Spain’s economic crossroads

Diego Sánchez. Professor. IE University

1 April 2014

Should we be optimistic or pessimistic about the Spanish economy? It depends on how you look at it. It also depends on the steps taken next to consolidate the newly found strength of exports and to strengthen the private sector by lowering taxes and deregulating the labor market to make it more flexible.

When it comes to making a diagnosis of Spain’s economic situation, we find a series of very different indicators that could serve to make us either optimistic or cause us see things from a more pessimistic perspective. Our future well-being will very much depend on how we approach this crossroads.

Is there more light than shadow? Everything depends on how you look at it. For example, we can see companies and families pulling themselves out of debt … but we cannot ignore the problem of massive public debt that has built up over the last five years.

If we talk about the flood of foreign investment that arrived in Spain in 2013, we can find good reasons for optimism. However, crippling taxation levels are preventing Spanish economic agents from playing a larger part in the rise in investment and demand Once again, we find ourselves lurching between good and bad news.

The same applies to the labor market. We can be happy about the rise in productivity and the end of the mass destruction of employment… but we are still seeing a highly complex scenario, with a serious unemployment problem. Only 44% of Spain’s active population is in work, which should make us think about whether it is a good idea or not to increase flexibility in work conditions. An interesting stop in this direction would consist of adopting a single contract system.

If we take a look at the strength of Spanish exports, in my book “Sin Medias Tintas” Ignacio de la Torre explains that “thanks to an enormous improvement in competitiveness, Spain is now the second western country in terms of the percentage of GDP made up by exports. When the crisis exploded, the export sector made up just 25% of GDP, while the figures for 2013 show an increase of around 10%. The main reason for concern in this regard is the low number of companies that sell abroad, even though the export base is growing.

In order to consolidate the “internal devaluation” and give added impetus to the more positive aspects of the timid recovery process, it is important to stimulate private sector activity by means of a significant drop in taxes coupled with the liberalization and flexibilization of our markets. As Luis Garicano explains in “Sin Medias Tintas”, “We need to reduce the kind of intervention that distorts competition and favors the development of markets in which profit is not based purely on income.”

There are other needs that must not be ignored: institutional regeneration, education reform, bureaucratic rationalization … An improvement in these areas could help Spain pass through the difficult crossroads that it currently faces. As a consequence, the recovery process would gain strength and this would help us recuperate a good part of the wellbeing lost in recent years.

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