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Spain instead of Greece is the real test for the European Union
By Clive Crook and Marc Champion |
April 17, 2012, Tuesday
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THE decisive test of the euro area's plans for economic recovery was never Greece but Spain, and the European Union shows every sign of failing it. The Spanish government's new austerity plan hasn't won investors' confidence, and this creates a threat not just to Spain but to the whole EU. Europe's governments need to change course before it's too late.
The problem is not that Spain's new austerity plan is too timid. Just the opposite: Under EU orders, Spain is promising what might be the tightest fiscal squeeze that it or any other European economy has ever faced. The new plan calls for the budget deficit to fall from 8.5 percent of gross domestic product to 5.3 percent this year. Since the economy is already shrinking, this requires a discretionary fiscal tightening of roughly 4 percent of GDP - with the unemployment rate already standing at about 23 percent.
Spain overshot its previous too-demanding fiscal targets, and is being told to make up lost ground. It missed its budget goal because regional governments, over which Madrid has limited control, failed to do their part, while economic growth came in lower than expected. This is all too likely to happen again.
Weak labor market
Spain's overall unemployment rate is terrible enough, but the youth unemployment rate is an amazing 50 percent. Recession isn't the only cause. The country's labor market has long been seen as one of the most dysfunctional in the developed world. The government's efforts to reform it are necessary and long overdue - but it's hard to win support for reforms that will cause further labor-market disruption. The new government, in office barely three months, is facing strikes and just lost a regional election it expected to win.
The Greek economy is tiny, but Spain's is the fourth largest in the euro area. If it goes down it will take the EU's still-puny defenses against such an eventuality down with it.
Spain cannot work through this crisis without more help from its EU partners. In their own larger interests they should allow a milder path of fiscal consolidation, and support Spanish growth along that path. That means steps to buoy EU-wide growth, including easier fiscal policy in Germany and easier monetary policy from the ECB. It means outright temporary fiscal transfers to Spain.
Spain is being drawn into a vicious circle of economic, fiscal and political collapse. Even now, this is an avoidable danger, so long as the EU is willing to act. But if it stands aside too long and lets Spain fall into the trap, containing the damage will make dealing with Greece look like child's play.
Clive Crook and Marc Champion are editors of the Bloomberg View column. Opinions expressed are their own.
The problem is not that Spain's new austerity plan is too timid. Just the opposite: Under EU orders, Spain is promising what might be the tightest fiscal squeeze that it or any other European economy has ever faced. The new plan calls for the budget deficit to fall from 8.5 percent of gross domestic product to 5.3 percent this year. Since the economy is already shrinking, this requires a discretionary fiscal tightening of roughly 4 percent of GDP - with the unemployment rate already standing at about 23 percent.
Spain overshot its previous too-demanding fiscal targets, and is being told to make up lost ground. It missed its budget goal because regional governments, over which Madrid has limited control, failed to do their part, while economic growth came in lower than expected. This is all too likely to happen again.
Weak labor market
Spain's overall unemployment rate is terrible enough, but the youth unemployment rate is an amazing 50 percent. Recession isn't the only cause. The country's labor market has long been seen as one of the most dysfunctional in the developed world. The government's efforts to reform it are necessary and long overdue - but it's hard to win support for reforms that will cause further labor-market disruption. The new government, in office barely three months, is facing strikes and just lost a regional election it expected to win.
The Greek economy is tiny, but Spain's is the fourth largest in the euro area. If it goes down it will take the EU's still-puny defenses against such an eventuality down with it.
Spain cannot work through this crisis without more help from its EU partners. In their own larger interests they should allow a milder path of fiscal consolidation, and support Spanish growth along that path. That means steps to buoy EU-wide growth, including easier fiscal policy in Germany and easier monetary policy from the ECB. It means outright temporary fiscal transfers to Spain.
Spain is being drawn into a vicious circle of economic, fiscal and political collapse. Even now, this is an avoidable danger, so long as the EU is willing to act. But if it stands aside too long and lets Spain fall into the trap, containing the damage will make dealing with Greece look like child's play.
Clive Crook and Marc Champion are editors of the Bloomberg View column. Opinions expressed are their own.
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