Spain needs to do more

Spanish employment has taken a pummeling during this crisis, but the outlook is not necessarily so bleak, at least by Spanish standards. As much can be gleaned from conversations with Spanish executives, whose job prospects nowadays seem to have touched bottom.

As the now empty Madrid streets on a Wednesday evening show, the situation for most is still austere and sentiment somewhat grim. Yet that potential improvement, if sustained, may be of enormous importance to Spain, , as well as the rest of Europe, in so far as employment is a key variable in Spain’s efforts to stave off financial contagion from other periphery countries.

A little bit of history may help to put things into perspective.

At the beginning of the 90s Spanish unemployment reached over 24%. Furthermore, at the beginning of the last decade some government economists swore that unemployment would never fall below 15%. Back then this was the widely accepted estimate for the natural rate of unemployment in the country. Time proved those economists wrong. During the boom, in March of 2007 to be more exact, the unemployment rate fell as low as 8%. Now, however, in Spain 20.5% of the active population is back in the unemployment queue, according to the latest Eurostat data, the highest rate in the EU-15, versus the average of 9.9% in the Eurozone and 9.5% in the wider European Union.

Painfully, even some incumbent politicians are willing to publicly recognize that unemployment may soon go over the 5 million mark, a politically and psychologically very sensitive number in a country of 46 million. Nonetheless, that forecast is a matter of debate even within the same ruling Socialist party, though some of those differences of opinion are simply a function of May´s regional elections (not to mention national polls next year).

The most worrisome aspect of this situation and the chief problem, politics aside, is the massive loss of competitiveness by Spanish workers throughout the last decade. Said loss is the product of sustained  - and to a good degree unjustified - decade long inflation (and labour cost) differential versus other countries. This is, in part, one of the by-products of the necessary ‘one size fits all’ monetary policy in the Eurozone, but at least also as much down to successive governments´ lack of structural reforms or, at least, countercyclical policies to compensate for the aforementioned.

There are also many other historic ‘ills’ which have contributed to the current situation: the highest redundancy costs for fixed contracts in Europe; defects in the current wage bargaining process which leads to nominal wage gains in excess of productivity; the atomized nature of Spanish small- and medium-sized enterprises (SMEs) and a related lack of internationalization; the associated lack of private investment (low productivity) and of non-bank financing for those same SMEs; powerful unions and divisive regional politics.

As if the above were not enough, we could also add - although it is a highly divisive and politically charged issue - what some believe to be a bloated civil service, with overlapping functions at the regional level. Certainly the very strong euro has not helped either. Mercifully, nevertheless, most of Spain´s trade is carried out with the rest of its Eurozone or EU-27 partners.

In particular, however, we would highlight the current wage bargaining scheme. A notorious, albeit perhaps extreme, example of existing inefficiencies is that under some already pre-negotiated wage bargains some sectors have this year seen 3% salary increases. Given that employment levels are still falling this should be considered nothing short of highly anomalous and pernicious, or just simply unfair.

Taking another look at the human cost, by some estimates the number of those looking to work abroad has doubled in the last two years, with 1.42 million already working outside of the country. Meantime, within Spain’s borders, among the young (defined as those below age 25) unemployment is now at 43.5%, versus 20.5% at the EU-wide level, according to Eurostat data. Curiously enough, once again the rule of thumb that youth unemployment tends to be twice that for the rest of the population again holds true here. Statistical curiosities aside, a further 240,800 people - of between 16 and 24 years of age - have yet to start their first job. As in other European countries, those without university degrees are faring considerably worse than the rest of the population. For men and women between 25 and 29 years old with university degrees, unemployment is approximately 18%, versus 40% for those without.

Now for what there is of good news. Almost all economists agree that with sufficient structural reforms - and some other measures - the Spanish economy has the sufficient wherewithal to tackle the current crisis. The requirement is to buttress and raise the economy’s growth potential. If done, so the argument goes, then unemployment should be able to be held to an increase not excessively above the 5 million unemployed mark. The benefits are self-evident, but even more so given the need to avoid banks’ loan books having to deal with another source of stress.

Underlining the need for prompt action, the latest European statistics show Spanish employment contracting at a 0.3% quarterly rate at the end of last year, when in the rest of the Eurozone it has actually been decreasing slightly for over a year now. Also, and quite unfortunately so, at 0.6% year-on-year Spanish gross domestic product (GDP) growth is still some way short of levels of growth usually associated with sustained lower unemployment.

The International Monetary Fund (IMF), however, is relatively upbeat in its latest projections for the Spanish economy, and sees unemployment falling modestly next year despite GDP growth only being expected to come in at around 1.4%. In fact, it sees employment beginning to recover as soon as this year, but even if the Washington-based lender were wrong there are measures that could and should be adopted to rectify the situation. In any case, markets are quite expectant ahead of the government’s announcement of reforms to the collective wage bargaining process anticipated towards the end of this month. They should be.