This post is based in two speeches made in Pescara and
Warsaw recently.
1.-
Introduction
In this presentation I will try first, to emphasize some of the structural
characteristics of the Spanish economy.
Second, to discuss if the crisis in the
Spanish economy is already finished or not, and if it has
already overcome the historical problems which have limited its healthy and
sound growth.
From 1960 the Spanish GDP per capita has quadrupled and has converged to
the average of the euro zone although with cyclical swings:
-.
converging from 1960 to 1975
thanks to the important relative increase of labour productivity;
-.
diverging from 1975 to 1985,
notwithstanding the relative increase of labour productivity, because of the significant loss of jobs
produced by the crisis of these years;
-.
converging again from 1985 to 2007
explained basically, and mainly from 1994, for the important increase of jobs; in the meantime the relative
productivity of labour decreased;
-.
and diverging again from 2007
with the current crisis due to the
historical loss of jobs; at the same time, and thanks to the increase of
the unemployed, the labour productivity has increased.
Then, the Spanish economy does not seem to be able
to have at the same time an increase in the labour productivity and an increase
in the creation of jobs which would lead to a more significant growth of
the GDP per capita. Contrarily, it
seems to have some correlation among the unemployment rate and the labour productivity
for the whole period which seems especially intense in the periods of crisis.
2.- The onset
of the Spanish economic crisis
Since 2008 the Spanish economy has suffered the effects of a major crisis,
with a sharp drop in its GDP and per
capita GDP, against a backdrop of significant economic imbalances and severe structural problems.
In fact, Spain’s real per capita GDP has fallen 8.1%
between 2007 and 2014, which is more than the euro zone mean, and much
more than in France and Germany.
In 2007, Spain’s unemployment rate was more or
less at the level of that of other countries (8.2%), but in the crisis years it shot up dramatically
so that by 2014 it stood at 24.3%, more than twice the rate of the rest of
countries where it also increased slightly.
It has been estimated
that probably it will take the Spanish
economy more or less 25 years to get its unemployment rate back to pre-crisis
levels.
There can be no doubt
that the Spanish economy is
experiencing its deepest crisis since the 1936-39 civil war.
A crisis that given
its intensity and duration can be
compared to the impact in Spain of the Great Depression of the 1930s. GDP
per capita fell at the outbreak of the
civil war, but it recovered much faster if we take into account that in
the fifth year of the period it was higher than it had been in the initial
year. In the 1929 crisis and in
the current crisis, after seven years, the per capita GDP remained below the
initial level. The current crisis
therefore is characterised by its great intensity and duration, with an overall
fall in per capita GDP of between 7 and 8% seven years after its onset.
This has had a great impact on the rise in unemployment, the increase in
poverty and the threat of the general deterioration and the collapse of public
finances.
In the last three
years of economic expansion the Spanish economy presented a public sector
surplus; however, with the appearance
of the crisis the public deficit grew rapidly peaking at 11% in 2009.
Thereafter, the deficit remained high,
finishing 2014 at 5.6% of GDP, well above the limit fixed by the European
Fiscal Stability Treaty or the "fiscal compact". Moreover,
the Spanish deficit remained much higher than that of the other larger countries
of the euro zone.
As a result, Spain’s public debt as a % of GDP,
which was at a very low level in 2007, has
increased much more rapidly than in any other country considered. In
2014 Spain’s public debt stood at more than 98% of GDP.
Private debt, on the other hand, has increased
significantly and rapidly since 1999 reaching a maximum of 231% of GDP in 2010.
Therefore, Spanish private debt is more
than twice that of public debt. In comparison private debt in relation
to GDP is more than 74% higher than the mean for the euro area and 92% higher
than that in Germany.
Beyond doubt, the Spanish economy’s private debt has been
one of the main causes of the crisis and remains one of the most important
problems to be faced. As happened before 2008, one of the main symptoms
of a looming crisis is rapid growth in private debt. These were exactly the
circumstances that the Spanish economy, like many others, faced before the
Great Crisis of 2008.
The causes of the
crisis have been neither the public sector deficit nor the failure to implement
"structural reforms" as it has been noted many times by the professor
Alberto Bagnai. No less a figure than the vice president of the European
Central Bank (Constâncio) has recognized that both: rising private debt levels and the lack of prudence and efficiency on the
part of the creditors that caused this situation are at the root of the crisis
in Europe.
