Thursday, January 28, 2010

The Vultures Circle Over Spain's Economy

As Spain still waits for a formal declaration that the recession has finished, the Spanish government has been getting a lot of advice recently about what to do with the economy. On the international front the ratings agencies have been getting terribly worried about the debt of some countries. These are of course the very same ratings agencies that thought Bernie Madoff was marvellous, and which gave top ratings to some of the most worthless financial products which the world has ever known. Now they are busy telling "the markets" that the problem is one of the public debt which countries have. Could there possibly be any connection between this debt and the spending which has had to be done to bail out the financial system because those highly rated products turned out not to be quite as good as their ratings suggested? Don't go down that road, you might draw dangerous conclusions and we all know now that the crisis has been caused by simultaneously incompetent behaviour on the part of 150 different national governments. There is nothing else fundamentally wrong.

Meanwhile a loose tongued banker went very off message in Spain the other day and suggested that private debt could also be something of an issue as the construction sector owes a mere €325,000,000,000 to the banks and is not being very good when it comes to paying it back. Mortgage defaults are significantly lower than the defaults on the loans to the industry that built the homes. Better cut that public deficit now in case the bankers need more funds, at which point public spending suddenly becomes more respectable again. That's just what has been suggested by the governor of the Banco de España, who has temporarily abandoned his previous crusade to make sacking people easier.

There is no doubt that Spain's deficit has increased significantly as a result of the crisis, as has also happened in several other countries. Despite this, Spain's debt is not tremendously high by historical standards and even though it can be expected to rise further it's not a cause for hysteria. The main problem with the deficit is the over tight restrictions placed by the European Union on budget deficits, which were the product of another age when people thought that spending your way out of a crisis was just so 1930's. The EU's upper limit of 3% of Gross Domestic Product has been shattered in the recession, and given that several respected sources think that it's going to be necessary to carry on spending to avoid a relapse it seems crazy for people to be looking for massive spending cuts at this time.

Anyway, let's get back to sacking people. With some disastrous unemployment figures expected for January it's clear that unemployment is going to continue its rise in 2010 even if the economy stops shrinking. Bizarrely, it is still insisted by those who want to make sacking even easier (for which read cheaper) that this is the only solution to the unemployment problem! We still hear a lot about the two-tier labour market (a product of the last time it was reformed) where temporary workers get sacked and the rest don't. In reality, as the recession has advanced, this has become something of a legend and many workers with greater security have also been sacked. In fact, sacking people during the crisis has not been a problem at all for Spanish employers, they've done it very successfully. What they are now looking for is to come out of the crisis with even more advantage.

If it wasn't enough just to lose any job security at all, we have the head of the Spanish employers federation - the now thoroughly discredited Gerardo Diaz Ferran - telling us that everyone should work until they are 70. Coming from an employer who doesn't pay his employees or their social security contributions you might be tempted to ask what Gerardo thinks people will live on? Silly to ask. Pension reform is on the agenda and does need to be dealt with because of demographics. That, however, is no reason for us to be bombarded with suggestions on how long we can work from people who have almost certainly arranged very generous retirement pensions for themselves.

Then there is the question of the salaries. One of Gerardo's colleagues the other day suggested that the fundamental problem was the high salaries paid in Spain, and I have reason to believe that he wasn't talking about Gerardo or himself. On this issue we also have the IMF back to its old game with the mantra of making salaries more "flexible" (i.e. lower). Somebody slap me in the face, I think I must be dreaming! I was completely unaware until now that Spain had a problem of high salaries. Never mind the mileurista, if these people get their way we should prepare now for the bright future of the 75 year old ochocientoseurista - doesn't roll off the tongue as easily.

