EU should reverse austerity, reform tax system, and restructure debt
Spain has come full circle: In the years before the financial crisis we were a model of growth and job creation, now we’re the poster child for European austerity and painful reform.
When the economy was booming, no one seemed to care about the price of that success: the huge, unsustainable debts that tipped us into the deepest crisis the country has seen since the 1930s.
Today, Spain is held up as an example of the positive impact of policies demanded by the European Union, the European Central Bank and International Monetary Fund. We have left the recession behind and our economy has annual growth of 1.6%.
Once again, few are paying attention to the real nature of that recovery. Big problems persist and the forecasts are not good. Unless Spain, and Europe, change course we risk dangerous deflation and decades of high unemployment — currently at nearly 24%.
Per capita income is lower than in 2004. At the current rate of job creation, high unemployment will last several decades. Real wages, which lost 13% in purchasing power during the crisis, continue to shrink. And inflation is negative for the sixth month running.
Long-standing problems remain unresolved, or have even worsened. Inequality has grown faster in recent years in Spain than in any other OECD country. The private sector has made little progress paying down debt. And government debt has risen to 98% of GDP from 40%.
The current strategy is clearly not working. The lower and middle classes are carrying the burden. We’ve regained competitiveness only by depressing domestic demand and increasing unemployment. Austerity has exacerbated inequality. The government has taken on more debt to rescue the banking sector.
Spanish voters face a clear choice in the coming months: continue with current policies, and risk years more pain, or embrace an alternative aimed at serving the interests of the majority.
Podemos, the new party that emerged from a wave of popular anger, represents the only opportunity for a new model that requires four changes:
First, we need to reverse austerity. With households and companies weighed down by debt, only government spending can revive growth. Large scale public investments are essential if we want to create jobs, improve our productivity, and modernize our infrastructure.
Second, we need major reform to make our tax system more progressive. We need to go after the tax evaders, and eliminate exemptions which benefit large companies and those on the highest incomes.
Third, we need to halt the decline in wages. In the EU, more than 80% of aggregate demand comes from domestic demand, and most foreign trade takes place between EU members. That means the few gains in competitiveness arising from falling wages are largely offset by the collapse in private consumption. And this approach risks becoming a “beggar they neighbor” policy which won’t work for Europe as a whole.
Finally, we need to restructure our debt. A real alternative for Spain cannot ignore its greatest problem. Given the scale of the burden, for both private and public sector, we need to reschedule repayments, renegotiate interest rates and cancel some debt. Without this restructuring, it will be very difficult for households, businesses and government to drive economic expansion.