“Something is happening here. But you don’t know what it is. Do you, Mr. Jones?” That’s Bob Dylan at the cultural and social turning point in the mid-1960s.
Something is happening in today’s European economy as well, but it is too early to draw definitive conclusions.
Most recent data provided by forward-looking economic indicators tend to point to an improved outlook. Of course, there is no reason for claiming victory yet, as in many countries unemployment remains unacceptably high and as the reforms that support growth drivers are still half-way or about to be implemented. But neither can we deny the underlying trend indicating that a rebalancing and reform of the European economy is clearly underway. This concerns by and large the eurozone economies, as well as the United Kingdom.
Spain is a case in point. The Spanish sketches A.D. 2013, according to last week’s important IMF staff report, are telling. The trade balance adjusted from a deficit of 6% of GDP in 2008 to a surplus of 1% in 2012. As Spain needs to run surpluses over the medium-term to cover its large external debt, import volumes have also fallen. The Spanish export sector has been standing well over time, even though wages in Spain have responded only partially and with a lag. Over the past years, the lack of flexibility and the marked duality in the labour market translated into large employment losses in the economy.
As the Spanish economy needs to reallocate its resources from the non-tradable sectors, notably construction, to more productive uses, notably the export sector, we can take a cautiously positive note of recent figures that indicate a better trend in job creation. No doubt this trend may reflect in part a seasonal pattern, related to Spain’s relatively competitive tourism industry, but it could mark the long-awaited turning point. Next month, we will assess in detail Spain’s labour market reforms in 2012.
The momentum to reform, to improve the functioning of the labour market, should be maintained. Social partners traditionally have a central role in Europe. Overcoming the duality between permanent and temporary contracts and giving young people more opportunities are the tasks and responsibility for all the stakeholders involved. IMF staff recently provided a simulation of a broad-based ‘social agreement’ between the employers and trade unions on an internal devaluation: employment increases (and price cuts) in return for unions agreeing to significant further wage moderation. Such a rise in employment and lower inflation would boost consumption growth already in the second year. In that simulation, unemployment would fall by 6 to 7 percentage points over the next three years compared to the current path.
The comments by authorities that are presented in the IMF report are sceptical as regards the chances of success of such a broad-based social agreement. I don’t underestimate the political challenge to bring about a broad political and social consensus on an economically optimal path of adjustment. But wouldn’t it still be worth a serious try, for the sake of those millions young Spaniards who are currently unemployed? Those stakeholders who would outright reject it would take a huge national responsibility of the social and human costs on their shoulders.
A strong sense of political responsibility has been key for the success stories of Ireland and Latvia in terms of economic reform and internal devaluation. The pundits in the euro-sceptical commentariat and media have been telling us that this is simply impossible in the light of economic history, due to the money illusion and sticky wages – “it won’t happen, and even if it were to happen, then it would break the political back of the society, so no one should copy Ireland and certainly not Latvia!”
I’m mentally ready to get a chorus of prophets of the doom voicing their outrage in financial media against this perspective. But if we had trusted them and followed their advice, the euro would have broken up already some years ago.
Let’s imagine: What if Spain yet can achieve what Ireland and Latvia did? Don’t rule it out from your imagination, Mr. Jones.