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A former senior economic advisor to the IMF tells SUR in English why he believes Spain has ‘turned around’ its economy
04.04.12 - 18:42 -
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Dr. Holger Schmieding Senior economist and strategist
Dr. Holger Schmieding. SUR
Just two days before yesterday’s nationwide general strike, it was announced by the Bank of Spain that the country has officially slipped back into recession – barely two years since it emerged from the last one.
Yet despite gloomy headlines, some key, opinion-forming economists are arguing that Spain is starting to reverse its economic woes.
Leading the way in the optimism stakes is the influential, German-born Dr. Holger Schmieding, the Chief Economist at Berenberg Bank, Germany’s oldest private bank.
Before he joined Berenberg, he was a Senior Economic advisor to the International Monetary Fund; a Senior Strategist at the Bank of America; and in 2007, the Financial Times Deutschland placed him at the top of the list of 50 analysts for the proven accuracy of his forecasts over the last six years.
You’ve talked of a ‘Spanish economic turnaround’. What do you mean by this?
The Spanish economy is adjusting rapidly to the challenges posed by the bursting of its real estate bubble and the debt crisis. Two key achievements stand out: Firstly, until recently, Spain was living well beyond its means. At the peak of its credit-fuelled bubble in 2007, Spain’s imports of goods and services exceeded its exports by more than 7 per cent of GDP. But thanks to a fall in imports in 2008 and 2009 and a major surge in exports from 2009 onwards, Spain now exports slightly more than it imports. The result shows that the Spanish economy is now competitive.
Secondly, Spain’s major long-term problem is its labour market. Spain has tackled the problem head-on with its recent labour market reforms. Such reforms, including cuts in future severance pay, do not generate many new jobs immediately.
But, as Germany learned after its 2004 labour market reforms which turned Germany from the erstwhile ‘sick man of Europe’ into the continent’s powerhouse, such reforms work well after a lag of one to two years.
Once the economy starts to grow again, lifted by exports or an easing of the initial pain of austerity, companies will offer more jobs than they would have done without such reforms. And more jobs will mean more money to spend for Spanish consumers and a less depressed outlook for the housing market and the banks.
Has Spain now put the danger of default behind it?
Only partly so. The risks looks smaller now than in late 2011. Spain itself has taken the key steps to reduce the risk. But it’s only partly under Spanish control. If some external shock or an overreaction of markets to Spanish fiscal shortfalls caused by recession were to trigger a new panic among bond investors, Spain would still be vulnerable. It may take at least one more year until, amid a return to GDP growth and a fall in unemployment and with a major improvement in the fiscal balance, until Spain will be fully safe again.
Is the eurozone now safe from Spain’s fiscal crisis?
Spain has taken many courageous steps to improve its situation. With the ECB’s massive liquidity injections and the new fiscal pact, Europe has reduced the risk of contagion. But the risk still exists. A buyers’ strike for Spanish bonds is less of a risk than it was in late 2011. But it is still not impossible. In case of major turbulences in Spanish financial markets, Italy and the Eurozone as a whole could still be affected.
So why has Spain headed into its second recession in two years?
The Eurozone as a whole fell into a recession in late 2011 after policymakers had allowed contagion from Greece to the much bigger markets and economies of Italy, Spain and the Eurozone as a whole. Led by Germany, the Eurozone economy will probably start to expand again in mid-2012. But as Spain needs, and has more, short-term austerity than many other countries, the economic recovery will initially be more halting in Spain than in the Eurozone as a whole.
Why was the bond market so “nervous” last week?
Concerns about global growth weighed on markets. As economies with significant austerity such as Spain need to raise their exports further to offset the domestic pain, Spain is vulnerable to concerns about the strength of demand in its trading partners. These concerns were exacerbated by negative - and overdone - comments from some market economists about Spain.
What does this mean and what effect will it have?
The Euro crisis has always come in waves. Whereas tensions eased very much over the last three months, we may still have to brace ourselves for the risk of a new wave of crisis. But thanks to the progress seen in Spain and the efforts on the European level to contain contagion risks, a potential new wave of crisis would probably be less damaging than the wave that hit Europe late last year.
How does Spain compare to Italy, Greece and Portugal right now?
With the turnaround in its external balance and its major labour market reforms, Spain is ahead of Italy, Greece and Portugal on these two key counts. On the fiscal side, Spain is far ahead of Greece but not yet ahead of Portugal and Italy. While Spain has the advantage that its pile of government debt is much smaller as a share of its GDP, Spain had a significantly higher fiscal deficit than those two countries last year. The major task for Spain is to contain the fiscal deficits of the regions. If Spain found an effective and credible way to do so, it could move ahead of other countries on the Euro periphery on the fiscal count as well.
Will Brussels become increasingly involved with Spain as it has with Greece?
Courtesy of the new fiscal rules, Brussels is becoming more involved with all fiscally challenged Euro countries, not only with Spain. But in the likely case that Spain escapes a full scale market panic that could force it to request help, Brussels will remain much less involved with Spain than it is with Greece. Spain is much more the master of its own fate than Greece which totally depends on support from Europe and the IMF.

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