Wednesday, September 10, 2014

Yes, Spain's Economy Is on the Road to Recovery, But....

The Organisation of Economic Co-operation and Development (OECD) made an important announcement a couple of days ago: Spain's economy is on the road to recovery. After dealing with nearly a half decade of negative GDP growth, Spain is seeing positive GDP growth once more. This is good news or a country whose nominal GDP is over $1T, and is relatively more reassuring than what we see in Italy right now. The International Monetary Fund (IMF) echoed similar positivity in its recently published Article IV Consultation, pointing out that exports are driving the recession, domestic demand is making a comeback, and labor reforms have been enacted (p. 4). By looking at many of Spain's macroeconomic indicators (for my Spanish-speaking readership, you will also enjoy this July report from la AsociaciĆ³n EspaƱola de Banca on economic indicators), it seems like Spain is doing better. Even with this good news, what the data on the Spanish economy tell us is that Spain is hardly out of the woods yet.

If we take a closer look at the OECD's latest economic survey, Spain still has some issues, most notably with unemployment (IMF, p. 7). One in four Spaniards are still unemployed, which is well above the Euro Zone average of 12 percent. The OECD recommends additional job search assistance and vocational training to remedy this issue. Price Waterhouse Coopers also points out in a recent report that a proper investment in human capital will be vital for Spain's future (p. 73-74). Looking at the World Bank's Doing Business Index (as well as OECD analysis; OECD, p. 10), it would help if Spain loosened up some regulations, especially when starting a business. If the World Bank is ranking you where your country is the most difficult in the Euro Zone to start a business, you should do something to foster economic growth in the private sector. Entrepreneurship is key for boosting economic growth, and is something Spain should keep in mind.

Public sector debt, combined with its high tax burden, also remains a major issue for the Spanish economy. Before the recession, the debt-to-GDP ratio was just at 36 percent. Now, it's at a whopping 94 percent, which doesn't do any favors for its International Investment Position. Being able to pay of this debt is vital for Spain's economy in the upcoming years, which is why tax reform is a good idea (OECD, p. 10). This means cutting back on the income tax, removing the preferential treatment on the value-added tax (IMF, p. 26), and removing the bank tax. Spain should make its tax broader and more efficient to mimic its European counterparts. Cutting back on its welfare state would also do wonders for the Spanish economy.

We can go into other facets of the Spanish economy. We can talk about it's a good thing that Spain keeps inflation low enough to maintain a sense of competitiveness (IMF, p. 33) because the Euro Zone is in that bad of shape. We can discuss fiscal consolidation (IMF, p. 25), reducing trade barriers (IMF, p. 24), but if the reports from IMF and OECD indicate anything, it's that Spain's recovery, while impressive, needs further reforms if we want to actually consider it long-lasting.

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