The government may lack ideas for the future of the Spanish economy, but at least they can claim something that their critics cannot; they have given consideration to options which don't just consist of greater insecurity, lower wages and a longer working life. Where the government most definitely went wrong is in their tax increases to try and rein in the deficit. Despite playing footsie for weeks with the idea of making those who can best afford it pay their contribution to dealing with the crisis, they opted in the end for a mostly regressive solution by putting the bulk of the tax increase on VAT. No extra increase at all for the barely taxed SICAV funds used by the super rich, and Cristiano Ronaldo continues to pay income tax at the same rate as those on the lower end of the earnings scale. I read a book about the crisis last year which I strongly recommend (The Gods That Failed by Larry Elliot and Dan Atkinson). It's hardly a radical manifesto but amongst many other things it does ask the question of just how unreasonable is it to ask that the very wealthy pay tax at the same rate as those who clean their houses?


santcugat said...

I find Spain actually has the opposite problem, wages are too low to attract and keep talented people (except maybe football players) from Spain or around the world.

I'm not sure what kind of exports these economists are thinking that Spain is going to make with a bunch of low(er) paid, low skill workers. It's not like anyone can compete with China and India on that front.

The fact that a country calls itself socialist, yet tolerates incredibly wealthy nobility who have done absolutely nothing for their money amazes me. I suppose with all the interconnections and enchufe at all the high corporate and government levels, nothing will get done to threaten the status quo.

Graham said...

A really good article. The low wage, low skill economy can never really work in Western Europe so Spain has to go for high technology industries where it is a leader, solar, wind, railways etc... to try and get back on track. The knowledge economy could work here.

However as long as there are incompetent idiots like Diaz Ferran in charge of the "Patronal" there is little hope.

I actually do agree that sacking needs to be made easier, nobody in Spain takes on permanent workers because it is hideously expensive if the workforce needs to be reduced to actually respond to a recession, but at the same time the safety net needs to be improved and abusive employers like Diaz Ferran need to be "inhabilitado" from running a company.

santcugat said...

There are lots of things that could be done to encourage more long term hiring and labor market mobility.

Perhaps substituting a more generous unemployment insurance for the finiquito (or for that matter, making finiquito portable, so people aren’t encouraged to sit on their butts and wait to be fired rather than leaving for better opportunities), or creating a “kurtzarbeit” model during downturns, where only full-time employees would qualify, could encourage more long term hires.

From Barcelona said...

I agree with santcugat. one of the sad ironies is international economists are calling for wage deflation when most spanish i know barely get by on two salaries.

like graeme, I think Spain's starting to do some good things in renewable technology, but it'll take at least a decade to see any benefits, i think.

one area of reform i'm surprised there isn't more discussion is with autonomo laws and the social security tax. it just seems making it a percentage of earnings like the iprf opposed to the flat 280 it is now would bring in more money to the system. it'd also give the service sector labor flexibility to pay hourly wages. not the entire solution, but it'd help the youth unemployment.

moscow said...

@Graeme. You see, I am all for a decent level of social protection. People should not be let to fall into a bottomless pit if they take a wrong turn in life. I also admire the consistency of your views. At least you are honest with your readers (and with yourself). But the the two-tier system is death for Spain. I agree that scrapping it won't do for this crisis, but it will do for Spain's future competitiveness. The sooner everybody realises it, the better. The actual system is unjust, it fosters inefficiency and sends the wrong signal to employees. Young people get short-term low paid jobs. No matter how good they are on their job, they will be the first to get sacked when things go wrong. Spain's system is a first-in/first-out-ssytem-no-matter-what. In addition, employers do not invest in training young employees on short-term contracts. It's catch-22. Conversely, insiders on long-term contracts may under-perform in the knowledge that they are hard to get rid off. A vicious circle that is replicated in many areas of the Spanish economy with similar insider/outsider structures (Pharmacies/chemists, taxis, and so on). Once reform(s) are put through I am sure we will start to see more competitive and higher salaries.

The government knows perfectly what needs to be done. It is just they are scared to make a move because they fear the reaction of unions and the regions. But the hard REALITY is starting to sink in: 67 years to get a pension? Quite right so.

Graeme said...