In such circumstances,
policies of "internal
devaluation" offer no solution but rather create a vicious circle of
increasing austerity. Yet, believing
that the solution to the crisis faced by the countries of Europe is simply a
matter of revoking the austerity measures and promoting expansionary policies
is just a dream.
The existence of the euro – which means
countries have neither their own currency nor the instruments needed for
implementing their own sovereign economic policy – make this impossible.
In fact, an expansionary policy in the peripheral
countries, in a situation of fixed exchange rates (because of the
existence of the euro), would result in increasing problems of current account imbalances.
Bearing in mind that
the current crisis is not a public debt crisis but one of external private
debt, it seems logical that the
priority of the economic policy should strive for equilibrium in the balance of
payments (the so-called "External Compact") rather than equilibrium in the public sector
balances (which is what the "Fiscal Compact" has tried to do,
without much success). In fact, the proposal that international trade ought to
be balanced, besides being logical, is not new: it was proposed by Keynes at
Bretton Woods and it is also what Meade later proposed to ensure that economic
integration might work.
3.- Is Spain
Heading for a recovery?
Some “green sprouts” seem to grow in the Spanish economy.
Since the third
quarter of 2013 the Spanish economy has not been in recession. Spain’s GDP is growing, very slightly,
but there is growth. Even the forecasts
from the IMF seem to indicate that the Spanish economy has been growing
by 1.4% in 2014, a rate that is higher than the mean for the euro zone and
similar to the mean for the EU as a whole. And it is forecast a higher growth
in 2015 and 2016.
The number of unemployed and the unemployment
rate have started to fall. However,
unemployment stands at more than 5 million people and the unemployment rate at more
than 22%.
Other “green sprouts”
are a small and very recent recovery in
the situation of :
-.
the companies (investment
demand, industrial production, turnover of the companies)
-.
the demand of consumers (consumer
credit, purchase of housing , purchase of automobiles, retail consume).
Undoubtedly, some external shocks are helping to what it
seems an economic recovery, and particularly:
-.
The decrease in the price of the barrel of petrol.
-.
The depreciation of the euro in front of the dollar.
-.
The OMT first and the QE after from the ECB.
At the same time, at the internal level, the austerity
policies implemented, especially from 2010, -in addition to the negative
consequences that they have produced- they have also created some conditions
which probably have helped to this little recovery.
An important part of
this recovery of the Spanish economy has been achieved thanks
to the austerity policies, to the “internal devaluation", to the labour
market "reform", which has succeeded in moderating wages.
There is little doubt that there has
been a very severe "reform" of the labour market, which has meant
cuts in wages, a significant reduction in unit labour costs for companies, a
reduction in firing costs and a decrease in unemployment benefits, together
with greater flexibility for companies in all collective bargaining procedures.
Consequently, during
the crisis period, wages in
Spain have been the lowest of
the major countries of the euro zone and they have also shown the most moderate growth since 2009. As
for nominal unit labour costs,
these grew significantly throughout Europe until 2009 and since then they have
continued to grow, albeit moderately. The differentiating factor is that since 2009 they have fallen markedly in Spain
and as of 2014 the costs are one of the lowest of all the countries (with the
exception of Germany).A fact
that, given the moderate wage growth since 2009, can be explained mainly by the
evolution of labour productivity which has risen sharply in Spain since the
onset of the crisis. This large relative growth in Spain’s labour
productivity can be explained mainly by
the large loss of jobs and the consequent increase in the number of unemployed
since the beginning of the crisis.
At the same time, the OECD indicators of employment protection
legislation in the Spanish economy have fallen. Since 1995,
the gradual liberalization of the Spanish labour market has placed it on a par
in terms of flexibility with the average for the OECD countries and at a much
higher level of flexibility –for the regular contracts- than that prevailing in
the larger countries of the euro zone.
As Paul De Grauwe has pointed out, the internal devaluation (and
especially “wage devaluation”) in the peripheral countries of the
euro zone, and in Spain in particular,
has been very intense. Moreover, a comparison with the countries at the
core shows that the burden of the
adjustments to improve the imbalances in the euro zone between creditor and
debtor states has been highly asymmetric, with the peripheral countries being
the ones that have had to suffer almost exclusively these adjustments,
as has happened in other fixed exchange rate regimes, including that of Bretton
Woods and the European Monetary System. Some
believed that the European Monetary Union and the euro would change this
behaviour, but it has not worked out like that: the adjustment process has been
as asymmetric as in the other fixed exchange rate regimes.
