánchez’s party leadership bid. Their leader has no principles or political agenda, just an insatiable appetite for power. As we are now beginning to see, he shares one goal with many of his political allies in the current government: they all want to stay out of prison.
A teacher, a bouncer and an electrician walk into bar…
José Luis Ábalos, the son of a bullfighter, has a degree in education and was a primary school teacher for three months before entering politics. His lieutenant, Koldo Garcia Izaguirre, a convicted felon for assault and battery, subsequently pardoned by a PP government, was a nightclub bouncer, bodyguard, and Socialist Party councilman in Huarte (Navarre) before becoming Mr Abalos’ driver and bodyguard in 2018. Mr Santos Cerdán is an electronics technician by trade. Mr Pedro Sanchez is by far the most accomplished of the group. He holds an undergraduate degree in economics without distinction from the obscure Real Colegio Universitario María Cristina and a much-debated PhD in economics from a hitherto little-known for-profit college in Madrid, Universidad Camilo José Cela.
In a televised address, a seemingly contrite and garishly made-up Pedro Sanchez apologised to the Spanish electorate for the wrongdoings of his closest political allies in the Socialist Party. Sánchez optimistically claimed that Mr Santos Cerdán would immediately resign his seat in parliament to stand trial as any citizen would. Perhaps surprisingly, he did, unlike Mr Abalos who hangs on to his seat eighteen months after his affair was uncovered.
What did the president know and when did he know it?
The question that remains unanswered is how much Pedro Sanchez knew and when.
Up until a few days ago, the cabinet was united in the defence of the innocence of the President’s brother and wife, as well as that of the Attorney General and Mr Santos Cerdán. Moreover, several cabinet ministers were openly accusing the judiciary of conducting lawfare against a progressive government. Such is the pressure set on by these investigations that the Government initiated several programs to defang the courts. On July 21st, the Spanish parliament will vote on a bill that will flood the benches with new and apparently more malleable judges, and stuff the public prosecutor’s office with acolytes. The government is also trying to extend the Attorney General’s mandate beyond the current administration and to substitute investigating judges with government-appointed prosecutors.
In more normal times the President would have resigned and maybe even called for a snap election. Not in Madrid. The hodgepodge coalition that supports the government includes two conservative nationalist parties, Junts per Catalunya and the Basque Nationalist Party; the former communists of Sumar; the anarchists of Podemos; the radical left nationalists of ERC and Bildu and a few other loose cannons. None of them would be better off if elections were held. Pedro Sanchez is thus probably right to assume that he will be able to hang on until 2027.
It is also worth noting that it takes two to tango. These corrupt practices only took place because of the willing engagement of several engineering and construction companies. Interestingly, none of their officers or directors appear to be under investigation, for now. It is true that a middle-management executive at one of these companies was asked to resign. However, it remains unclear how this employee had access to €1 million in cash to make the payments without anybody else approving such an outsize cash advance.
Spain will continue to pay a very high price in terms of economic growth and solvency as long as he remains President. The revelations of corruption captured the headlines, however there were other important revelations this week. The Bank of Spain suggested there is too much government debt. This is interesting as the current Chairman, Mr José Luis Escrivá, is partly responsible for this problem.
A gaping hole in the social security net
As Social Security minister he designed a pension reform plan that has not dented the shortfall of revenues to cover outlays. According to a paper by the economics team at one of Spain’s leading insurers, all of the growth in Government debt since 2010, €400 billion, is a result of the Treasury issuing debt to cover this shortfall, which by the way is not counted as Government fiscal deficit. Today, the Treasury covers 30% of pension payments. This is just the beginning as the number of retirees will grow by 56% by 2050. The generous pension programs in Spain will reach 17.1% of GDP vs 13% today, while social security revenues will only reach 13.6%. The future is bleak for young Spaniards.
As discussed previously, the present is not much better. While Spain remains one of the most popular tourist destinations in the world, that industry does not generate much domestic well-being. Cleaning rooms or waitressing do not offer great long-term career prospects.
The evidence for the continuous deterioration of the middle class is best observed in data such as the average age of passenger vehicles, which has climbed continuously from 8.4 years in 2008 to 14.5 years in 2025 as passenger vehicle sales have plummeted from just under 2 million in 2007 to just 949,359 in 2024.
Not enough housing? Let’s restrict the supply.
Meanwhile, a mounting, unnecessary housing crisis deepens. In large cities the median young family cannot afford a house as costs have risen much more quickly than household incomes and mortgage rates remain high. Two employed thirty-something year olds cannot afford to buy a small two-bedroom apartment, let alone a house, when 30-year fixed mortgage rates are hovering around 2.6%.
The housing crisis is often depicted as a supply problem resulting from scarce land, scant bank lending, slow permitting and greedy private equity funds. But the situation has been made far worse by a Sánchez-era rental law that is confiscatory and results in property owners taking units off the market.
No Country for Young Men – Or Women
This is not a country for young people. The economy has never fully recovered from the savings and loans crisis of 2010-2017. The main growth industry is low value-added tourism. Real wages have stagnated for nearly 20 years and most young people face a very sombre future. There are now more deaths than births.
In addition, the home country bias has resulted in further impoverishment in relative terms as domestic investors are overexposed to the local equity market. Even worse, most savers have too much exposure to fixed income, perhaps because their advisors fail to explain to them, they would be better off with equities that have both a higher yield and embedded inflation protection.
As in many other countries, residential property remains the single largest investment for most families. Even that allocation has a weak value base and not just because of the extortionate stamp duty tax of 7%, the previously discussed adversarial rental laws, or frequently shoddy construction and materials. The country’s stock of housing does not generally please the eye either.
It is hard to say what produces more distress when shopping online for homes in Spain. Certainly the prevalence of orange tinted wood-panelled doors and closets, the expansive single-pane aluminium-framed windows, the uncarpeted and blindingly bright varnished laminated wooden pine floorings, the undersize bathrooms with miniature fixtures, the dangerously sharp splatter painted bedrooms walls, the manmade colour schemes on the walls of the living and dining rooms, the ersatz Ikea furniture, the white Formica kitchen cabinets with peeling laminates, the faux granite grey composite countertops, or the white plastic appliances are all the garish symbols of a society still not quite affluent.
However, the real dinger is the general absence of any books. There appears to be a general dislike for displaying books anywhere in these homes for sale. Not even the children’s bedrooms have bookshelves. It would appear that showing books might discourage buyers. This is another sign that even though education gets lip service, there is no real yearning for knowledge or culture, just a need for accreditation.
What is the future for a country that…?
What is the future for a country that has a kleptocratic political class in cahoots with a corrupt business community? A country that has been investing far less in R&D than its trading partners for decades leading to lower productivity growth. A country with a rapidly ageing population? A country where the rule of law is uncertain, universities are mediocre, real wages peaked almost twenty years ago, where massive unfunded public sector liabilities grow under the radar of an irresponsible political class or the scrutiny of an uninformed and carefree citizenry? In sum, how is a sub-8/and-not-quite-5 economy going to compete in a 24/7 global marketplace?
Would anything change should Mr Sanchez calls a snap election? We have serious doubts because we do not see any more realism or desire for profound structural reforms in the opposition.
However, the optimists will point out that the economy is humming along very nicely. This is true recently as it is easier to grow from the low base created by the 2020 economic depression. But growth in Spain is unfortunately not very high quality. It consists of a combination of debt financed government spending and population growth coming from the immigration of hundreds of thousands of unskilled and under-educated workers, which has the effect of lowering the average household income while increasing the burden of Government debt per capita.
This growth model needs to be revised and overhauled or Spain will get stuck in this upper middle-income trap for generations.