For what you say to be true Moscow, then you have to show that changing work contracts is going to produce better quality jobs, I know of no examples. Everyone can see without difficulty how such a change benefits employers, but what abou the rest - especially if the main, or only, result of the change is to turn everyone into an insecure worker? How can we blame those who dedicate so many years or their lives to oposiciones in such circumstances? Or those who leave the country looking for a better chance somewhere else?

The idea that if we do the labour market change there will somehow be a miraculous culture change in Spain's employers just doesn't convince me at all - on the contrary I suspect there will be even more Diaz Ferrans.There's no point in Spain becoming a better, more productive, economy unless the benefits are felt by all. If you don't get anything out of it except a longer, more insecure and badly paid working life, then what can be justifiably demanded of you?

moscow said...

Changing the work contracts is not the only thing, I agree. As you pointed out before, there needs to be investment in new industries. Spain needs to export more and better. The "econommia sostenible" law is not a bad thing on the whole. But I don't buy that reforming is no good because it favours employers. And who, on earth, could you please tell me creates jobs in this world? Well, it's not the Unions, that's for sure.

Employers, entrepreneurs, and so on create jobs for a profit. That is what gets the world going. This crisis hasn't changed that, and until a better system is found, the market economy is still the only known system that works. I also don't buy that employers are bad. Some are. The majority worked very hard to get where they got. If the system is changed they will adapt. The present system is stupid, and they respond in kind.
And if employers feel the benefit make them pay taxes as required, and then the government will make sure it gets spread around. No benefit, no growth, no employment, no taxes, no benefit for all. It's that easy.

Andrew said...

Of course the inequities of the tax system should be tackled BUT indirect taxes are easier to collect!

Unfortunately taxing the super rich etc wont bring that much into the coffers whereas TVA will.

Cutting spending will be a priority but it should not happen until Spain shows some real signs of recovery.

Unfortunately you are wrong on wages - in terms of productivity the Spanish pay themselves to much. If Spain stays in the Euro it will have to become more competitive.

A suggestion - do you ever read Edward Hugh's blog on the Spanish economy. He is a typically gloomy economist but he provides a lot of excellent analysis.

moscow said...

Totally agree with you about the wages. Spain needs to raise productivity first. The political establishment, including the PP, is in denial about this. And the politics of envy won't do. Spain requires urgent radical (labour market) reform. I honestly don't know what is wrong with 20-25 days/10-15 years severance as opposed to the totally bonkers 45 days/30-odd years that is now the rule? Americans don't get a penny when they get the sack. Now that is cruel. And unfair, if you ask me.

I am not sure how many people actually realise that what is at stake is the whole Euro thingy. The consequences of the unravelling of the Euro system could be dire for all, and destroy any hopes of Spain ever catching up with the likes of Germany.

Graeme said...


Taxing the super rich won't bring much into the coffers? Check out the estimates on the take for Britain's new tax on bankers bonuses, it's really quite impressive. To turn your argument on its head we might as well argue that the SICAV funds shouldn't pay any taxes at all, given that 1% is such a pathetic rate. They've raised taxation on other capital earnings from 18 to 21%. It's not so much that the rich have to pay for everything, it's just that they might make some contribution given what they have taken out. Whilst we're at it we could employ a few more anti-fraud tax inspectors, their work repays their salaries many times over.

Yes, I do read some of Edward Hugh's blog but I'm more interested in the human effects of some of the crazy economic 'logic' being applied at the moment than trying to assess what will happen within the confines of the existing model. Perhaps, using the abstract and frequently inaccurate models that are used to predict economic trends it might seem to make sense to suggest that Spaniards are overpaid. For many of us who live and work in the country the assertion is enough to have us calling for people in white coats to bring out the straightjackets. Because we shouldn't beat about the bush here, when you talk about reducing salaries in Spain you are not talking about the minority of high earners, you are talking about those who aren't. Nurse!

