Spain: Macrosociology of an economic crisis

Thanks to my friend Andrew Hull, an economist and neighbor here on Spain's southeast coast, I've discovered the charts and analyses of Edward Hugh, a macroeconomist who keeps a close watch on several economies, including Spain's. Especially interesting to me is Hugh's blog, Spain Economy Watch. What they, both Andrew and Edward, make abundantly clear is that Spain's problems are deeper than either the government or the opposition is willing to admit -- though for opposite reasons.

The opposition Partido Popular would have us believe that Spain's soaring unemployment and deficit are due almost entirely to the economic mismanagement of the Socialist Party government, and that if they were in charge, they'd bring the country back to the booming prosperity of the recent past -- especially the years when PP leader José María Aznar was president, 1996-2004.

The governing Socialists know that that is impossible, in fact ridiculous, because the main economic policy of Aznar's time was to do everything possible to stimulate the construction boom bubble that has now burst. Zapatero said as much, just today: that it was the Aznar government that was mainly responsible for Spain's crisis -- a simplification, to be sure, but not totally off the mark.

Here are some observations I found most useful in Edward Hugh's blog:

As [Paul Krugman] shows, Spain had no fiscal problem till the housing boom went bust. Now of course, the need to prop up the economy, and support all the "unproductive" labour which doesn't show up in the unit labour costs chart is producing a massive fiscal deficit. Thus the fiscal issue in Spain is a symptom, not a cause. The root of the problem lies in the structural distortions produced by the massive overheating of the economy during the boom years, an overheating which lead to excessive inflation, large-scale dependence on imports, and a complete loss of competitiveness in the non-tradeable sector - a loss of competitiveness which even the Kingdom of Spain accept.

…

So essentially the issues is this one. Spain's economy will not recover, and return to growth till Spanish products become more attractive in price terms, and this only means one thing: some sort of internal devaluation is inevitable, and all the talk about an exclusively fiscal correction is simply an attempt to get rid of the smoke without going to the trouble of extinguishing the fire which is producing it.

The Socialists, unlike the PP, recognize that what everybody calls "the crisis" is truly a crisis (krisis, in Greek, appropriately enough, meaning a turning point). Meaning, that once you get to this point, you can't go back to where you were. The government, however, understates the depth of the problem and overstates the likely impact of its sometimes contradictory economic responses. Even when the most prudent thing would be to do nothing -- that is, not change policies until the Greek crisis is resolved in one way or another, or until there are clearer signs of what the European Central Bank and the credit markets might do -- the government seems to believe it must be seen to be doing something, because the unemployed and entrepreneurs without clients or credit grow impatient.

The only real solution will be long-term, much longer than the next electoral cycle. The Socialist Party, or at least a part of the party, recognizes this, and has come up with a long-term program for totally reorganizing the Spanish economy, making it much less dependent on construction, much more technical innovation, modernizing agriculture, developing Spain's already impressive advances in renewable energy sources, etc. -- all together, 10 economic sectors to be overhauled. It's a persuasive and well thought-out program, put out by the party's new think-tank, IDEAS, headed by Jesús Caldera. The program would assure a far more prosperous and egalitarian society, and it all is socially and economically within range of the Spain's human and material resources.

The question is whether it is politically within range -- whether the Socialists can keep their allies in the smaller parties and win the votes necessary to stay in power, either alone or in coalition, to see it through. Right now that looks doubtful.

The Partido Popular, meanwhile, offers no positive proposal except to tear down the Socialists. They may succeed in sabotaging the transformation Spain needs by their unprincipled attacks, and the Socialists themselves, being politicians, will no doubt sabotage themselves by opportunistic concessions and compromises to secure votes. But in the longer run, longer than the elections coming up in 2012 (or possibly earlier), something like Caldera's "IDEAS" ideas are a prize worth fighting for.

Spain Economy Watch (Edward Hugh)

Los empleos de la economía sostenible -- ELPAÍS.com

Fundación Ideas

Spanish Premier Insists Economic Recovery Is Near - NYTimes.com