A world in economic crisis

Spain’s economic stagnation: and why Zapatero Socialism is to blame

Posted in welfare state by Aussie on February 21, 2010

Spain’s economic stagnation: The zapping of Zapatero | The Economist

Spain is in economic trouble and aides to the Socialist Prime Minister of Spain are claiming that Spain is the victim of a speculative attack and of a plot by the Anglo-Saxon press to destroy the euro. What rubbish!!

The Economist points out that Spain did not have to bail out its banks like the UK and the rest of Europe, as well as the USA. At the same time, fears of financial contagion have in fact made the market volatile. The reasons that the investors are feeling nervous about Spain make sense:

  • it has the highest unemployment rate in Europe;
  • it is an economy still in recession;
  • it has a fiscal deficit that jumped to 11.4% of GDP last year, as recession cut tax revenues and forced up spending on the unemployed.
  • the lack of growth will lead to a public debt that is unsustainable.

Zapatero is out of his depth (now that really sounds familiar), he was a popular leader in the good times, but he failed to see the bust coming. He misdiagnosed the problem within the economy as an imported recession that he could safely wait out. Just like a typical socialist he:

  • carried on doling out public money
  • raising public pensions
  • raising public-sector wages

whilst shunning reform. 

On the other hand the markets have recognized that if Zapatero continues on this course of action then Spain is on the road to ruin. They are one step ahead of a moribund government, which has reacted with fumbling confusion which has launched an austerity plan and a vague scheme for labour-market reform, only to withdraw bits of both at the first sign of a protest.

Spain has become a high-cost, low-productivity economy. Wage indexation has made businesses uncompetitive. Generous severance arrangements discourage firms from hiring workers and have created a two-tier labour market and mass unemployment.

It would seem that the only way forward for Spain is to recognize that it has fallen into stagflation and then look at the appropriate measures that need to be taken, even if they cause pain to the unions. Spain managed this in the 1970s when Felipe Gonzalez was Prime Minister, but it seems that Zapatero does not have the capability carry out the necessary reforms that are required to lift Spain out of its moribund condition.

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