And once again, Spanish people like me will need to go to the polling station, after the hung parliament couldn’t be solved by an agreement between any of the parliamentary groups. This environment is not attractive either for international investment or internal economic growth. It’s true that economic perspectives weren’t the best before all this political turmoil, with an economic deceleration having been rejected by our socialist government throughout the last whole year and a half. Their interventionist policies and announcements of greater tax hikes have deteriorated the Spanish economy up to a point at which confronting a mere possibility of a new recession doesn’t seem even plausible. Any sign of those very necessary structural reforms vanished away when Pedro Sanchez came into power in mid-2017. We are now confronted with the ECB promoting new liquidity injections into the European economy by renewing and restarting their QE program, lowering reserve rates for commercial banking with deposits in the Frankfurtian institution, and overall promoting a shallow environment and eliminating any incentive of fiscal reforms that could have been planned by national governments when last December Draghi announced the end of new liquidity injections. And, on top of it, populisms of both sides of the political spectrum are using this situation to incentivize fear, anger, and an anti-establishment feeling in the population. Spain is not in a comfortable starting position when facing all this nascent political (even though some have been consolidated along the last few years) and economic phenomena. So, which are Spain’s main economic problems, and how could they be solved in a mid-long view?
Spain’s economic problems could be resumed under just five headlines: Debt, deficit, public expenditure, unemployment (structural most of it) and the public pensions system. Let’s start.
The public debt bubble
Spain recently reached its maximum nominal public debt level. The maximum of its History. That’s no joke at all. In relation to GDP debt stands at a level of 98,4%, while the central government’s objective for this year was 95,8%... that was close Pedro! (note my irony). What’s most worrying of all is that outstanding 1.21 trn euros debt (In American numeracy), with our Social Security system accounting for 48.6 bn euros, and our Autonomous regions accounting for almost 25% of the total, with 300 bn of accumulated debt. I have always been a defender of decentralization, and that’s why I’m in favour of reforming it, to make it more efficient, and if possible, even more decentralized. But for the moment, who’s buying all this debt?
A great part of it was bought by the ECB, which since March 2015 has acquired more than 260 bn euros of Spanish sovereign bonds, completely inflating the bond market, and artificially lowering the Spanish risk premium in an adverse economic environment. This leaves the Spanish government a very little margin of manoeuvre and disincentivizes reforms by creating a false image of economic perspectives, which only recently the government discovered and admitted. Since 2012, debt interests’ payment was set as a public policy priority by the Spanish government, but recently it has seemed as if public institutions forgot about it, having abandoned any sing of expenditure contention or fiscal reforms. Irresponsibility has returned to Spanish economic policy, if it ever went away. Reforms to reduce public debt levels down to a normal and acceptable level (60% of GDP according to Maastricht limits), public policy needs to tackle public deficits first of all.
The public deficit nightmare
It hasn’t been so much time since Spain exited the European deficit procedure, due to its previous deficit levels exceeding the 3% limit set by the Maastricht Treaty. We have the greatest structural deficit of the whole eurozone, and a primary deficit over 2% of GDP. For example, in 2018, the overall public deficit reached a level of 2.48%, over the projected goal by the central government of 2.2%. Measured in an aggregate level, Spain has the fourth largest deficit of the European Union, just preceded by Cyprus, Romania and France, all of them countries characterized by economically dirigiste policies. It’s not only free-market supporters or fiscal conservatives the ones claiming for a balanced budget and the end of the never-ending growing public sector bubble (not the end of the public sector, only anarchocapitalists want that..). Well, the European Commission should be ultracapitalist also, no?, as they asked Pedro Sanchez to reduce the Spanish public budget by 7.8 bn euros. It’s not capitalism, it’s just logic and basic mathematics, along with institutional responsibility.
When people ask how to solve these problems without having to cut on education, healthcare or dependency budgets, I always answer in the same way: “By cutting off the bad weed doesn’t mean you have to destroy the whole garden”. And yes, it is completely what could be done with Spanish public expenditure… bad weed should be cut off. The Spanish government gives out more than 14 bn euros in subsidies per year, without any kind of accountable responsibility or measurable results of efficiency or productivity, according to the AIReF. Furthermore, even though in relation to its workforce, Spain is on the average of OECD in terms of public workers, when speaking about wages and public money directed to public employment we are well over the average expenditure on public workers/GDP in relation with the OECD and the EU, spending 8.2% of GDP on public workers’ wages. Of course, that could be contained!
How is Pedro Sánchez playing with our money (Yes Carmen Calvo, public money)?
In Economics, resources are always scarce by definition, but Pedro Sánchez seems to think that public funds are the exception to the rule. Or at least, he portrays that image by the way he acts. In the middle of an economic deceleration, Pedro Sanchez has been the first President to increase public expenditure in Spain since 2012, concretely, rising it by more than 21bn euros in 2018, and leaving it near the 500bn of annual public expenditure registered in Spain, equivalent to a weight of 41% of GDP. It’s crucial to understand how inflated Spanish public accounts are, due mainly to a complete mismanagement of public resources, due to an enormous lack of efficiency and a ridiculously low productivity of capital in the public sector; as was implied in the previous paragraph through the public workers’ wages empirical data. According to statistics from Q1 2019, this year’s total public expenditure will be near 499bn with government income reaching nearly 477bn, which amounts to a public deficit of 30bn at least; taking into account the misperception of public expenditure and overestimation of future tax revenue, as has always been the case.
It’s pretty funny to hear some people speak about the “Spanish austerity”, when in reality, that austerity didn’t exist, at least in the long term. Public expenditure has risen in cumulative terms by 18.5% since 2007, with GDP having grown by just 11% over those same 12 years. So public expenditure has increased by 7.5% more than GDP in a 12 years period. That’s a bizarre type of austerity…
The sempiternal Spanish unemployment dilemma
Unemployment issues in Spain are nothing new. Unemployment has always been on the Spanish economic headlines, due to our inefficient economic structure, which impedes capital reinvestment and the growth of firms, consequently shrinking labour demand. Even though unemployment contracted throughout the last few years, until reaching 14%, the economic situation, and the government’s inactivity has caused it to deteriorate severely, by for example, registering the worst contraction in employment since 2012, in July and August. In July, indefinite hiring fell by 2,33%, whilst last year July registered an increase of 19%, in annualized terms, according to the EPA. This could be due to the Okun’s Law practical application to Spain, which implies that the Spanish labour market is much more sensible to changes in economic growth, in terms of job creation, as could be observed when severe employment contractions coincided with lower growth estimates by relevant institutions as Banco de España, which estimated future growth to be near 2%, instead of the previously projected 2.4% expansion.
This rigid labour market, with very high “structural unemployment” is a clear sign of the need for a deeper liberalizing labour market reform, making labour relations and contracts more flexible, and allowing direct negotiation of work conditions between employers and employees. If the 2012 labour market reform saved 900.000 jobs (according to BBVA Research), a deeper reform could have a much larger positive effect in the long term, while alleviating economic conditions nowadays.
In conclusion, as can be seen by the aforementioned data, Spain, and the whole of Europe are not facing an easy economic situation, mainly due to the lack of structural reforms and political immobilism. Spain should try to differentiate itself by lowering taxes and turning more competitive towards external markets but setting those goals with our actual government in mind, is nothing more than a utopia.