Mark Weisbrot Director, Centre of Economic and Policy Research
The EU authorities won't allow Spain to use the policies needed to get out of the crisis, says the CEPR director
14.02.11 - 11:43 -
Weisbrot says the current economic measures are ‘unhelpful'. Sur
“Spain, a hostage to the eurozone” is a report published last week by the Centre for Economic and Policy Research (CEPR), an influential, independent think-tank which advises international governments and the UN from their headquarters in Washington DC.
Mark Weisbrot, the CEPR’s director and report author, speaks exclusively to SUR in English to defend the controversial, and largely pessimistic, picture it paints.
The ‘Hostage’ was published, some say deliberately, days before the German Chancellor, Angela Merkel flew to Madrid with her finance and economy ministers to meet the Spanish Government.
In the capital, she hailed reforms undertaken by Spain to revive its depressed economy and fend off the need for an Irish-style bailout.
At a joint press conference with Spanish Prime Minister, José Luis Rodríguez Zapatero, Merkel said “Spain has really done its homework and for that reason I think Spain is on a very good path.”
This is a direct contradiction to the CEPR’s report.
Mark, how would you describe the current, overall economic situation in Spain?
It’s still pretty bad. The economy shrank by 0.2 per cent in 2010 and is now projected to grow by 0.7 percent in 2011. This is not enough to make a dent in the country's depression-level and the 20 per cent unemployment rate.
Why do you think Spain is enslaved by Europe and the euro, as you suggested in “Spain, a hostage to the eurozone”?
Well there are several reasons. The main thing is that the country is stuck in a swamp of low growth and extremely high unemployment, and the ‘European authorities’ - the ECB (European Central Bank), the European Commission, and now the IMF (International Monetary Fund) is included with them - won't allow any of the standard macro-economic policies that would be needed to get out of it. They are: expansionary fiscal policy, which is prohibited by the European authorities; expansionary monetary policy, the ECB won't do this, and certainly won't allow the kind of quantitative easing and Central Bank financing of debt as the U.S. is doing; and, of course, exchange rate devaluation is precluded by membership in the Euro.
This leaves Spain dependent on a miracle in export demand to recover. It may happen, but it also may not.
Was Spain going into a single currency with, say, Germany destined to fail?
Probably.
Are there social, cultural and/or economic reasons for this?
The reasons are economic: Spain’s productivity was 63 per cent of Germany’s in 1999. There was no way to catch up, especially with the bubble-driven growth of the past decade.
Countries with this much of a productivity gap probably shouldn’t have the same currency; furthermore, joining a currency union with neoliberal rules and a far-right central bank is a bad idea in general.
What has the economic experience been for Spain since the euro was introduced?
The adoption of the euro opened up a period of bubble growth, with big capital inflows from other European countries, and the country experiencing a vast run-up in the stock market and a huge housing bubble. Spain’s economy grew by a third between 1999 and 2007, and its net debt fell to just 26.5 percent of GDP in 2007. But it was bubble-driven growth: the stock market peaked at 125 percent of GDP in November 2007 and dropped to 54 per cent of GDP a year later. A housing bubble increased construction from 7.5 per cent to 10.8 percent of GDP (2000-2006), and housing starts dropped by 87 percent when the bubble burst.
It was the bursting of these bubbles, and not any lax spending policies by the government, that crashed Spain’s economy and caused its budget troubles.
Do you believe the euro is the ‘new Deutschemark’?
If you mean that the Germans have a strong influence over the ECB, that is certainly true.
Is a two-tier euro system, such as having one currency for the north and one for the south of Europe, workable?
That would make more sense than the current system, but again it would depend on the rules under which it was organised.
How would Spain benefit in real terms by leaving the eurozone and going back to the peseta?
Mainly because it would be able to pursue all three of the expansionary macroeconomic policies I described earlier, as necessary, in order to reduce unemployment and kick-start the economy. This would, of course, include a devaluation.
Isn’t devaluation taking a step backwards? Wouldn’t it be better to take painful reforms like has been the case in many other European countries, such as Germany?
Well the problem with the path that Spain is on now is that there’s no telling where the end of the road is. You could have years and years of high unemployment and economic stagnation. And then even if the economy does recover, because of favourable external conditions, the problems that brought the current crisis, including the productivity differential, will still be there.
If Spain’s main export partners are fellow Europeans, would the euro not be a good thing?
Well, not under the conditions that I’ve just described, no.
What measures do you predict the Spanish Government will take over the next 12-24 months to try and boost the economy? And can those measures be successful?
I don’t see that any of the Government’s measures would have the effect of boosting the economy.
The Government is currently committed to pro-cyclical (that’s to say, cutting spending and raising taxes) fiscal policy, which would tend to make things worse. Although, if there’s enough pressure from below, they could relax that some.