I'm still waiting for someone to tell me where the benefits of Spain's boom years have gone, because they sure as hell didn't go on salaries. Anyway, as you've recommended me some reading, let me do the same. The book I mention in my post demonstrates quite eloquently that none of what is currently happening in the world economy is either inevitable or fixed. The immense damage that has been done by the neocon 'revolution' can be undone and should be - for the benefit of the majority rather than the private interest of the few. Enjoy.

Graeme said...

@ Moscow

Yes, employers create jobs to make a profit. Now, let's introduce a bit of historical perspective. Employment protection, and other legislation was introduced because of abuses by employers who regarded employees as personal possessions - such laws were often imposed by society with the active opposition of employers. It doesn't matter whether it's all employers or not who behave that way, it's enough to create the need for a minority to do it.

Now, the de-regulatory wave has had years of implementation in other countries to prove your case that removing employment protection directly produces a well paid, well trained, stable workforce. Where?

Andrew said...

Graeme -. you misunderstood me on tax. I said the inequities of the tax system should be addressed. On the failure to have a go at SICAV schemes etc I am at one with you.

My point is that this will not generate the billions needed and unfortunately a regressive taxes like VAT are effecient ways of raising revenue. The bankers bonus tax may raise 100s of millions!

The rich and privleged should pay their full whack be they footballers or bank directors.

Yes wages are too high - not necessarily nurses who are cerainly underpaid and, in this region, in short supply. In international traded goods such as textiles etc Spain is in the wrong industries and overpays itself. This problem has been hidden by the construction boom and tourism - both now in decline.

Spain's current account defecit is 5.7% of its GDP - only Greece is worse. In effect a large chunk of any bail out fund from the European Central Bank will end up buying imports!

Graeme said...

The estimates I have seen on the bonus tax are significantly more than was initially expected - and this at a low point in the bonuses! A huge amount of the wealth generated in Spain has gone effectively untaxed, whilst the salary earners you see as a problem have had to pay taxes.

What is truly an unsustainable model is one that says when the going is good you get low wages and high mortgages, and then when the going is bad you get lower wages and high mortgages.

moscow said...

No, the present regulation was put into place under Franco - for whatever reasons. The PSOE then introduced short-term contracts because the unions were having none of it and were dead against making sacking cheaper on long-term contracts. So now we got the worst of both worlds, insecurity and hyper-flexibility for some, and hyper-rigity for others.

Germany. Ever heard of Hartz IV? You must have, since you've been there. More flexible labour regulation in Germany is being credited for Germany's present success. Germany has weathered the present storm rather well. The same for Italy. Austria, Denmark, Holland are other countries that have introduced flexibility in the labour market. I don't think they are low salary places. But I agree with you that there needs to be investment as well. And I repeat, I am in favour of more social protection, but let's protect people not jobs. I would be in favour of some sort of subsidy once unemployment benefit runs out. Increase min annual holiday leave to 25 days. Extend maternity and paternity leave further. That sort of thing. All the present legislation does is protect job-positions. It was enacted when Spain was an isolated& protectionist&fascist dictatorship.

Graeme said...


To attribute the strength of Germany's economy to the Hartz reforms is to ignore all of the preceding history. Germany was only seen as a basket case by those who thought that the now throughly broken bubble in the UK represented some sort of new paradigm.They've gone very quiet on that issue recently. Germany's GDP actually declined quite sharply during the crisis, but they managed it without sacking lots of workers - hardly the model you're advocating. None of the countries you choose as examples have been low salary countries before or after any reforms, and almost all of them (I'm not sure abut Italy) have significantly higher social spending than Spain. The legislation in Spain is not Francoist at all, it's undergone numerous reforms by different governments - but to say that by making half the workforce insecure you then have to do the same for the rest to correct the imbalance is only one (fairy cynical) option.

moscow said...

They haven't got quiet. They are rather loud about it. But they now use Germany's success to vindicate why the EU is not viable: squaring the circle, lutheran vs. Latin, Spain and Germany cannot share the same currency and the usual blah, blah. It's the same tory-neocon-murdoch-dailytelegraph discourse of old. They want the EU and the Euro to sink and disappear.

