Is Spain's Fiscal Correction Sufficient?

¿Qué quiere decir depender de exportaciones en el contexto español?
Edward Hugh - Barcelona: November 2010

El Tema Numero Uno Es Deuda Ahora la gran pregunta es, ¿Cómo volver a bajar los ratios de deuda en el PIB?

La Deuda Española También Ha Crecido En Relación Con El PIB Entre hogares, empresas y gobierno, la deuda ahora esta cercana al 265% del PIB

La Deuda Del Gobierno No Es Excesivemente Alta En Comparasión Con El Promedio Europeo Pero Esta Creciendo Rapidamente Problema: Una Parte Importante De Los Prestamos No Fue Financiado Desde Los Dipositos, Sino Del Mercado Interbancario Europeo Con El Resultado De Que La Deuda Externa Neta Del País Ha Subido De Forma Notable

La Segunda Tema - Los Desajustes Entres Paises Estes estan estrechamente conectados con el problema de endeudamiento a través de los niveles de ahorro y credito de cada país.

La Tercera Tema - Envecimiento Global Although at this point the implications are not completely clear, no other force is likely to shape the future of national economic health, public finances, and policymaking in the same way the irreversible rate at which the world's population is ageing will. According to the UN, the proportion of the world's population aged over 65 is set to more than double by 2050, to 16.2% from 7.6% currently. By the middle of the century, about 1 billion over 65s will join the ranks of those classed as of non-working age. The developed economies are ageing much faster than the emerging ones, and this is producing a dynamic where it seems there is a transition taking place between consumer societies and saver societies.

Aunque este tema esta todavia muy contestado teoricamente, podemos indentificar cuatro vias potenciales de impacto. i) El tamaño de la fuerza laboral, y con este la tasa de crecimiento tendencial ii) Los patrones de ahorros y prestamos nacionales, y con estes la magnitud y direción de los flujos de capital. iii) A través del impacto (ii) el proceso de envejimiento puede influir en los valores de los activos claves tales como las acciones y la vivienda. iv) A través del impacto sobre la relación de dependencia, el envecimineto tendra un impacto sobre la deuda soberana, y su evolución, con la consequencia que el “ranking” de los “ratings” cambiara, y sobretodo entre los paisos emergentes y los paises ya desarrollados. Impactos Economicos Del Envecimento

Un Hipotesi: la relación entre el envecimento de la población y la cuenta corriente puede tener esta forma. Chart courtesy of Claus Vistesen

Japón y Alemania son actualmente las dos sociedades mas viejas de la planeta. Los dos también son fuertemente pendientes de las exportaciones. ¿Este es una casualidad? También ha bajado notamblemente el crecimiento tendencial de ambos paises, haciendo ambos muy sensible a golpes externos de demanda o en los valores de las divisas. Entonces ¿Qué ejemplo seguira España? ¿El de Alemania y Japón?

El crecimiento tendencial de Italia hoy en dia es de menos de 0,5% anual. ¿O Aquello de Italia ? Italia también tiene un edad media de 45, pero la posición de la cuenta corriente ha deteriado mucho desde los años noventa, con un impacto evidente sobre la tasa de crecimiento.

De Hecho El Deterioro En El Balance Externo Italiano Se Corresponde Totalmente Con La Bajada De Crecimiento Tendencial

La Gran Metamorfosis ¿de gusano a mariposa?

Si fijamos en el gráfico de arriba, que muestra el crecimiento anual en el consumo familiar en Alemania, se puede ver fácilmente que no es cierto que los alemanes sean “no consumidores y ahorradores natos". En los años noventa , hubo un" boom" notable en el consumo alemán, un "boom“ que llegaba a su fin un los últimos años de la década. Sólo es a partir del año 2000 cuando el consumo privado carece de vitalidad y es incapaz de tirar de la economía. El “boom” olivadado del consumo alemán

Si miramos el gráfico equivalente del consumo privado español, podemos ver que España disfrutaba de la misma clase de crecimiento en el consumo que Alemania había experimentado en los años noventa.

