Spain has the means to avoid the fate of Greece
Saturday, 20 March 2010
Luis Garicano
After six quarters of negative growth and unemployment rates inching towards 20 per cent, perhaps the most surprising feature of the situation in Spain is the inaction of the government and central bank. The government initially misdiagnosed the crisis as a temporary drop in demand that could be remedied with short-term, stopgap measures, and has accepted only recently the need for structural economic reforms. The Bank of Spain, after being praised for sound banking regulation that impeded the accumulation of "toxic assets", is dithering about the restructuring of the financial system. Credit to all sectors is plummeting, with the perverse exception of the moribund property sector.
Yet Spain does not need to be the next Greece. Public debt is still low. Foreign investors have no immediate cause for concern, as the country can easily meet its obligations over the next few years. But the social fabric cannot long withstand this inaction.
The diagnosis is now generally agreed. Yes, the crisis was global, but Spain was particularly exposed. Over the last decade, the country experienced no productivity growth, but gross domestic product (GDP) per capita grew, and fast, owing mainly to increases in the working population as a percentage of the total population and to unemployment reductions. Then the property bubble burst, destroying in its wake a large portion of families' highly leveraged wealth. Apparently solid public finances were revealed as no more than an illusion.
What needs to happen now falls into three categories. First, the financial system must be restructured. As well as world-class banks such as BBVA and Santander, Spain has a large number of smaller, undercapitalized cajas that are unquoted and often controlled by regional political bosses. Many are heavily exposed to the euro325bn ($442bn, £296bn) stock of dubious loans to property developers now on Spanish banks' books. To compound the problem, freewheeling book-keeping is going unchecked.
Second, the government accounts must move towards sustainability. The government needs to raise euro200bn in gross debt this year, including euro100bn in net new debt to pay for the 2010 deficit. A key upside risk here is the pending restructuring of the financial system, which, if it costs the full euro100bn, will push the debt-to-GDP ratio towards 80 per cent. In recent months, the government has announced and then shelved or equivocated over measures such as a freeze in civil service wages and tax increases.
Third, structural reforms, particularly in the labour market, are needed to lift productivity. The "dual" labour market (extremely protected insiders, completely flexible temporary jobs) has limited the scope for youngsters to get a job with a future; plentiful opportunities in tourism and construction, meanwhile, have encouraged teenagers to leave school in droves.
The government and the Bank of Spain need to face up to the gravity of the situation. Fiscal consolidation and structural reform are the main tasks for the former while the latter must dramatically increase the transparency of the financial system and jump-start its restructuring. Such reforms could unleash the potential of the country. The alternative is years of anaemic growth and persistently high unemployment.
The writer is professor of economics and strategy at the London School oJ Economics. FT Syndication Service
After six quarters of negative growth and unemployment rates inching towards 20 per cent, perhaps the most surprising feature of the situation in Spain is the inaction of the government and central bank. The government initially misdiagnosed the crisis as a temporary drop in demand that could be remedied with short-term, stopgap measures, and has accepted only recently the need for structural economic reforms. The Bank of Spain, after being praised for sound banking regulation that impeded the accumulation of "toxic assets", is dithering about the restructuring of the financial system. Credit to all sectors is plummeting, with the perverse exception of the moribund property sector.
Yet Spain does not need to be the next Greece. Public debt is still low. Foreign investors have no immediate cause for concern, as the country can easily meet its obligations over the next few years. But the social fabric cannot long withstand this inaction.
The diagnosis is now generally agreed. Yes, the crisis was global, but Spain was particularly exposed. Over the last decade, the country experienced no productivity growth, but gross domestic product (GDP) per capita grew, and fast, owing mainly to increases in the working population as a percentage of the total population and to unemployment reductions. Then the property bubble burst, destroying in its wake a large portion of families' highly leveraged wealth. Apparently solid public finances were revealed as no more than an illusion.
What needs to happen now falls into three categories. First, the financial system must be restructured. As well as world-class banks such as BBVA and Santander, Spain has a large number of smaller, undercapitalized cajas that are unquoted and often controlled by regional political bosses. Many are heavily exposed to the euro325bn ($442bn, £296bn) stock of dubious loans to property developers now on Spanish banks' books. To compound the problem, freewheeling book-keeping is going unchecked.
Second, the government accounts must move towards sustainability. The government needs to raise euro200bn in gross debt this year, including euro100bn in net new debt to pay for the 2010 deficit. A key upside risk here is the pending restructuring of the financial system, which, if it costs the full euro100bn, will push the debt-to-GDP ratio towards 80 per cent. In recent months, the government has announced and then shelved or equivocated over measures such as a freeze in civil service wages and tax increases.
Third, structural reforms, particularly in the labour market, are needed to lift productivity. The "dual" labour market (extremely protected insiders, completely flexible temporary jobs) has limited the scope for youngsters to get a job with a future; plentiful opportunities in tourism and construction, meanwhile, have encouraged teenagers to leave school in droves.
The government and the Bank of Spain need to face up to the gravity of the situation. Fiscal consolidation and structural reform are the main tasks for the former while the latter must dramatically increase the transparency of the financial system and jump-start its restructuring. Such reforms could unleash the potential of the country. The alternative is years of anaemic growth and persistently high unemployment.
The writer is professor of economics and strategy at the London School oJ Economics. FT Syndication Service