Theoretically, the other element characterising the austerity policies
has been the cuts in public spending designed to facilitate fiscal
consolidation, with the consequent reduction in
public deficit and public debt to the levels established by the Fiscal
Stability Treaty.
There is no doubt that many public services
have had to accept major cuts; however,
public deficit has withstood these attempts at reduction and the public debt to
GDP ratio has increased constantly. And from the onset of the economic
crisis, Spain has not fulfilled by a long way the criteria established in the
"fiscal compact", to the surprising
condescension of the European Union.
It seems particularly
clear that, besides the labour market reform, an important element in accounting for the recent moderate growth in GDP
and the slight fall in the number of unemployed, is the sizeable public deficit
that has maintained the Spanish economy in recent years. Contrary to the official line, in recent
years Spain has implemented a relatively expansionary fiscal policy, which has
given some support to the domestic demand or that, at least, has prevented it
from falling further. The
deficit of the Spanish economy has, since 2008, been much higher than
the mean of the EU and the euro zone. At the same time, and because of the high
public deficit, the public debt to GDP
ratio has also increased very significantly and continuously, and today
it has almost reached 100% of GDP.
In fact, the Spanish
economy experienced a moment of crisis very dangerous, especially between 2011
and 2012, which coincided with a big rise in unemployment, a sovereign debt
crisis with very high risk premiums on the public debt and the beginning of a
profound crisis of the banking system.
The danger that the
Spanish economy could get to the bankruptcy and to the need of a bailout as the
Greek economy came to be very close, with a very important difference: the
Spanish economy is much larger than Greece, and therefore, the consequences of such
a situation could have on the whole euro zone and the euro itself would have
been much more severe.
And in this context,
it is probably legitimate to ask to what extent the European Commission (and
the troika as a whole) did not allow that Spain maintained also a very
important deficit to make a relatively expansionary fiscal policy, to prevent
it from becoming a new Greece much more dangerous to the euro and by all euro
area countries.
As Paul de Grauwe has noted, although the
interest rate on Spanish government bonds has fallen, this does not mean that
they have made the situation sustainable. Spain will face grave difficulties in turning
its public debt around and will be obliged to introduce even stricter austerity
policies. This in turn will further reduce the nominal rate of GDP
growth plunging the country into a
vicious circle that will be extremely difficult to break.
As for the current account balance, in Spain the deficit became larger and
larger in the period of economic growth (based on the housing and financial
bubbles), due to high import growth (which increased at a faster rate than
GDP). This growth in imports and
increasing private sector indebtedness were financed primarily with funds from
abroad, and Spain recorded a historic current account deficit of almost -10% of
its GDP in 2007.
With the onset of the crisis, and with it
the application of a policy of "internal
devaluation" Spain began to
cut its imports significantly together with some reduction in private sector
borrowing abroad. Consequently, the current account balance,
albeit still negative, gradually recovered until 2013 when it became a
surplus. However, the first signs of a
possible recovery have once again caused imports to rise and in 2014 the
current account balance was back in deficit.
Based on these figures, the Spanish government, along with the European
Commission and the IMF, have begun to speak of the great success story of the
Spanish economy and of the effective policies they have promoted and
implemented: they see this as evidence that
competitiveness can be restored within the euro zone, and that it can start to
grow again, based above all on increased exports, implementing policies of
"internal devaluation" and fiscal consolidation. Furthermore, the Spanish economy is being held up as an
example, as a model, of what other economies, particularly Italy and France,
should do if they want a return to prosperity. Spain has become
"the good boy" of the euro zone.
From a critical perspective, it is claimed that this is a mercantilist
("beggar-thy-neighbour") strategy,
like the one implemented by Germany some years ago, and that it is not possible to apply it simultaneously
in all European countries or throughout the euro zone, because there will
always be winners and losers.
BUT, in the
Spanish economy
There is “a
dark side of the moon” related to:
-. The great
unemployment and the structural problems in the labour market.
-. The retards
in the relative provision of technological capital and in the R&D
expenditures.
-. The retards
in the relative provision of human capital.
