Finding New Solutions to Old Problems? The Spanish Socialists and Financial Reform (1988-1993)

The question of why states engaged in capital-friendly reforms in the 1980s was, until very recently, one that the literature had a clear answer for: they had no choice, given the decline of effectiveness of capital controls and the necessity to attract investment in an open economy. However, a recent strand of literature (e.g. Abdelal, 2007; Krippner, 2011) has begun to question the political choices that kicked off financialisation and the agency that states had in bringing them about. This paper seeks to contribute to this literature by examining the case of Spain, which is of topical relevance for two key reasons. Firstly, Spain experienced a rapid take-off of financialisation in the early 90s, which eventually had dramatic consequences in the aftermath of the 2008 Financial Crisis. Second, the reforms that led to this were enacted by a Socialist government (the Spanish Socialist Workers’ Party, or PSOE), leading to the moral question of what a left-wing government that had won on a platform of full employment and redistribution may have hoped to gain from capital-friendly reforms which have been widely acknowledged to lead to greater inequality (e.g. Alexiou et al., 2021; De Vita & Luo, 2020; Huber et al, 2020). I use Bayesian process tracing (Bennett, 2016; Fairfield & Charman, 2022) to adjudicate between two different hypotheses on why Socialists adopted policies friendly to the financial sector in the late 1980s. The first posits they were looking for new sources of productive investment and tax revenue to pursue redistributive politics, while the second posits that finance provided Socialists with new “privatised” opportunities to compensate for the negative distributive consequences of their orthodox policies. Assessing the evidence presented in newspapers, interviews with key policymakers, party programmes and manifestos and key secondary accounts, I argue that the evidence leans in favour of the second hypothesis: Socialists unleashed a process of financialisation by seeking new finance-based solutions to distributive dilemmas. From 1987 onwards, Socialists increasingly turned to fiscal incentives to promote the rise of investment funds, pension funds and mortgage funds as a way to meet their economic objectives of promoting savings (to counteract the rise of credit, which was creating inflationary pressures) as well as their programmatic promise to expand home ownership. The market for these new highly profitable financial instruments soon came to be dominated by the banks. This paper therefore sheds new light on the moral arguments used by left-wing parties to justify pro-capital reforms, unleashing a process of financialisation that has come to characterise our contemporary political economy.