Spain’s €15bn austerity plan is flawed, warns leading economist

The Spanish government has made plans for austerity measures based on growth forecasts that far outpace those of the IMF and EU.

Javier Diaz-Gimenez, IESE Business School, Madrid

Spain’s €15 billion austerity package, announced on May 12, may fail to alleviate the fiscal deficit because the government has “overestimated” growth rates and tax revenues, a leading Spanish economist has warned.

“The Spanish government forecast for growth, which is double the figure estimated by the IMF or EU, is very optimistic,” says Javier Diaz-Gimenez, professor of economics at IESE Business School in Madrid. “When you get that kind of forecast – and if you’re going to use that to design the 2011 budget – then it will end in trouble because you’re going to overestimate government revenues by a large margin.”

Diaz-Gimenez sees the picture as further complicated by the lack of public access to up-to-date current account cashflow data in Spain.

“The head of the Treasury knows how much money came in this week and how much money went out this week,” he says. “In Spain, as elsewhere in Europe, there is a lack of transparency on government finances and I see that as intentional because how could it be otherwise? Take the fact you cannot go to the government website and see the Treasury revenues and outlays to date, to last week. This number seems an obvious number for the public to know; after all, it’s our revenues.”

Diaz-Gimenez says it is impossible for people outside government to gauge what kind of budgetary cuts might be appropriate in Spain, since they lack the data needed to make sensible estimates of growth.

But it would be a mistake to blame Spain’s problems on euro membership, Diaz-Gimenez warns. Countries in the Eurozone have never enjoyed such a prolonged period of growth across the continent and low inflation as they did in the eight years that followed the currency’s launch. Spain is one of a number of heavily indebted Eurozone countries with poor growth figures that cannot now cheapen its currency in order to reduce its debts. But the country is still better as a part of the Eurozone, Diaz-Gimenez argues.

“When you depreciate, the overall impact on the Spanish economy is small, because we import more than we export, so by depreciating the currency we only get more expensive imports,” says Diaz-Gimenez, who previously acted as an advisor to the Spanish government on its employment and economic policies.

“This myth of depreciating your way out of a recession does not convince me. We know that in the long term it creates inflation but even in the short term in a place with a negative trade balance it’s not very clear [that it’s positive]. I’m not convinced it would be a solution,” he says. “Being part of the Eurozone gives us access to the European interbank market in a way that we never had before. Most of this growth [from 2000 to 2008] has been done on borrowed money.”

But there is no doubting the problems Spain now faces – and being part of the Eurozone cannot save it from those. Among them, Diaz-Gimenez is especially worried about jobs and real estate. Spain’s unemployment rate recently breached 20%.

“Our major pending reform is the labour market reform,” he says. “We have very inflexible labour markets and, as in Greece and the southern European countries, our economy has a lot of seasonality. We have a very industrial north as in Italy but in the south there is a lot of seasonality. That requires a very flexible labour market and we just don’t see that in the southern regions of Europe. But we really do need it given that we cannot use monetary policy as an adjustment to external shocks.”

Diaz-Gimenez also points to the hangover of vacant real estate left by a housing bubble that began to deflate in 2008 but many argue could lead to substantial future losses. “There are perhaps 800,000 unsold units and that’s going to take a long time to be absorbed by the market, given the rate at which prices are going down,” he says. “We have to do something with this huge stock of unsold houses which are on the books and are part of the banking problem.”