Spain faces a huge crisis, there are voices that call for a Peseta currency again but it is not the solution from my point of view, it can work hardly in the short run but Spain could face a worse situation latter, these voices call for competitiveness under currency devaluation under Peseta currency but it could bring inflation latter and crisis again. Spain beak point was in 2003 when her saving rate faced a decline from 23.8% as a share of her GDP to 18.2% in 2011, moreover financial crisis and her huge debt contributed to her nowadays situation. This note shows how Spain can get out of this crisis, she has to work hard on improving her private saving, public saving and foreign saving under crisis. To reach better savings rates, old and new international organizations have to work on it. For example, social security such as spanish pensions and health services have to be supported by World Bank, Intentional Monetary Found (IMF) and other international organization through a very long run credit. These organization were created to work on these type of situations. A new Eurozone Committee has to be created to work on long run productive economic projects, it means it is no enough with European Central Bank (ECB), this committee has to develop long run projects when crisis come to avoid high unemployment rates, projects have to be targeted according to each Eurozone member, today is Spain, tomorrow other member can be.
Author: Humberto Bernal,
Economist,
e-mail: zhumber@gmail.com
Twitter: Humberto_Bernal
Spain pass through a deep economic crisis, her unemployment rate is about 26% that means 6 millions of citizens, this country has 47 million of citizens. Many proposes has come to avoid a social disaster in this country, for instance some people say that Spain has to leave the Monetary Union (Eurozone) and come back to Peseta note. This proposal goes to get global competitiveness through real depreciation under Peseta exchange rate devaluation. However, this proposal is a short run solution, Spain could face high inflation due to this devaluation and expansive monetary policy to pull her economy but this country could probably face a crisis again. On the other hand, there is other proposal that says Spain has to reduce her public debt that reaches 85.3% of her GDP. This proposal goes for austerity economy where unemployment from government projects will increase due to lack of spending. This note shows the break point of spain crisis and some ideas to reduce unemployment under Euro currency.
From macroeconomic theory one knows that the sum of the three savings is equal to total investment, these savings are private local saving, government saving and foreign saving, $S^{Private}_{t}+S^{Public}_{t}+S^{Foreign}_{t} \equiv{I_{t}}$ . This identity is so important due to relation between unemployment and investment, figure 1 show the clear “negative” relation between these two variables in Spain between 1976 and 2011, as investment increases, then unemployment rate shows a reduction. Therefore, it is straight that European Central Bank (ECB) and Spain government have to work hard on increasing the investment into Spain (local investment and foreign Investment).
Figure 1.Unemployment rate and investment as share of GDP in Spain 1976-2011
(%)
Some facts that have to take into account to increase this investment is the increasing of these three savings pointed above. Figure 2 shows the private saving in Spain from 1976 to 2011, as one can see the break point in this crisis started in 2003 when private saving started to decline in deep. This Private saving decline brought an indirect unemployment increase in about 1.5% per saving (% GDP) point missed. Now, Society has to improve her private saving under economic crisis, its sound rare but is it possible under well coordinate economic polices between ECB and Spain government, for instance long run infrastructure projects from European Long Run Infrastructure Projects Committee. It means, it is not enough count with just a ECB, it is time to think in a eurozone infrastructure committee that works in big project for each country that improve economic productivity in all Eurozone countries, then when crisis come, projects are ready to make. These projects can mitigate economic crisis such Spain faces today, tomorrow it can be faced by Italy, Germany or some of 17 countries. Through multiplicative effect from these long run projects people can increase their saving to pull up other activities in Spain. Support for this committee has to come from all countries public savings and through liquidity from ECB. However, time is not enough to spanish, other instruments have to be working at same time.
Figure 2. Private saving as share of GDP 1976-2011
(%)
Unfortunately spanish government faces a high public debt as a share of her GDP, it is 85.3% and her central government budget balance as percentage of her GDP is on deficit as figure 3 shows. Nevertheless in the last two years it showed better results. Spanish government could increase her external credit to pay social security duties such as pensions and health, this resources can come from World Bank, IMF and similar organization, in my opinion these organization have to work to solve this issues and it is time to give support to elderly and unhealthy spanish. Then spanish government can generate a budget surplus to improve local investment through low interest rates, in other words spanish government and international organization have to work hard to generate public saving, then private investment can increase.
Figure 3. Central government budget balance as share of GDP 1976-2011
(%)
The last saving is foreign one. Foreign saving come from external credit (external credit taken by spanish) and from Foreign Direct Investment. The first one is huge, private and public debt is about 147% of her GDP, then spanish government has to work hard in attracting FDI. FDI inflow is about 2.1% of her GDP, Spain has faced positive FDI inflows that means long run investment and lower unemployment rate but government has to pay attention of type of FDI is coming in, it can bring employment or unemployment see Letto-Gillies (2012) part V, The question is the type of FDI is coming to Spain (productive or extractive). From my point of view, it is not a big issue if current account is in deficit, the issue is how Spain is financing it as figure 4 shows. FDI as productive investment tool is welcome, and it will bring low unemployment rate if it is well focused. Government has to work on promoting local investment and foreign investment through media and highlighting the priority of it.
Figure 4. Current account as share of GDP 1976-2011
(%)
Source: World Bank data and International Historical Statistics Europe Palgrave. Own Calculations.
The last topic in this note is the relation of unemployment, investment and inflation in Spain from 1976 to 2011. If investment increase in a percentage point as a share of GDP, then the unemployment rate shows a decline of 1.5% and if inflation rate increase in a percentage point, then the unemployment rate show a decline of 0.6% points as table 1 shows. This information highlights that investment has to be a target point in Spain and they have space to reached due to a low inflation, it was 2.4% in 2012 with declined trend since 1976. The best way to work on policies above is under Euro currency, the other way around is postpone the problem for latter under Peseta currency.
Table 1. Unemployment rate model 1976-2011
(%)
Variable
|
Coefficient
|
Investment (% GDP)
|
-1.54
|
Inflation rate (%)
|
-0.61
|
Constant
|
57.21
|
R2
|
0.91
|
Unemployment rate is explained by investment rate and inflation rate under OLS model. The model is significative under conventional levels.
Source: World Bank data and International Historical Statistics Europe Palgrave. Own Calculations Stata 12.1.
No comments:
Post a Comment