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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 that sought to defend the recent IMF proposal to for a social compact involving a 10% reduction in Spanish wages and salaries, 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.

One Response to “In Spain, Simply Doing Nothing Is Not An Option!”

SOUTHSPANIARDSeptember 11th, 2013 at 7:44 am

Oh, my, here we go again!. Sheer lunacy from IMF (given their self-admitted lack of success with predictions on austerity) or from the likes of Oli Rehn (with their lack of moral compass) is almost expected. But anyone living in Spain like Hugh can see with its own eyes the rows of empty shops and stands the lack of internal demand is creating, so asking for a further decrease in wages requires either a particular kind of blindness or a very defined political agenda. Given the editorial line of Ara I'd bet for the last, but I'm not going to feed the secesionist trolls, so we'll stick to economic arguments.

1) Wages have already fallen throughout the country (including 25% off for public servants, of whom there are already 250.000 – 300.000 less). But prices still continue steadily increasing, with IPC firm in the 1-2% range, and most of this increase comes from energy prices. Costs of electric power in Spain are right now the highest in the continental Europe, and we have the more expensive (before taxes) automotion fuel in Europe. Not only that hurts competitivity big way, but also makes further lowering wages impossible: typical monthly electric bill is around 40-50 Euro; try to fit that within a 600 Euro wage. But electric and fuel companies (supposedly) were frequent "anonymous" donors of (supposedly) illegally large amounts to the Partido Popular. Anyone really hopes that the Government is going to discipline their (supposedly) former benefitors and keep a tight rein on energy prices?.

2) With unfortunately few exceptions the spanish job providers are a greedy, clueless lot whose only concern is making a fast buck, the devil takes long-term prospects for companies. To this lot of philantropists the Government has provided with a huge stick, in form of a labor reform which gives almost life-or-death power to the companies, while taking out almost all bargaining power from unions (which were particularly inefficient to start with). The outcome is that, instead of creating jobs, the companies are just imposing wage decreases and more hours to employees to increase benefit margins or to deleverage. Even more: recently Rosell, the employers' boss, claimed for a further reform so that full-time contracts can be turned into part-time contracts. The reason?. The new labor reform makes so easy to force employees to accept extra-hours, and so difficult to check that they really are paid for (as sheer fear of losing the job is a very powerful incentive to keep the employee's mouths shut), that some of the worst employers are dreaming on making mini-jobs on their own.

3) Finally, the sentence on the workers aged 50+, invoking images of overprotected old moochers goofing in their jobs, is completely out of target (and malicious). The real meaning of that statistic is that the spanish employers are overusing the part-time and temporary contracts, so essentially we're running out of middle-age people with indefinite contracts who had been employed long enough in the same company to reach a decent wage. Which not only tells a lot on what future waits to the spanish worker at retirement time, but also (combined with the layoff of older workers made easier by the labor reform) tells why hard-won experience is being lost fast in Spanish companies, so that it's getting harder and harder to find anyone making things correctly. Compare this with the german practice of using the kurzarbeit for keeping the experienced, already formed manpower within the company and you'll start understanding why Spain will never be a exporting workhorse like Germany, as Rehn and others would like to believe.

So, invoking the confidence fairy through an additional 10% off wages not only does not work, but is an almost sadistic proposal in today's Spain.

And, finally, anyone who has read Krugman's blog knows how much he is AGAINST a kind of internal devaluation like this, which inflicts needless pain to the worker masses, while leaves untouched the creditors, which should be suffering haircuts proportional to their reckless in lending.