El Boom De España Se Parece Mucho Al Boom Alemán Anterior

No es de sorprender que la causa sea lo de siempre – un incremento rápido en el recurso a crédito. Una vez más, los gráficos ilustran que es falso pensar que los alemanes siempre han sido una nación de ahorradores meticulosos. Pero más que el boom de consumo en si mismo, lo interesante es lo que lo impulsaba. El Ultimo “Boom” De La Vivienda En Alemania Los gráficos cuentan la misma historia de incremento de hipotecas en España, incluso en una versión aún más exagerada. El Patrón Desarrollado En España Fue Bastante Parecido A un período de crecimiento fuerte en las hipotecas se sigue otro de estancamiento, después de acabar el" boom", lo cual es una de las razones más importantes para no quedar estancado y esperar el renacimiento de otro de expansión, basado en el crédito; pero no llegará.

Y el endeudamiento no fue solo un fenómeno de las familias, las empresas también estaban contratando créditos. Las Empresas También Por lo general, a partir del cambio de siglo las empresas alemanas han sido bastante ahorradoras, con la excepción de un período breve durante la crisis reciente.

Una vez más España se destaca por la magnitud del fenómeno. 

El endeudamiento de las empresas españolas – y no sólo las constructoras – es un problema bastante más serio que su equivalente alemán en su tiempo. Las Empresas Españolas Están Fuertemente Endeudadas Las empresas españolas están, ahora, desapalancando y reduciendo su exposición al crédito. Mirando estos últimos gráficos de crédito, destacan dos características. En primer lugar, el total de deuda privada actual no es tan diferente entre los dos países, pero hay que tener en cuenta que el PIB alemán es el doble del PIB español.

La Deuda Alemana Fue Muy Inferior A Su Equivalente Española De Hoy En Día

En segundo lugar,si se mira la cola larga del cambio de crédito interanual alemán, se puede discernir un poco el futuro que le espera a España. La tasa de crecimiento interanual no volverá a subir a sus niveles de antaño, y tenemos que esperar que se va avanzando pegado cerca de cero, a la medida que el sector privado en España vaya desapalancandose. Todo esto nos lleva a un concepto muy importante, la relación entre "booms" basado en crédito y déficit en cuenta corriente. Tal y como se puede ver en el gráfico, Alemania no fue una excepción. Durante todo su "boom" de consumo, el país llevaba un déficit sistemático, pequeño, pero constante. Es este déficit el que se convierte en superávit en la medida en que el país pasa por un ajuste estructural que acompaña al desapalancamiento, y a la transición hacia un país fuertemente exportador.

El Déficit Inesperado De Cuenta Corriente De Alemania 

Es el camino alemán el que, seguramente, España tendrá que seguir, pero hay que destacar la diferencia masiva de escala entre las dos transiciones. El ajuste español será muy grande, casi sin precedentes históricos. Pero quién permitió que España desarrollase un desajuste tan enorme?

El reto es exportar: ¿Pero qué y dónde?

El sector de exportación español es demasiado pequeño. Tantos años de vivir con el boom fácil de la construcción han dejado su huella. Algunos dicen que el sector de exportación es lo suficientemente competitivo. Pero quizás las cosas no son tan fáciles. Tanto las exportaciones españolas como las alemanas están otra vez a su nivel de antes de la crisis. Pero en el caso alemán el nivel es el doble (pro rata) que en el caso español. Es por eso que el sector español tiene trabajo por hacer, y bastante.

El necesario e ¿incompleto? reajuste. Entonces, ¿Que Puede Hacer España?

Edward Hugh en el Financial Times del lunes:

Asked what Spain and Portugal should do to stop the so-called contagion, Edward Hugh, a Barcelona-based economist, replied: “Not do anything wrong.” He went on: “The only thing you can advise these people to do at this stage is to be absolutely frank and stick absolutely to what they say.” “From this point on, the more you do fiscal austerity, the more you contract and the less you can pay,” said Mr Hugh.

