Untimely circumstances for undertaking reform plans

By Juan Pedro Marín Arrese, in Madrid | You don’t usually pick up the most suitable moment to undertake a widespread reshuffle of ill-functioning markets. Stiff political and social resistance leads to abandon any plan or hope to do it. As shelving problems don’t settle them, reforms are only accepted under the pressing need to redress a desperate situation. As a result, measures tend to inflict more damage and reap fewer benefits.

The labour market overhaul in Spain provides a good example of such an attitude. The need to turn it more flexible was widely felt to avoid distortions from curbing competitiveness. Yet, nothing was done in the good old days. With unemployment reaching now awesome levels, the prospect of being easily sacked under the new rules enacted, is bound to depress private consumption and investment. A reform that could have worked smoothly under favourable circumstances is bound to fuel downturn pressures.

The move to clean up bad debts from banks balance sheets raises similar concerns. Putting their record straight seems unavoidable if only to avoid the worst from happening. Should this massive write down take place one year ago the bill to pay would have been much reduced. The sharp deterioration in solvency rates will now lead to consume huge resources to meet the demanding requirements and might eventually end up in a full-fledged credit crunch.

The moral is that trying to address shortcomings only when they grow out of control inevitably backfires. Will politicians learn the lesson and implement remedies in due time? Don’t bet on that so long voters are always prone to choose the easiest way. That is nursing false hopes that problems will evaporate on their own.

* Juan Pedro Marín Arrese is an economist.

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