dimarts, 8 de setembre de 2015

The euro and the Spanish Economy: some current problems

In one of my recent posts I pointed out that:
"The causes of the crisis have been neither the public sector deficit nor the failure to implement "structural reforms" ... (contrarily) 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."

Furthermore, and "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."

So, one of the main challenges for the Spanish economy to be able to have a solid, strong and powerful recovery was "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.".

Now we will analyze more concretely these problems.

It can be observed that, during the period of expansion that began in the Spanish economy from the mid 80s of last century, there has been growth rates -in annual cumulated average growth rate- higher before (1986-1998) than after the implementation of the euro (1999-2007).

Moreover, after the implementation of the euro 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.

Moreover, the use of the installed industrial capacity is systematically lower in Spain and Italy than in France and Germany as well as in the EU and the euro area.

Finally, the evolution of competitiveness (measured by the Real Effective Exchange Rate) in Spain has been negative, in absolute terms and more than the euro area in relative terms, in 1994-98 and in 1999-2007 while in both periods in Germany it was positive. From the onset of the crisis the competitiveness has improved but more in Germany and especially in the euro area than in Spain.

The Real Effective Exchange Rate (REER) calculated by the Bank of International Settlements (BIS), which are internationally accepted measures of international competitiveness, are compiled by adjusting the nominal exchange rates (nominal parity among currencies) by the relative inflation rates and other production costs.

Then, if the real effective exchange rate rises for a nation it signals a loss in its international competitiveness. Conversely, if the real effective exchange rate falls it signals a gain in its international competitiveness.

Cap comentari:

Publica un comentari a l'entrada