Manuel Campa hablando con Bloomberg el martes:

The best thing “to generate credibility in the Spanish economy is to execute the measures we have announced at the time and in the way they were announced, and that implies not taking additional measures,” Jose Manuel Campa, deputy finance minister for the economy, told reporters in Madrid today. Miguel Angel Fernandez Ordonez declarando en una comisión del senado: “We have to convince people that we’re going to do exactly what we said we were going to do,” Bank of Spain Governor Miguel Angel Fernandez Ordonez told reporters in Madrid after appearing before a Senate committee today. Spain’s deficit- reduction effort is going “very well,” he said. "The outlook for a gradual recovery is surrounded by uncertainties,“ Bank of Spain Governor Miguel Angel Fernandez Ordonez told senators."In an environment where financing conditions will foreseeably remain restrictive and in which the public and the private sector have a pressing need to clean up their financial position, we can expect the pace of recovery in household consumption to slow versus the first half of the year," he said.

Contagión En Los Diferenciales



¿Es Este La Solución? 

ECB's Weber Says Europe Can Go Beyond EUR750B Rescue Axel Weber, German Central Bank president and council member of the European Central Bank, said Wednesday the euro is solid and euro-zone member states will protect it from speculative attacks, even if that means putting more money on the table. He said any speculative attack on the euro would fail as he assumes European countries are ready to increase the EUR750 billion rescue package created in May to fend off threats to financial stability within the 16 member states of the euro zone. "If that amount is not enough, we could increase it," Weber said. "An attack on the euro has no chance of succeeding."

Yo Creo Que No Lo que necesesitamos a) Reducir el coste de la deuda. Que el BCE compra bonos en los mercados primarios en un golpe de “shock & awe”, con el objectivo de bajar el rendimento de bonos de 10 años hacia una franja de entre 1% & 1,5% (tipo Reserva Federal). b) Euro Bonds. Que los paisos de la Area Euro emiten bonos en conjunto, que son de todos y para todos, para asumir una parte del coste de los platos rotos de los primeros diez años de la divisa comuna . c) Condicionalidad. Crear un mecanismo con poderes convincentes para vigilar los deficits y los desajustes externos de los paisos miembros de la Zona Euro.

 Durante Los Primeros Años de Este Siglo La Economia Alemana Tenia que Luchar Para Recuperar La Competitividad Hoy En Dia La Economia Española Se Enfrenta Un Reto Parecido. ¿Estaremos A La Altura De Esta Tarea?

 Thank You For Your Attention

You can download the full presentation here.

Does Norway Need Immigration - TEDXNH Bergen Sept 2010

Is Immigration A Solution To Our Edward Hugh Long Term Pension Problems? Bergen: October 2010



Global Ageing: An Irreversible Truth

No other force is likely hot shape the future of national economic health, public finances, and policymaking as the irreversible rate at which the world's population is ageing. U.N. figures show the proportion of the world's population aged over 65 is set to more than double by 2050, to 16.2% from 7.6% currently. By the middle of the century, about 1 billion over 65s will join the ranks of those classed as of non-working age. The cost of caring for these people will profoundly affect growth prospects and dominate public finance policy debates worldwide.



Second Demographic Transition

This process of rapid ageing is due to the combined impact of two factors
1) Declining fertility Spain Total Fertility Rate
2) Steadily Rising Life Expectancy Spain Male Life Expectancy

• The pace of aging varies greatly across countries and regions,
• Most pronounced and rapid in those countries that for decades have had fertility rates below replacement levels - Japan, German speaking countries, Southern and Eastern Europe.
• The median age of populations in Europe as a whole will increase from 38 today to 49 in 2050 (with significant differences between countries), and at this point it will be over 20 years above the estimated median age in Africa (which will be the youngest continent).
• Spain - with half its population older than 55 by 2050 – is expected to become the oldest country in the world, followed closely by Italy and Austria, where the median age is projected to be 54.