-. The problems
that represents the existence of the euro and concretely the loss of importance
of industry and manufacturing in a context of lower growth and loss of
competitiveness.
The unemployment rate
in Spain is the second highest in the
EU and the euro zone after Greece. It is more than twice -in the 2014, in the period of crisis and in the
previous expansion- both in these areas as in the larger countries in the euro
zone.
Moreover, it seems that the pace of GDP growth
predicted cannot achieve to reduce it in a really significant amount.
Youth unemployment represents also another important issue,
which in 2014 has a rate of over 50% and the average rate for the period crisis
(2008-14) is approaching 45%.
On the other hand, it seems apparently a contradiction that,
with an unemployment rate so high, the
long-term unemployment in the Spanish economy is in the average of the euro
area and below Italy. Moreover, despite an average unemployment rate at
least twice as large, the average rate
of long-term unemployment in the crisis period is the lowest of all countries
and groups of countries considered.
However, the explanation of this phenomenon is a temporary
employment rate much higher in Spain than in the other countries and,
therefore, an upper rotation and
volatility of the employees hired.
Moreover, the Spanish economy is a clear example of that the creation of
employment (even a lot of employment) is not necessarily a synonymous with the
decline in unemployment. Thus, between 1994 and
2013 in Spain the employment increased by more than 40% but the unemployment
did it by more than 75%. In contrast, in Germany, Italy and France, the
employment in the same period grew much less but the unemployment also rose
much less or it decreased in the case of Germany.
In the case of Spain this is related to
the great wave of immigration
that arrived in the country during the expansion period but also, and mainly, on
the type of productive specialization of the country, based on
construction, tourism of masses, cheap services related to tourism and
construction -that is, on unproductive sectors and little advanced
technologically sectors-, and on the contrary it is not based on the most
productive sectors and the most technologically advanced sectors in the
industry and services.
So it is already clear
the major problem that represents the
unemployment, which has an important
structural component. This structural unemployment, so high and
persistent in absolute and relative terms, seems related to:
·
First, the type of
specialization of the productive system of the country which is too much
focused on sectors relatively unproductive and not technologically advanced.
·
Second, second, an
education system unable to respond adequately to the needs of businesses as it
has led to an excess of people who only have primary education (and with a
major school failure) and to a lack of people with secondary education,
specially on job training.
·
Third, a significant
delay in the technology system and the innovation system of the country
compared to the average of the euro area.
Then, one of the main structural problems of the Spanish economy is its
technological retard, both with respect to the
European Union and the major countries of the euro area and also as compared to
the OECD:
-.
The technological capital in
relation to GDP is almost 30% below the euro area average.
-.
The R & D expenditure of the
Spanish economy are 40% below the average for the euro area and decreased
clearly from the crisis. They are currently well below the EU average, the Euro
zone average and the OECD average.
-.
But the situation is even worse in R
& D expenditures by companies, the private sector, because the
Spanish R & D expenditure is done mainly by the public sector.
-.
The same deficiency occurs when considering the number of researchers in % of the labour force.
Another important structural backwardness
of the Spanish economy occurs in the
provision of human capital endowments, because:
-.
Human capital in relation to the working age population is 5% below the euro
area average and its relative improvement is stagnant since 2005.
-.
Meanwhile public expenditure on education relative to the working age
population is even worse: a 22% below the euro area average and prone to
decrease since 2009.
During the period of expansion that began in
the mid 80s of last century, there has been growth rates higher before (1986-1999) than after the
implementation of the euro (2000-2007). Moreover, there is a loss of weight of both the
industrial production and the manufacturing production in France, Italy and
Spain, and contrarily it has increased in Germany, especially after the
outbreak of the crisis. Finally, the evolution of competitiveness (measured by
the Real Effective Exchange Rate) has been negative, in absolute and relative
terms, in relation to the euro zone, from 1999.
Eventually, to sum up,
in this context the recovery of the
Spanish economy does not seem to have a very solid base. The permanence of the structural problems of
the economy (high structural unemployment; mismatch in the labour
market; backwardness in the technological capital and the human capital adversely
affecting productivity; the important problems of growth and competitiveness posed
by the existence of the euro) as well
as the fact that there has been no change in the predominant type of
sectors in the economy, it does not
permit much optimism regarding the possibility of achieving a strong and
powerful economic growth without the problems and the limitations of the past.
