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José Luis Álvarez , Professor at School of Economics and Business Administration, University of Navarra, Spain

Chronically ill?

Mon, 01 Feb 2010 08:32:19 +0000 Published in Expansion (Madrid)

The latest update of the International Monetary Fund's (IMF) growth forecasts has once again put its finger on the sore spot. While the rest of the developed economies seem to be showing signs of recovery, Spain could be the only one to see its GDP fall in 2010.

It continues to be a weak Economics and suffering from numerous ailments. In addition to the financial flu that, like a pandemic, has affected a large part of the world, there are, in the case of Spain, various imbalances, all resulting from a long period of excesses that must now be purged.
The depth, seriousness and variety of these imbalances, together with the absence of adequate treatment for years, will require a long period of recovery in which the joys of the recent past will not be possible. Moreover, we no longer even have the balsamic relief provided by the devaluations of the peseta.

The severe "fever" experienced by the Spanish Economics has been particularly damaging. In this case, it is not the temperature that has risen, but the price of housing. But the effects have been similar to those of an intense fever, which causes confusion or even delirium in the patient.
In fact, Spaniards - and I include here all agents, from public administrations to financial institutions, including companies and consumers -, confused by the continuous rises in housing prices, took decisions that we now understand to be less sensible than we believed at the time: Going into too much debt, abandoning the Education attracted by work jobs that required few qualifications, investing savings in an asset that is now depreciating, facilitating excessive urban development plans and granting loans with a certain ease to those who were at high risk of default.

These decisions have placed Spain in a difficult position status, with deep problems that become more evident as leave the fever breaks and we see reality more clearly. An oversized construction sector, the asphyxiating level of private debt, financial institutions overexposed to the risks of default, excessive dependence on foreign financing or an unfair and inefficiently dual work market are some of the problems whose correction will require time and sacrifices.

A long convalescence

The economic policy measures implemented have barely served as a palliative. It is true that the fiscal impulse, in the form of a larger public expense , has managed to cushion the fall in aggregate demand. But the price to pay is very high, too high. We have slid, at breakneck speed, down the slope of deficit and public indebtedness, creating a new and dangerous imbalance for which the international markets may penalize us.

It will not be easy to get out of the impasse. To achieve this, in addition to controlling the public deficit, a more political than economic issue given the level of decentralization of our public administration, courageous structural reforms are needed to attack Spain's ills at their source. We need a system educational that endows the Spanish Economics with the human capital of advanced economies.

There is an urgent need for a change in the institutional design of the labor market to make it an efficient mechanism for the allocation of the factor work. entrance Likewise, the modernization of the productive system requires the implementation of a regulation that promotes a healthy skill and the emergence of new entrepreneurs.

Let us not deceive ourselves. Reforms such as these will not be miracle cures, nor will they prevent the long convalescence that awaits our Economics. But they will allow, in a few years, a full recovery and a more vigorous and sustainable growth. If they are not carried out, with the current lack of competitiveness and fiscal discipline , there is a danger of making the ills of the Spanish Economics chronic and, as Nouriel Roubini warns, Spain could even become a serious threat to the health of the euro zone.