Differential Rates Of Ageing

Not only will populations get older, in many cases they will shrink. According to the latest forecasts, Germany’s total population will shrink from its current 82 million to somewhere between 69 and 74 million by 2050, while the proportion of people aged 65 and older is projected to rise from just under 20% today to just over 33% by 2050, depending on immigration. At the same time, the number of very elderly (those aged 80 and over) will nearly triple to as much as 15% of the total population.

Shrinking As Well As Ageing 

Eastern Europe Especially Badly Affected Among emerging economies, the situation in the East of Europe stands out as by far the worst in the short term. In 2025, more than one in five Bulgarians will be over 65 - up from just 13 percent in 1990. Ukraine’s population will shrink by a fifth between 2000 and 2025. And the average Slovene will be 47.4 years old in 2025—among the oldest in the world. Between 2000 and 2005, the only countries in the world with population declines of more than 5,000 people were 16 countries in Eastern Europe and the former Soviet Union The fastest aging countries on the planet over the next two decades will be in those of Eastern Europe and the former Soviet Union.The entire region is projected to see its total population shrink by about 23.5 million. The largest absolute declines will be in Russia, followed by Ukraine and Romania.

The magnitude of China’s coming age wave, is simply staggering. By 2040, assuming current demographic trends continue, there will be 397 million Chinese over 65 - more than the total current population of France, Germany, Italy, Japan, and the United Kingdom combined. China Too China’s ageing is characterised by the unusual speed with which it is occuring. In Europe, the population over 65 passed the 10 percent threshold back in the 1930s and will not reach the 30 percent mark until the 2030s, one century later. China, on the other hand, will traverse this same distance in a single generation.

Norway Is Ageing More Slowly Than Most 



Fertility has fallen, but never below the critical 1.5 tfr level Life expectancy is also rising With the result that the medium growth Population pyramid doesn’t look like a nightmare.



The secret is maintaining economic growth. Migrants have been attracted by Norways recent rapid economic growth And seem to follow pathways laid down during earlier waves of internal migration.

As far as we understand the issue at this point, population ageing will have impacts which could be categorised under four main headings:

i) it will affect the size of the working age population, and with this the level of trend economic growth in one country after another
ii) it will affect patterns of national saving and borrowing, and with these the directions and magnitudes of global capital flows
iii) through the saving and borrowing path the process can influence values of key assets like housing and equities
iv) through changes in the dependency ratio, ageing will influence pressure on global sovereign debt, producing significant changes in ranking as between developed and emerging economies.

Impacts Of Population Ageing

Most of the literature on the impact of immigration on ageing focuses on the impact of immigration on the labour market and the welfare state. A drawback of this focus then is that the impact of ageing and immigration on capital formation and economic growth usually are ignored. Most “overlapping generations” economic models assume that the younger generation works, borrows to buy a house and pays pension contributions, whereas the older generation lives from previous saving, pension benefits and (later) dissaving. Modern economic growth is increasingly fuelled by either exports and credit growth, and the latter implies that an ageing economy experiences a decline in economic growth. Immigration then might help counter this decline.

Not Just Working Age Population Growth Is Also Involved

Japan and Germany are currently the two oldest societies on the planet. With median population ages of around 45. They are both heavily “export dependent”. Just a coincidence? Also trend GDP growth in both these countries has fallen back strongly, and both countries are now highly sensitive to the impact of external currency and demand shocks.

Germany And Japan: Examples (to try) Not to Follow?

The Counter Argument

“There may be many reasons to favour increased immigration....But it would be wrong to advocate increased immigration as necessary to deal with the fiscal consequences of an ageing population, or as a means to avoid large future tax increases or benefit reductions”. Marty Feldstein - The Effects of the Ageing European Population on Economic Growth and Budgets: Implications for Immigration and Other Policies

Two Principal Points i) immigration is not necessary to deal with the fiscal consequences of ageing populations ii) it is false that immigration constitutes a way of handling ageing which enables you to do so without large tax increases or benefit reductions since increased immigration would do little to reduce the future fiscal burden. The increased revenue from a large rise in immigration would finance only a small part of the coming rise in the cost of pension and health benefits.

