February 9, 2010

The Spanish Tragedy- Paul Krugman and his opposer

Filed under: Uncategorized — ktetaichinh @ 1:24 am
Tags: , , , , ,

DESCRIPTIONOECD Government debt as % of GDP

As Europe is roiled by sovereign debt fears, it’s important to realize that the crisis in the largest of the PIIGS (Portugal, Ireland, Italy, Greece, Spain) has nothing to do with fiscal irresponsibility. On the eve of the crisis, Spain was running a budget surplus; its debts, as you can see in the figure above, were low relative to GDP.

So what happened? Spain is an object lesson in the problems of having monetary union without fiscal and labor market integration. First, there was a huge boom in Spain, largely driven by a housing bubble — and financed by capital outflows from Germany. This boom pulled up Spanish wages. Then the bubble burst, leaving Spanish labor overpriced relative to Germany and France, and precipitating a surge in unemployment. It also led to large Spanish budget deficits, mainly because of collapsing revenue but also due to efforts to limit the rise in unemployment.

If Spain had its own currency, this would be a good time to devalue; but it doesn’t.

On the other hand, if Spain were like Florida, its problems wouldn’t be as severe. The budget deficit wouldn’t be as large, because social insurance payments would be coming from Brussels, just as Social Security and Medicare come from Washington. And there would be a safety valve for unemployment, as many workers would migrate to regions with better prospects. (Wages wouldn’t have gone up as much in the first place, because of in-migration).

The point is that this has nothing to do with a spendthrift government; what’s happening to Spain reflects the inherent problems with the euro, which now more than ever looks like a monetary union too far.

Update: Whoops. Yes, Italy is bigger than Spain — and it has been fiscally irresponsible. But in a way that makes the point; Spain, which has been a good actor, is in much more trouble than Italy, which hasn’t.

February 5th, 2010
2:09 pm
Dear Prof. Krugman,
With all due respect, I believe your analysis to be partially flawed. First, because unit labour costs have not been the main driver of Spain´s lack of competitiveness; second, because, in any case, Spain is no as uncompetitive as you portray it. As the following paper shows (pag.21)… it is high corporate margins, and not salaries, that have made Spain uncompetitive. Of the 1.85 percentage point average annual inflation differential with the Euro zone between 1999 and 2007, 0.8 pp were due to margins, with salaries responsible for only 0.30 pp and productivity substracting 0.45 pp. Thus, it is lack of competition rather than salaries that is the real issue. In any case, Spain is competitive in many markets. In fact, we are one of the few Western economies to have gained market share of world trade in the aftermath of the crisis. Furthermore, if you look at real unit labour costs in many sectors, for example car manufacturing, they are in fact lower than in Germany. These are just two examples of how Spain´s economic fundamentals are constantly misrepresented in the media and among so-called “well-infomed analysts”, following the lead of conservative media and opinion leaders. Spain´s economy, contrary to what is reported, has been more resilient than most other developed economies during this crisis. In 2009 GDP fell by 3,6%, compared to Germany´s 5%. Productivity is actually higher than the EU average, and has been gaining ground strongly, a process that begun even before the crisis. Our current account deficit, which was a recurrent theme in conservative press headlines until very recently, has dropped by 50% and is expected to be less than 3% next year. We (still) have one of the lowest levels of public debts in the EU and, despite all the recent hysteria and speculator-driven attack on the Euro using Spain and other countries as a proxy, our Treasury closed yesterday a 3-year bond auction at 2,63%, which, as I am sure you know, is a historically low level, especially for Spain. And our ability to service the debt seems solid; at present we devote to it 4% of GDP, compared to France´s 6% (and we have now implemented an immediate 50bn € cut in public spending and have raised taxes, something which neither the UK, nor France have done). Our financial system is strong, with only one small bank having been rescued and Spanish banks having sufficiently strong balance sheets to buy their British competitors. Spain´s multinationals are world leaders in many high value added sectors: renewables, infrastructures, utility management, finance or fashion. And even when it comes to employment, undoubtedly our biggest problem, people fail to analyse the current 19% unemployment rate in its proper context: over the last business cycle (1994-2007), Spain´s active population has increased by 39% and, even more remarkably, the labour force has increased by 66%, over 8 million people. It is true that we have 4 million unemployed, but it is also true that over the last decade Spain has welcomed 5 million immigrants, 3.5 of which are still employed today (people fail to realize that Spain immigration has reached 10% of population in barely a decade, while in countries like Germany and the UK the process took 30 years). So, what is really remarkable is not the level of unemployment but actually how much employment the Spanish economy has managed to create over the last decade. And, contrary to popular belief, many of those jobs have been created outside the construction sector and are not low-skilled jobs. Spain is, even after the crisis, the country that has created more jobs in the Eurozone since the creation of the Euro: twice as many jobs as Germany and three times as many as the UK. And many of those are permanent, high quality jobs. At the beginning of the cycle we had 6 million full-time permanent contracts, today we have 11.5 million, and 30% of the workforce has a college degree. I say all this not to be on the defensive but simply because, while Spain needs serious and painful reforms, they are not the ones usually demanded by the (mainly conservative) press and the not-very-well-informed analysts who just repeat what they have read somewhere else or base their analysis on a few isolated facts without bothering to look seriously into the numbers. Only if we get the diagnosis right can we put in place the right reforms. Prof. Krugman, as you are perfectly aware, your comments shape public opinion and even the markets. The prestige which your work has rightly brought upon you also makes you responsible for being well informed when commenting on other countries. I am sure that is your wish. So, when commenting on Spain (which I hope you will, and critically, for we need as much constructive and well- informed criticism as we can get), please look a bit more thoroughly into our economic fundamentals. Thank you.

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