IS THERE HOPE FOR SPAIN?, Why it's too early to give up (via @LuisMHuete)
By Professor Arturo Bris - October 2012, IMD website
Professor of Finance, IMD / Research Fellow, Yale ICF and ECGI. Expert in Corporate Governance, Banking and Financial Strategy
(
@arturobris (
Bris on Deanstalk 15 April, 2012)
@IMD_Bschool: "We are jeopardizing the future opportunities of one or two generations of Spaniards," IMD Prof @arturobris http://t.co/7dUcesvc
www.arturobris.com, IMD; previously at Yale School of Management, European Corporate Governance Institute, 74 citations on Thomson Web of Knowledge, Google Scholar profile)
Is there a future for the people of Spain once the current sovereign
bond crisis is over? Is there any hope for Spanish youth, more than 50
percent of whom are unemployed? While the current outlook does not seem
to call for optimism, I believe that with a fundamental shift in Spanish
mentality, there are several promising indicators suggesting that this
time Spain's real recovery might be in sight.
The release of the central government budget for 2013 is not among
these promising indicators, unfortunately. The expectation is that tax
increases will result in increased revenues and that together with
drastic cuts in expenses, the public deficit will be reduced so as to
appease the European institutions that are supposed to bail Spain out.
However, with up to 25% of the budget used to pay interest on
outstanding debt, there will be less investment in education and
infrastructure, a reduction in the number of public employees, higher
VAT and higher income, corporate and wealth taxes.
In plain English—public policies will hardly contribute to the
creation of employment and wealth. And in a country where 52.1 percent
of job seekers under 25 are unemployed and where the overall
unemployment rate is 24.6 percent, this is discouraging. Spain now ranks
39 out of 59 in the 2012 IMD World Competitiveness Report (it was
number 35 in 2011), below poorer economies such as Estonia, Kazakhstan
and Mexico. Unlike in the U.S., the government cannot help the real
economy; there is no central bank that could print money. And with bond
spreads exceeding 400 basis points the prospects for the recovery coming
from the private sector seem gloomy.
Spain's pensions and salaries are already lower than the European
average. However, although the retirement age is 65, many start enjoying
their retirement benefits much earlier, from as young as 55. This is
compounded by the fact that about 70 percent of workers live off the
government.
What to do?
- There is no question that those who can pay for the cost of the
crisis should do it—this includes public employees who enjoy a lifetime
of job security, and the wealthy. Transfers that do not represent an
investment in the future of the economy (subsidies, tax advantages to
certain sectors and professions) should be eliminated in favor of
investments in education and job creation.
- Likewise, the service sector must be liberalized. The ECB Monthly
Bulletin argued in August that one explanation for the higher labor
costs in Spain is the lack of flexibility in the service sectors
(architects, doctors, pharmacists, lawyers) which are quasi-monopolies
controlled by professional organizations.
- Raising taxes is unavoidable, but it should be accompanied by taxes
on financial transactions and restrictions to financial institutions on
dividend and bonus payments. The emphasis on investments rather than
certain transfers should result in a massive reduction of the public
sector and in particular of the local and regional governments, removing
duplications and promoting institutions that foster employment and
innovation.
But first and foremost, all these decisions must have the objective
of changing the Spanish culture of subsidies and government support.
This must be a change that convinces Spaniards that everything—health,
education, pensions, highways, libraries and electricity—comes with a
price. Last July the government implemented measures so that with some
exceptions, people have to pay 40% of their pharmacy bills (these were
100% covered before). As a result, consumption of pharmaceutical
products fell by 24% in the first month, which suggests that when
medicines are free, people spend more than necessary. Hopefully this
change in mentality can come from within Spain, rather than developing
as a result of further conditions imposed by the European Union.
There are some good reasons to be optimistic. The recently released
analysis of the Spanish banking sector from Oliver Wyman concludes that
the total capital needs of the system are €57.3bn, half of what was
originally estimated. This is the capital injection that would be needed
in the worst possible scenario, one that assumes a 6.5% drop in GDP,
unemployment reaching 27.2% and drops in house and land prices of 25%
and 60% respectively. Even then, only 7 out of 14 institutions would
then need help, and the three largest financial institutions in the
country currently display sufficient capital surpluses.
Unlike Italy and Greece, Spain enjoys a strong government that earned
an overwhelming majority in last year's general election. While it is
true that the recent decisions have upset many people, the government
can certainly engage in a massive reform program without the need to
reach political consensus.
The weak domestic Spanish economy is balanced with an external sector
that has remained resilient during the last few years. Spanish
companies have continued exporting, mostly services, since 2008, and
Spain is a massive exporter of knowledge and human capital. Between 2007
and 2011, domestic demand dropped by 10 percent in terms of GDP, while
the external demand grew by 8 percent.
There are also some positive signals from the outside. First and
foremost, the clear statements by ECB President Mario Draghi that the
euro would be supported as much as necessary; this has dissipated any
doubt on the sustainability of the common currency. What is good for the
euro is good for Spain. The recently announced Quantitative Easing
program in the US, which will float the market with cheap dollars, will
also help Spain by strengthening the euro and thus making Spanish
imports of goods and services cheaper.
At the end of the day, Spain's best asset is its people. The IMD
World Competitiveness Report shows that in "Availability of Skilled
Labor," Spain ranked 41 in 2008 and is number 13 in 2012. The quality of
Spanish engineers is sixth in the world, and we have improved 20 places
since 2008 in protectionism.
We need the world to believe in us, but we need to start by believing in ourselves.
Professor Arturo Bris is Finance professor at IMD. He directs the Advanced Strategic Management program and teaches on the Building on Talent programs.
Recent Comments