My opinion - Feldstein is both right and wrong He is right that immigration alone won’t be enough to address the problems we face. We also need structural reforms in labour markets to encourage higher participation rates. We need to move away from Paygo to fully funded pension systems. But he surely goes too far. Migrants can help keep our welfare systems afloat as we transit from one system hot the other. They help fill the gap of the “missing generation” of contributors. Most migrants are in their 20s and 30s, so they will also form homes and families, helping push the birth rate up a bit.

Two Examples Of What Not Not Do From The South Of Europe 

Italy

Significant migrant inflows since 2000, but no net impact on the decline in trend growth. Trend growth could now be below 0.5% per annum - and could turn negative during this decade.  Human Capital Loss Gives The Key To The Italian Problem

• It is hard hot say why Italy has fared so badly in terms of growth, given the recent strong immigration.
 • A number of factors involved, but one that stands out clearly in the annual brain drain out of Italy.
• Each year somewhere between 5% and 10% of Italian university graduates leave their country, never to return.
• So some of the migration represents a “bad swop” of highly qualified people for people with far lower education levels.
• Reform in Italy’s “insider-outsider” labour market, and changes making it easier for young people to start their own businesses would be a big step forward.

Spain

 Spain’s huge housing bubble lead to a decade and a half of recession-free growth, growth which then came to a dramatic halt after the bubble burst. During the boom nearly five million migrants were “sucked- in” to keep the economy afloat, but now the boom is over many are unemployed and the authorities have no clear idea what to do about this problem.

Initially the new migrants became contributors to the social security system, thus helping to make the PAYGO pension system more sustainable. But as these very same migrants now queue up at the labour offices many Spaniards are asking whether this was the best way to do things.

The Price Of Doing Nothing

Credit rating agency S&P’s estimates that without policy changes U.K. government debt would rise to over 430% of GDP by 2050, while German government debt would rise to more than 400%, French government debt to more than 403%, Italian government debt to over 245%, and Spanish government debt to over 544%.

You can find the full presentation here.

20th Economic Forum (Krynica Zdrój, Poland, 2010)

EU Crisis Zones : Has a Eurozone Domino Effect Been Averted?

It was always known that the eurozone was a less than perfect construction, especially in terms of fiscal policy incentives, yet the magnitude of the crisis that first hit Greece and may yet affect Spain, Portugal, Italy and others still surprised most observers. For the moment the 750 billion euro stabilisation mechanism agreed in May appears to have calmed the markets, but is it enough? Are the stress tests conducted on EU banks credible? What is a proper medium term response and medium-long term strategy to protect the Euro zone and avert a disastrous domino effect. The risks remain high. Are there lessons to be learnt from the non-eurozone countries? Should the euro adoption process be modified? Will Germany and France continue to foot the bill without a reform of eurozone fiscal discipline?

Moderator:  Alfred Vanags - Director, Baltic International Centre for Economic Policy Studies (BICEPS), Latvia

Speakers:

Agnes Benassy-Quere - Director, CEPII (Center for International Prospective Studies), France

Jochen Bittner - European and NATO Correspondent, Die Zeit weekly, Germany

Pawel Dziekonski - Director, Risk Mangement Division, Deloitte, Poland

Morten Hansen - Head of Economic Department, Stockholm School of Economics in Riga, Latvia

Edward Hugh - Macro Economist, , United Kingdom

Commentators:

Sergey Kadochnikov - Dean of the Faculty of Economics, Ural State University named after A.M. Gorky, Russia
Valerii Salyvin - Director, Scientific Research Center for Problems of Social Reproduction, Ukraine

España, ¿Hacia Finlandia o Argentina?

