In Spain Simply Doing Nothing Is Not An Option!

The recent IMF proposals to help stimulate growth and job creation in Spain at least deserve serious consideration.

In a blog post which sought to defend the recent IMF proposal to for a social compact involving a 10% reduction in Spanish wages and salaries, the EU Economy and Finance Commissioner Olli Rehn cited a line from Bob Dylan – “Something is happening here, but you don’t know what it is”.

He was talking about the evident uncertainty surrounding the kind of economic recovery Spain might be having. But the line could equally be applied to the across-the-board response of Spanish society to those very Fund proposals he was defending. From employers to unions to government and opposition the country has spoken with one voice, “something is going on here and we don’t want to know what it is”.

I say “don’t want to” since most of the comments appearing in the Spanish press have had little to do with the arguments that are being advanced or even with trying to understand them. Some journalists simply focused their attention on the salaries received by the Fund’s own economists (which recently went up).

Others argue, citing the example of the Brazilian representative who refused to sign-off on the latest payment to Greece, that the institution is not democratic, since the emerging countries are not adequately represented. Little does it matter that what these countries are in fact complaining about is too much European influence on Fund policy and too much simplistic optimism. The prize for irrelevance though must surely go to the La Razon writer who thought it worth dedicating a whole article to the fact that German wages have risen 20% more than Spanish ones during the crisis.

What this latter point has to do with anything I’m not sure, but all these arguments do share one feature, they fail to take notice of the fact that Spain is in deep crisis. They ignore the fact that unemployment, and especially youth unemployment, is unacceptably high, that the country’s future is leaving by the day on planes, boats and trains, that the economic growth outlook is pathetically weak, and that, en fin, something most definitely needs to be done.

As Spain IMF Mission Head James Daniel puts it, “we see a recovery, but only a weak one”.

What the IMF are saying is that if you leave the situation as it is then growth will not be sufficient to make any significant change in the unemployment rate. Thus they estimate that on the basis of present policies the rate will still be 25% in 2018.

In addition they draw attention to the way the impact of the crisis has been so unfairly distributed, with those aged under 30, who surely have little responsibility for what actually happened, being asked to carry the biggest part of the burden. Given this, is it really so surprising that many of them are now leaving to seek a brighter future elsewhere? Still being unemployed in 2025 is hardly an enticing prospect!

Much has been done to protect those members of our society who, like me, are over 60, but we need to remember that it isn’t the increase in life expectancy that represents a threat to future pensions, the real threat is not having enough young people left around to pay them!

To avoid this catastrophe, as James Daniel says, “Growth needs to be stronger and needs to become more job rich”. This, he argues, is something that requires action in many areas, among which he includes “increasing wage flexibility so that growth produces more jobs” and creates “a more even playing field between those with permanent jobs and those with temporary jobs”. Does any of this ring any bells?

By chance this week I spoke with a journalist from Estonia, a country whose recent progress many in Spain would like to identify with. What he explained to me was that in his country the highest average wages go to those in the 30 to 35 age group, while in Spain the top paid workers are aged between 50 and 59. This situation doesn’t make any economic sense whatever and something is seriously wrong here if we want a country which is open to initiative, creativity, entrepreneurship and imagination.

The Fund’s proposal is effectively for a new set of “Pactos de la  Moncloa”, a series of agreements between all parties and social agents arrived at during the transition from dictatorship to democracy in the 1970s, to agree not only wage reductions, but for employers at the same time to make employment commitments while measures are also agreed which could bring down prices.

This is the so called “internal devaluation” that macroeconomists like Paul Krugman, Dani Rodrik and myself have been advocating for some 6 years now. It isn’t a perfect plan, having the Euro doesn’t make things easy, but it is a damn sight better than doing nothing and watching and waiting while things get worse. Certainly it is a proposal worth studying and discussing and not simply dismissing out of hand.

The above is an adapted version of an article that originally appeared in the Catalan newspaper Ara.

This entry was posted in A Fistful Of Euros, Economics, Economics: Country briefings by Edward Hugh. Bookmark the permalink.

About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

6 thoughts on “In Spain Simply Doing Nothing Is Not An Option!

  1. Spain is toast. The whole Latin part of the eurozone needs an external devaluation: period. The longer European leaders wait, the higher the price. It’s that simple. The party is over. The Spanish boom was nothing more than a short trip to the cocaine party. The eurozone is in need of an exit strategy for these countries reflecting a damaging limitation act for all involved. Wake up.
    http://www.economie-macht-maatschappij.com/eurozone-spanje.html

  2. Pingback: Eurosphere roundup: Norway’s centre-right wins election…EU unfreezes regional aid funding for Hungary… | Erkan's Field Diary

  3. Let me see if I understand. You are advocating a 10% reduction of all wages, coupled with an increase of employment to put Spain out of its depression.

    A quick back of the envelope calculation shows that in order to maintain overall income (average wage times employed population W*N), decreasing W by 10% requires increasing total employment N by 11.11%. The latter must take place immediately, otherwise depression will be even greater because of the net macroeconomic reduction in the global income of the Spanish population. And even after such a feat, unemployment would remain at a massive 18.11% (down from 26.3%), i.e. still higher than in any other EU country except for Greece and Spain.

    A more realistic unfolding of your proposal is (1) wages are reduced 10% (2) employment does not increase as fast (3) facing unemployment _and_ decreased wages, “country’s future continues leaving by the day on planes, boats and trains”.

    “the highest average wages go to those in the 30 to 35 age group, while in Spain the top paid workers are aged between 50 and 59. This situation doesn’t make any economic sense whatever.”

    Oh yes, it may well make sense. It depends on things like the kind of education different cohorts received, the importance of accumulated lifetime experience on-the-job for the economic activities the country engages in, and the participation rate of demographic groups like women and foreigners (who are lower paid).

  4. Hi aguest,

    “Let me see if I understand. You are advocating a 10% reduction of all wages, coupled with an increase of employment to put Spain out of its depression.”

    No. Not quite. Six years ago I was advocating a 20% reduction in wages AND prices. The so called “internal devaluation”. That did not happen, even though I think a consensus could have been established for the taking of some such serious step.

    It didn’t happen, as in the case of an initial Greek debt restructuring, because the Spanish financial and political elites said it wasn’t necessary. At the time Spain was said to have the strongest banks in the world. Unfortunately, the IMF to some extent swallowed this line, despite the fact that people like me were busy explaining to them that the Spanish view wasn’t at all realistic.

    Now six years later the back fo the country is almost broken, the society is very divided, and it is difficult to get consensus to do anything.

    What I am arguing is that doing nothing is not an option if you don’t want Spain to slide into total economic and social decadence. But really no one with institutional responsibility in Spain wants to talk about or think about this. They claim recovery is happening and that the problems are all over bar the shouting.

    So what I am advocating is that the Catalans should have the right to vote on whether they want to remain within Spain and sink inside the Titanic.

  5. … the EU Economy and Finance Commissioner Olli Rehn cited a line from Bob Dylan – “Something is happening here, but you don’t know what it is”.

    Yeah a lot of us do… it’s Rehn who doesn’t get it.

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