The contraction in Germany has been sharp, sharper than in Spain but Germany is out of recession and churning exports again. Hartz IV does introduce flexibility, it is different from what I suggest but it is all part of the package of measures required. Austria et al have more social protection, but Spain has to start to change somewhere. Zapatero has put some additional (and rather necessary) measures in place (depencencia and others). I don't think Spain's economy can wait for the perfect welfare network to be in place (although desirable). What I am suggesting is far from cynical. I'd like a way out and solutions for the future. I am sorry to say you are stuck with some pretty outdated views (even if honourable because they are well-intentioned). Not that you would be worried about that.

moscow said...

Oh, and Spain's regulations date from Franco's time and are thus francoist in spirit and in nature, no matter how you put it. There have been several attempts of reform since then, but they have never really touched the central core elements of the regulation, just tweaked around bits of it and nibbled at the edges.

Graeme said...

Well Moscow, in generous acknowledgement of your change of heart - now you call me well-intentioned and outdated instead of just mad - I'll share with you this interesting link I've found:

It outlines in some detail all reforms carried out to the 1980 Estatuto de los Trabajadores. As a further gesture of generosity, you were completely right about the temporary contracts being introduced by the PSOE. But that's it, end of generosity because I don't want you to become welfare dependent. On the rest you are completely wrong.

moscow said...

Christ, I am not aware I ever called you mad. That would have been 'Lesse Majeste', no less. Sincere apologies if that was the case.

As for changes of heart the one below surely should feature as one of the most acrobatic spine bending double somersaults ever accomplished: "I actually do agree that sacking needs to be made easier" (your words). No wonder I was feeling generous.

Oh, and many thanks for the link -which, basicly, fully substantiates everything I wrote before.

Graeme said...

I hate to break the news to you Moscow, but I think you've confused "Graham" and "Graeme". You're not the first person to make that mistake, nor will you be the last, but in this case it has led you to draw conclusions that are not justified ;)

As for the link, you have to cherry pick a bit to say that it supports your views. It reveals a far more complex picture of the labour market than the one you have presented in your arguments. Apart from anything else there is the existing contract with lower levels of compensation, and the fact that the changes made by different governments are far from trivial.

Andrew said...

The virtue of South of Watford is that it provides a level of debate to which Graeme and Moscow make a great contribution.

You help to keep my ageing brain active, you suggest arguements to be considered, books and links.

Whilst my economic instincts are closer to Moscow's, what I think we all want is a better Spain. We should all be able to have our mind changed by fact and argement.

On a related subject can I suggest 'The Spirit Level' by Richard Wilkinson - an epidemolgists analysis of societies which concludes that more equal societies are more effective on many levels. The Scandanavians come out well on this as does Japan. They are not necessarily the most effective economies but have other virtues in health, happiness etc

santcugat said...

A simple enough change would be to change severance into a pool insurance scheme. That way, employers don't really care whether they terminate younger or older employees (they've already paid in). Employees don't notice any difference.

It would probably cost employers significantly less than 12% maximum cost, since there are many cases where people leave their jobs voluntarily.

Then put a 5% employer tax on contract employees, which goes into the insurance pool, to equalize the cost of a full time employee vs a contract employee.

Coming from the US, the whole problem is a bit strange to me, since for US companies, the #1 reason to have contractors is to avoid medical insurance costs, which isn't really a problem.

Andrew said...

I must apologise to Kate Pickett, co-author of 'The Spirit Level'.
You can see aninterview eith her on

Spain comes out quite well on many measures AND it is not a very unequal society.

moscow said...

@Graeme (not Graham).
Well, it was too nice to be true. And I would have had to take back what I said about your consistency.

It is generally aknowleged that the biggest change to labour regulation since 1975 is the short-term contract introduced by the PSOE - in the nineties I think. Now, this is indicative of how little has really changed. There might have been reams of paper changing bits here and there, but the biggest change was one designed to actually by-pass substantial aspects of the regulation which where thus left untouched. And continue to be. The core elements are still francoist.