En el primer compás de su intervención, Edward Hugh afirmó que España se encuentra en un momento crítico de su historia, en el que se le plantean sólo dos posibilidades: ser como Finlandia, que en su crisis de la década de los 90 optó por coger el toro por los cuernos y acometer grandes cambios en su economía; o bien como Argentina, que no hizo nada frente a su último descalabro. Para el ponente, en este dilema no existe, además, un punto medio: o nos convertimos en un país más competitivo, o nuestros problemas se van a multiplicar.

Tras este primer y radical diagnóstico, hizo referencia al último informe del Fondo Monetario Internacional (FMI) en el que se apremia a la economía española a acometer de manera urgente reformas amplias y de largo alcance, con las que remediar las disfunciones de su mercado laboral, los estragos de la burbuja inmobiliaria, el elevado déficit fiscal, el excesivo endeudamiento exterior de su sector privado, el anémico crecimiento de su productividad o su baja competitividad, entre otros puntos débiles.

Para explicar el amplio consenso actual sobre los múltiples problemas de nuestra economía, hizo una panorámica de su curso reciente. Después de una década en la que se produjo un boom inmobiliario, España tiene hoy un serio problema de deuda, porque sus sectores público y privado acumulan un endeudamiento equivalente al 265% del PIB; este problema, sin embargo, es extensivo a otros países, como el Reino Unido o los Estados Unidos, por lo que concluyó que, de hecho, los niveles de deuda no son representativos de si un país es o no próspero –si bien, si la deuda sobrepasa el 100% del PIB, se corre el riesgo de una crisis a la griega–. En todo caso, al término de la recesión, la economía española ha empezado a recuperarse tímidamente, y, por ejemplo, su producción industrial ha dejado de caer y la venta al detalle mejora con lentitud. El paro, por su parte, se ha estabilizado, aunque las afiliaciones a la Seguridad Social siguen en claro descenso. Tampoco se ha recuperado el sector de la construcción, que prosigue con su severo ajuste. En este contexto, Hugh se mostró especialmente preocupado por la evolución demográfica, considerando que, tras el aumento ininterrumpido de nuestra población en los últimos 10 años, una contracción de la misma en tres millones de habitantes podría dificultar de forma notable la ya de por sí grave situación de nuestro mercado inmobiliario.

De vuelta a la evidente pero aún tímida estabilización de nuestra economía, señaló que ésta se ha logrado mediante dos instrumentos: el aumento vertiginoso del gasto público–mediante el cual se ha apoyado la demanda interna del país desencadenando por el camino un problema galopante de déficit público–, y el apoyo del Banco Central Europeo, cuya masiva inyección de liquidez ha permitido a los bancos españoles acceder a fuentes de financiación. El problema de estos instrumentos, en su opinión, es que su empleo ha empeorado los handicaps estructurales de la economía española.

Para apoyar esta tesis, se refirió al déficit en el comercio de mercancías, que hasta el año pasado había ido mejorando en España, pero que, de la inyección del BCE en adelante, ha empeorado gravemente.

Después de estas soluciones, España se ha convertido en un país tremendamente endeudado con el exterior, y ésta es una tendencia que, en opinión de Hugh, debemos cambiar. Es cierto que, como insiste José Luís Rodríguez Zapatero, no estamos tan endeudados como otros países de Europa, pero no por ello debemos desatender el crecimiento desatado de nuestra deuda. Para su reducción, las únicas vías para que España regrese a la normalidad económica son dos: inflación y crecimiento. Sobre la primera, Hugh quiso distinguir entre buena inflación y mala inflación, considerando que su dosis justa –en el entorno de los dos o tres puntos– podría ser positiva para nuestro país en el momento actual. En cuanto al crecimiento, en una economía moderna, el aumento de la demanda agregada puede producirse incrementando el crédito o bien por la vía de las exportaciones; como en España, hoy, tanto los hogares como las empresas están pidiendo menos créditos, la única vía de crecimiento a nuestro alcance es la de la exportación.

