A Month In Spain That Didn’t Shake The World | afoe | A Fistful of Euros | European Opinion

Going back to the Luis de Guindos WSJ article, I would highlight a number of points. In the first place he makes a pretty strange claim.  ”We perfectly understand,” he tells us, “the reasons our country has been brought to the outrageous situation of having the highest unemployment rate among developed economies.” Now I don’t know if I am alone in this, but I do find that a rather incredible way of putting things. The phrase is even more incredible given that it repeats almost word for word a statement Prime Minister Mariano Rajoy uttered earlier in the week. “My government,” he told his audience, “knows perfectly well what it needs to do to improve Spain’s reputation, stimulate growth and create jobs”.

At face value all of this seems an almost arrogant way of putting things, given that perfect knowledge is something we humans are not normally thought to have, and doubly so since even among “experts” there is still a huge debate going on about why Spain’s economy didn’t start to recover along with most other developed economies, but then it occurs to me that such a bold posture may be sheer bravado, and more to do with uncertainty and insecurity about what to do. The aparrent disarray among the various economy representatives does seem to give this idea some credance.

The suggestion that the Spain’s new government have been drinking the elixir of total knowledge looks even more questionable when we look at the next claim de Guindos makes:

“In Spain, we have inherited a very centralized wage bargaining system that establishes salary increases at the sector level. This system has proved to be one of the main reasons for the loss in competitiveness we have suffered during the last decade”.

This is a strong claim, a strong and highly questionable one. In fact I think Mr de Guindos is confusing two things here: why Spain lost competitiveness, and why Spain now has the highest unemployment rate in the developed world.

It’s The Housing Bubble, Stupid!

Simply put I think Spain’s centralised wage bargaining system can explain why Spain hasn’t had an internal devaluation and wage and price reduction of the kind Latvia, or even, Ireland had. Spain’s labour and product market structures are inflexible, and this is why the economy is having so much difficulty adjusting, and making the transition from a construction and consumer-demand driven economy to an export-driven one.

But this lack of labour market flexibility isn’t NOT the main reason competitiveness was lost before the start of the crisis. The reason competitiveness was lost was the availability of excessively cheap borrowing made available by Europe’s large and deep capital markets and cheap interest rates at the ECB. It was this massive and cheap liquidity which generated one of the largest property bubbles seen this century. The bubble created huge distortions (many of which have still to be unwound), and basically meant that it was too easy for everyone (workers and employers alike) to make money, so there was no pressure even on the employers themselves to address the fact they were paying increasing wages without getting increasing productivity. It was simply a “cool” time for everyone.

via fistfulofeuros.net