Thursday, October 29, 2015

The Sp. Economy; Sp. Politics; Our local economy; & Local services

THE SPANISH ECONOMY: If you can't access this link to a FT article, the text is at the end of this post.

SPANISH POLITICS: The always-unimpressive President Rajoy, playing to his neo-fascist gallery, insists the Catalans won't achieve any of their goals because he's going to hit them with every political and legal weapon in his armoury. Stand by for a change of tone if he's still president in January.EUROPE: How many people recall that, before 1914, yo could travel around Europe without a passport? And that there was a currency zone involving most of the continent? How many of ever knew? A golden age, all achieved without bureaucrats.

OUR LOCAL ECONOMY: Perhaps because this is driven by the (frozen) salaries of civil servants and the invisible drug trade, there are no real signs that the recession has ended. But one booming sector is the teaching of English. The latest operation I've clocked is called LANGU-ISH, a play on 'language' and English, I guess. You can see why they didn't go with LANGUISH.

FINALLY . . . LOCAL SERVICES: The second engineer came to fix my washing machine yesterday. The first one threatened to sue me for coming twice when I was out. When I pointed out he'd ignored my instructions, he retorted that, if they took stock of customer requirements, they'd never get anything done. BTW . . . The engineer found a pencil and a biro in the machine but none of the 12 missing socks.

Confounded by Spain

Martin Sandbu

Perverting the good news

The looming general election has, quite predictably, made Spain a political battleground over the merit of the policies pursued by the sitting centre-right government led by Mariano Rajoy and his People’s Party. But the politics is playing catch-up: for several years, Spain has also been the focus of a battle of economic ideas, about how best to understand the eurozone crisis, the aborted recovery of 2010-11 and the right policies with which to address downturns in a currency union.

The Spanish growth record — which for the past two years has left the eurozone overall in the dust, as the chart above shows — is now being touted by the government and by much of the eurozone establishment, as vindication of their strategy of tough budget consolidation and labour market liberalisation. A long report by the FT’s Madrid bureau chief Tobias Buck explicates the argument (which is not always analytically made — it includes the government’s campaign video featuring a patient going from cardiac arrest to recovery).

The chief components of that story are that reining in deficits brought panic under control, and reforms to push wages down caused the strong performance of exports. There is much that is wrong about this rhetoric, and it fortunately provokes intelligent criticism, most recently in the form of a policy brief by Simon Tilford from the Centre for European Reform. Tilford pokes some well-judged holes in Madrid’s narrative. Among them are to point out that fiscal consolidation can hardly be credited with the recovery, because it was only when austerity eased that growth returned (he could have added that there was also less austerity than had first been promised). Tilford also usefully points out that Spanish job growth, welcome as it is, still leaves unemployment shockingly high. It puts things in proportion to know that the number of jobless falling below 5m is enough to boost Rajoy’s re-election prospects; the unemployment rate remains well above 20 per cent. And as we noted in a Free Lunch in August, the new jobs are exceedingly precarious, as in much of the eurozone.

But while criticism is certainly warranted, there is a strange tendency among the critics of the Spanish story to overdo their naysaying. This was our take on a previous round of comments on Spain’s recovery (by Simon Wren-Lewis and Matthew Klein) this summer. Tilford, too, joins in a sort of admonishment against making too much of the recovery, which they all see as less impressive than some, and worry will not last. And paradoxically, the chief reason for the critics’ concern lies in a piece of diagnosis where they entirely agree with the austerity-and-reform proponents. That point is to attribute Spain’s recovery, such as it is, to “internal devaluation”, that is to say a cut in wages to make exports more “competitive”. The difference is that the Spanish government and its friends (such as the Finnish one) see lower wages as the way to succeed in the euro and celebrate policies to drive wages down; whereas the critics see lower wages as the way to succeed in the euro and lament that fact.

So it is worth restating some crucial facts. Spain’s export growth has little to do with squeezing workers by reducing “economy-wide unit labour costs” (which, in any case, arithmetically reflects a redistribution of national income from labour to capital rather than “competitiveness”). The prices of the goods and services Spain exports have developed roughly in line with the eurozone average and no more “competitively” than in other large eurozone countries. The graph below shows this visually; and our earlier note on Spain referred to more detailed numbers.

The labour cost of producing goods and services in Spain has, in contrast, been more restrained than most other eurozone countries. That, of course, is not enough to show it caused the export boom: other countries have reduced unit labour costs faster without a similar export performance. And even if exporters pay lower wages, it is an open question whether they choose to expand sales as a result or simply pocket the greater profit (the answer will depend on credit conditions and how competitive the relevant product markets are). But in any case, it is important to realise that in Spain’s case the cost reductions have not mostly been achieved by wage restraint. As the graph below shows, a good amount — until 2014, more than half — of Spain’s more efficient unit labour cost evolution relative to the eurozone has come from more output per hour worked, not more repressed wages.

Not that wages haven’t been repressed — they have — but the real lesson Spain shows is surely that significant productivity improvements are possible. Realising this, and prioritising them over wage cuts as a matter of policy, is long overdue.

No comments:

Search This Blog