Retomando el problema intrínseco a la dependencia sistemática de la financiación externa, Hugh afirmó que su efecto hace que España no sea hoy un país totalmente libre, sino que varias de las medidas que está adoptando en la actualidad vienen dictadas por la necesidad de mantener su credibilidad en el exterior. Tampoco se puede desatender el severo ajuste que España ha de completar de aquí a 2013, y que en opinión del ponente es un 1% mayor de lo que pensamos, de modo que su consecución va a ser todavía más dolorosa.

A modo de cierre, Hugh se mostró confiando en que ya se ha iniciado la senda hacia una ambiciosa consolidación fiscal, pero exigió que ésta se complete con reformas que favorezcan nuestro crecimiento estructural –entre ellas, la del mercado laboral–. Son igualmente imperativas las reformas del sistema bancario y del de pensiones. A su vez, ninguno de estos cambios se ha de plantear con las miras puestas en 2020, porque urgen resultados en este mismo 2010 o en 2011 Whither Spain – Towards Finland or Argentina?

Edward Hugh

Sitges May 2010

“Spain’s economy needs far-reaching and comprehensive reforms. The challenges are severe: a dysfunctional labor market, the deflating property bubble, a large fiscal deficit, heavy private sector and external indebtedness, anemic productivity growth, weak competitiveness, and a banking sector with pockets of weakness. Ambitious fiscal consolidation is underway, recently reinforced and front-loaded. This needs to be complemented with growth-enhancing structural reforms, building on the progress made on product markets and the housing sector, especially overhauling the labor market. A bold pension reform, along the lines proposed by the government, should be quickly adopted. Consolidation and reform of the banking system needs to be accelerated. Such a comprehensive strategy would be helped by broad political and social support, and time is of the essence”. IMF 2010 Article IV Consultation Spain Mission Statement

Following a decade long housing “boom” Spain now has an enormous debt problem. The combined debt level of Spain’s households, companies and government now amounts to some 265% of GDP.

However, in contrast to the situation in countries like Greece and Italy, Spain’s endebtedness problem is not principally one of massive public sector debt. The main component of Spanish debt is private – between households and companies accumulated debt amounts to some 210% of GDP.

Spain is not, by a long stretch, the only country to suffer from such a high level of private indebtedness. There is, for instance, the example of the United States, where total indebtedness now significantly exceeds the 300% of GDP level, a threshold which many consider to be highly structurally significant. The sheer fact of knowing you share this problem with other larger, and richer, countries may be soothing, but it should also give an indication of the kinds of difficulty Spain may experience in interacting with the external environment, since solutions will need to be found which fit the needs not of one isolated country, but of various countries, all at one and the same time.

Stabilisation....At A Price

After an extremely severe recession the Spanish economy has now been stabilised.

Industrial output has stopped falling, and retail sales have even started to rise slightly.

Output in the bloated construction sector, as was to be expected, continues to fall, as do house prices. Unemployment has stopped rising, although employment, and participation in the Social Security system continues to fall.

At the same time the previously large migration flows have now all but dried up.

But this stabilisation comes at a price, given that is the result of a dramatic surge in current government spending and a huge liquidity support operation for the financial system being supplied by the ECB.

Deficit and Debt Dynamics

As is by now well known, this increase in public spending has produced a further problem – one of a large government fiscal deficit – and this development has served to attract the attention of the international investors on whom Spain depends for its financing at precisely the time that the issue of sovereign debt in the ageing societies of the economically developed world is starting to become a cause for concern in the financial markets.

The principal difficulty facing the Spanish economy at the present time is that while the emergency measures have served to buy time, this time has not been wisely employed, and the measures have simply served to exaccerbate the underlying structural problems rather than resolve them.

According to the National Statistics Office (INE), the slight economic expansion that was achieved in the first quarter of 2010 (0.1% growth) was the combined result of an increase in internal demand and a worsening of the net impact of external demand – precisely the opposite of what you would want to achieve. In other words, while Spain’s exports did increase, the growth in domestic demand in conditions of limited international competitiveness meant that imports increased even more. On an interannual basis the negative impact of national demand reduced (from -5.3 percentage points to -2.5 percentage points – see chart below) while the positive impact of external demand fell (from 2.2 percentage points to 1.2 percentage points). To be clear, growth in the first quarter of 2010 was due to rising domestic demand, and not rising exports, which means the real impact of the increase in government spending and the liquidity measures applied by the ECB since June 2009 has been to reverse the positive trend in the goods trade deficit which had been seen in earlier quarters.

