Where does Spain stand compared to Greece?
Bruegel research fellow Benedicta Marzinotto argues for better clarity in identifying the differences between the crises affecting Greece and Spain. The author explains why comparing the Greek crisis with the situation in Spain is unwarranted. Greece has a fiscal problem, whose origin is domestic. The costs of a possible default are much greater for euro […]
Bruegel research fellow Benedicta Marzinotto argues for better clarity in identifying the differences between the crises affecting Greece and Spain. The author explains why comparing the Greek crisis with the situation in Spain is unwarranted. Greece has a fiscal problem, whose origin is domestic. The costs of a possible default are much greater for euro zone partners than they are for Greece itself, as foreign European banks hold 58 percent of the Greek debt. The situation of Spain is reversed. The Spanish problem has a European origin but the costs of delayed adjustment shall be borne by Spanish citizens. The EU has a vested interest in the solution of the Greek problem but a moral duty to support smooth adjustment in Spain.
Financial markets have shown extremely sensitive to the Greek debt crisis. They might cheer now
that Prime Minister George Papandreou has formally requested the activation of the EU/IMF rescue package. This comes however after days in which they have been clearly betting in favour of a default, fuelling contagion worries for Portugal, Spain and Ireland.
Nevertheless, it is wrong to lump together all Southern euro area members. Take Spain, for example.
Comparing the Greek crisis with the situation in Spain is unwarranted. Greece has a fiscal problem, whose origin is domestic. Still, the costs of a possible default are much greater for euro zone partners than they are for Greece itself, as foreign European banks hold 58% of the Greek debt. The situation of Spain is reversed. The Spanish problem has a European origin but the costs of delayed adjustment shall be borne just by Spanish citizens. The EU has a vested interest in the solution of the Greek problem but a moral duty to support smooth adjustment in Spain.
Spain’s main problem is structural. The bust of the real estate bubble now imposes that the over‐extended construction sector shrinks and that capital and labour resources are shifted towards the manufacturing sector. The factors that contributed to the current situation have very much to do with economic integration in Europe. The EU Single Market and the ensuing free movement of capital together with the prospect of Spain’s EMU membership have in fact favoured large inflows of capital into the country, generating over‐investment. Because investment was attracted by sectors other than industry, the manufacturing sector has rapidly lost productivity, thus compromising the country’s competitiveness.
And in fact, Spain has a competitiveness on top of a structural problem. Not only productivity over the last 10 years was flat or even in free fall, but also wages have grown excessively, and indeed well above productivity. Responsibility rests with the structure of the collective wage bargaining process. Wages are decided at the industry or regional level and then extended to all workers. The result is that relatively high wages are then imposed also on firms where productivity is low, thereby creating inflation to the detriment of price competitiveness.
The optimists note that over the last years Spain has not lost as many market shares as France and Italy. This is not sufficient to prove that domestic prices and costs are competitive on international markets. Over 1999‐2008 only 40% of changes in EU market shares were related to the evolution of price competitiveness indicators. All the remaining is explained by non‐price factors such as the technological content of products and their overall quality. Spain was able to preserve market shares only in certain areas. Services rank high just because the country is the largest exporter of touristic services. The other area in which the Spaniards register a positive record is world merchandise exports. The country is specialised in the production and export of products with low technological content. It is doing well on that front but that does not mean that it is generally competitive. Export prices in Spain deteriorated by 10% over the last decade but unit labour costs in the manufacturing sector by a stronger 16%. The former capture the price of the goods that are truly traded internationally and thus go through customs. The latter describe the price of the goods that could be traded. The bottom line is that international consumers are buying from Spain only those products, whose price competitiveness has not excessively deteriorated relatively to other euro‐zone countries.
The solution to Spain’s competitiveness problem is not to cut wages across the board. Is suffices to make sure that wage rises reflect productivity developments. This requires moving away from full centralization in wage bargaining.
That might be also a good recipe for keeping unemployment under control. Spain’s unemployment problem has a strong regional and local dimension to it. If wages start reflecting local productivity conditions, the demand for labour shall not fall further or may even be incentivised.
Preventing massive employment losses and, with them, poor domestic demand is even more urgent now that the country needs to buy time to find a solution to its structural problem. Re‐allocating resources, and labour in particular, from downsizing sectors towards manufacturing is a painful adjustment and can only come with time.
Whatever form adjustment and reform take, their costs will be borne by Spain only. This differentiates the country’s situation with that of Greece, as the costs of the Greek crisis are in fact
diffused amongst euro‐area partners.
The EU has a strong interest in supporting Greece but a moral responsibility to help Spain out. By conceding a special loan to the Greeks, the EU is giving a hand to Spain too, directly, because Spanish banks hold Greek government bonds, but also indirectly to the extent that the proposed rescue package should control the risk of contagion. And in fact, even if debt levels in Spain are by no means comparable to those of Greece and Portugal, the prospect of contagion is not fully unrealistic just because most of the country’s debt is held by foreign savers.
The author is a Research Fellow with Bruegel, the Brussels‐based European think tank, and Lecturer at the University of Udine (Italy).
A version of this op-ed was published by Kathimerini.
Republishing and referencing
Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.