2010 May 13 Thursday
Spain Labor Market Incompatible With Euro

One of my frustrations with the press comes from having to read a large number of news articles to find out the underlying causes of political and economic phenomena. Fundamentals are rarely addressed. Sometimes talented bloggers provide translations of articles that are written within politically correct mental strait jackets. But more often one has to just plow thru enormous numbers of articles to get to the core of a problem. Well, reading thru Op-Ed pieces in the New York Times I came across a short piece by U Maryland economist Gayle Allard who explains a core problem with Spain's economy as a member of the Euro: The country needs periodic bouts of inflation to undo the distortions caused by very powerful unions. This makes Spain's entry into the euro zone an act of enormous political folly for all involved.

While it was doing its fiscal homework, however, Spain overlooked a key requirement for the currency area: staying competitive without a national exchange rate. Spanish labor costs chronically rise much faster than productivity.

Read this and marvel at the absolute madness of adding the southern European countries to the euro zone. Yet a large number of politicians in Europe joined together to implement this madness.

In the past, the government periodically devalued the peseta to restore competitiveness. The euro took this escape valve away, but policymakers neglected the structural reforms that could help Spain compete without an exchange rate.

Spain’s key problem lies in its labor market. Collective bargaining is politicized and far from the realities of the firm. Unemployment benefits are high and easily collected, giving Spaniards incentives not to work and pushing market wages higher. High dismissal costs protect an “aristocracy” of workers from firing, making them immune to pressures to restrain their wages or boost their productivity.

Spain needs bouts of inflation as long as collective bargaining remains highly politicized. A country that needs periodic bouts of inflation should not share a currency with Germany. One doesn't need to be a rocket scientist running complex computer models to figure that out.

What is the most remarkable thing about the current European financial crisis? It was set in motion by the criteria used for choosing euro zone members. The steps that led into the crisis were obviously wrong to anyone who understood the distortions in the labor markets in southern Europe.

Think the Spanish government can fix Spain's economy? To do that involves taking on a huge system of job entitlements. Probably too many voters are in on the game for an elected government to undo it.

Overpaid American public sector workers are like most of Spain's economy. Imagine how much more messed up the United States would be if our problems with government worker unions extended into the entire economy. Overpaid public sector workers in the US are going to end up forcing some governments into bankruptcy.

Share |      By Randall Parker at 2010 May 13 10:11 PM  Economics Sovereign Crises

James Bowery said at May 13, 2010 11:12 PM:

I'm not sure how but there has to be a movie deal about Franco here.

A.Prole said at May 14, 2010 12:29 AM:

As I keep telling you until I'm blue in the face, the Euro was purely a POLITICAL project aimed at creating a federalist European superstate - the idea was to force fiscal union by forcing monetary union and then force political union by fiscal union.
That's all you need to know about it.It was imposed by the EU's profoundly undemocratic and elitist political class with no dissent (apart from a few brave Englishmen who managed to stop Britain being forced in by its political elite).
The economic short-comings were known by all those who thought, but as stress the undemocratic, elitist nature of Europe forced it through from the top downwards due to the pressing political objective.
In this sense, the Euro is exactly analogous to mass immigration into Europe - it happens because the elites want it.
- You will find that the shitcunts at the WSJ and Economist were strongly in favor all the way through, and thus bore great influence on the elitist politicians.

Buckaroo said at May 14, 2010 5:34 AM:

A.Prole is exactly right. As far as the evil (and I am using this word deliberately) megalomanicas running the EU/EC since at least the 80s are concerned, the budget/solvency crisis brought on by putting countries like Greece and Spain in the Euro straitjacket is not a bug but a feature. As sure as night follows day, we are now hearing demands that greater control be imposed on member countries by the EU oligarchy so that they don't bring down the whole house of cards by behaving like, well, like Greece or Spain. Of course the problem would magically go away (albeit at some loss to the current bondholders - yes, my heart bleeds!) if these countries left the Euro and many of the existing stupid EU regulations. But we can't have that, now can we? So the only alternative is to make the political "union" tighter. But, of course, it will be made tighter ON EVERYONE, not just the irresponsible Mediterraneans. If you are a Brussels technocrat with delusions of building an "European" empire to challenge the US for supremacy, what's not to like?

Randall Parker said at May 14, 2010 8:28 PM:


If that's the strategy the Mandarins are playing then it seems like a high risk strategy to me. I do not see how Greece can avoid a default. Will Greece decide to opt out of the euro zone at that point?

I expect Peak Oil will cause such a severe and lasting economic downturn that weak political and economic unions will get broken by the effects of it. Governments that can't inflate their currency will have to either default on debt or hugely cut entitlements. The publics of some countries will demand default. They'll reach a point where they care only about immediate relief and not long term considerations about their credit ratings.

Danny Gold said at May 12, 2012 8:13 AM:

What Spain really needs is some positive economic news instead of all the bad forecasts that scare off everyone. For example, with falling prices buying property in Spain can be a very good opportunity.

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