As the Spanish government stresses, the country’s share in world exports has remained more or less constant since the start of the century, but at the same time Spain’s share of world imports has increased. Put another way, thanks to the foreign funds which flowed in to finance the housing boom Spain became a major imports powerhouse, with the consequence that both the trade and the current account deficits deteriorated sharply, while a significant part of Spanish industry simple died. One of the major tasks of any recovery programme is to bring this industry back to life. In this sense what Spain’s economy needs is not rejuvenation but resurrection.

With a highly integrated global economy as the background, Spain’s seemingly insatiable demand to build and buy ever more housing units was satisfied via the massive entry of migrant labour (5 million immigrants in 10 years), and substantial ongoing capital inflows (a current account deficit of around 10% of GDP), which both served to raise the short term capacity of the economy, but lead to the consequence that Spain today is a highly over-indebted country – net external debt is around 90% of GDP – while a large part of the manufacturing base which would have facilitated paying down the debt now no longer exists.

As a result – and as Mr Zapatero repeatedly stresses – it is the case that the accumulated debt of the Spanish government is not (yet) inordinately large when compared to that of its peers, although as a share of GDP it has been increasing rapidly in recent quarters.

To reduce this debt burden the Spanish economy needs two things: inflation and growth, although it should be stressed that competitiveness can only be restored by some form of price and wage deflation.

In a modern, mature, economy growth in aggregate demand only comes either via an increase in the level of credit, or through an increase in exports. The problem that Spain faces is that, on the one hand all sectors of the economy (households, companies and government) are now heavily over-endebted and deleveraging as fast as they can, with the result that – on aggregate – they are demanding less (not more) credit. On the other hand, the Spanish economy is not sufficiently competitive to be able to grow simply by relying on exports.

In addition, systematic dependency on external financing is never a good thing, since your creditors can always impose conditions on you which may not be to your liking. Despite the fact that the commitment to reduce Spain’s fiscal deficit by 5% of GDP in 2 years is, in and of itself, a very strong one, the country actually has to make a far greater fiscal effort than it seems, due to the commitment contained in the recent Ley de Economía Sostenible to reduce substantially the quantity of unpaid receiveables on the public sector account books. Spain’s Autonomous Communities alone have some 30 billion (or around 3% of GDP ) in payments oustanding as of the last quarter of 2010 – which means there will need to be a reduction in spending of something like a additional 1% of GDP a year over the adjustment period under this heading alone.

The need to restore order to Spain’s public finances will mean that the adjustment will be even more painful than generally envisaged, and that the impact of the correction on the economy generally will be more severe. Thus, it is rather unlikely that the Spanish economy will grow in 2011 as many expect. Weighed down by a heavy fiscal correction, an unacceptably high level of unemployment, private demand in slight contraction and a weak growth rate in exports, it is probable that the economy will once more contract, possibly by between 1% and 2%.

To conclude, Spain stands at a crossroads, and important decisions need to be taken. A fiscal adjustment is necessary, but the country also needs a competitiveness adjustment in the form of a substantial reduction in the wage and price level (possibly by 20%). If this is not implemented the dynamic of Spain’s debt will surely become unsustainable. Spain has two – and only – choices at this point. It can follow Finland’s example in the 1990s, take the bull by the horns and use the present crisis as an opportunity to transform the Spanish economy into a new economic miracle, or it can remain in denial about the severity of the problem, let things drift until they can do so no longer, and then follow Argentina down the road of ruin and despair.

To cite the words of the latest IMF report: “Such a comprehensive strategy would be helped by broad political and social support, and time is of the essence.” Ladies and gentlemen, enough is enough. Nearly three years have now been wasted, and it is time to act.