The Spanish economy will get worse before rallying, says Huw Pill, former deputy director of Analysis and Monetary Policy at the European Central Bank. Would you agree?
The Spanish economy is nowadays in a very difficult situation. The good news is that the big mistakes have already been made: for example, unsustainable growth in the housing sector and insufficient regulation of mortgages by the Bank of Spain are behind us, now.
For some time both the society and the government have acknowledged this and they are correcting those faults. An example of that is unemployment, soaring right now. But fixing that takes time. How long? I do not think there really are economists trained to predict the end of crises, and this one is no different in that sense. However, we can note that the Spanish economy is much more competitive than a few years ago.
German analysts say that Spain will ask for a bailout and that will activate the purchase of bonds by the ECB. What happens to Spain, then?
A rescued country looks like a young twenty-something who returns to live with his parents after a period of freedom: while he gets help and security, and does not have to pay the rent or the food he finds in the fridge, he loses sovereignty and isn’t as free as before on how to live his life. A bailout is something that is not good for a nation’s pride, just for its pockets. It’s a situation that one must to agree with, but of which one wants to get out.
Anyway, it is not clear to me that Spain will prompt the bailout. The Spanish government now has to pay interests equivalent to three percent of Spanish GDP. And in 1996, interests represented more than five percent.
According to the IMF, there it comes a point at which austerity causes an increase in the deficit, not a reduction… Would you say that the scope and speed of the reform programme of the Spanish government are appropiate?
Compared to countries like Portugal or Greece, the Spanish government has not yet improved its accounts. The primary balance of Greece, for example improved from a deficit of 10% in 2009 to a surplus of 3% in 2012. Greece’s problem is the excessive debt burden. Compared with Greece, Spain has much less debt, but suffers the problem of high unemployment, which reduces revenue and increases government spending.
The ECB’s decision to support future bailouts with bond purchases is accepted with reservations in Germany. Despite the backing of Angela Merkel, the Bundesbank fears inflation risk could spike and countries in crisis would delay their reforms. Are these fears justified, though?
The truth is that almost no German likes the idea that the ECB could expand its monetary-policy mandate to actively finance states. But sometimes you have to do things you do not like. The ECB has the advantage of an infinite credit line. That gives a lot of weight to the words of Mario Draghi. And if Mr. Draghi achieves only with his words to lower interest rates for Spain’s government debt and others, then it’s great. And it is convenient in many ways, because it seems that the interests for private companies in the countries are guided by the interest paid on the public debt.
If words are not enough, the ECB has said it will buy bonds only for the states that ask for help to the European rescue fund ESM. That’s important because governments interested in obtaining aid must first negotiate with the ESM, the EU and the IMF, which means there will be a loss of sovereignty. But that in turn guarantees that no state will require a rescue from the ESM and ECB before thinking twice.
Draghi stressed to the Bundestag: “First, it is not a disguised mechanism to finance governments, and second, it will not compromise the independence of the ECB; third, the central bank will not assume excessive risk for taxpayers; fourth, it will not generate inflation.” Are you convinced?
The truth is that it is technically not state funding, but, indirectly, it can be. Otherwise, why would this measure be so attractive to states that suffer high interest rates? Therefore, there are risks to taxpayers. If a state becomes insolvent, and government bonds held by the ECB lose much of its value, member states will have to refinance the ECB. And yes, it will be paid by taxpayers.
Do you believe that Germany will accept Eurobonds in the future? Are there alternatives? Or are you against debt pooling?
R. If you and I want a loan, why do not we go together to the bank to ask, considering that we could even get a slightly lower interest? Because it carries risks. If I fail to pay interest and principal debt, the bank will go after you. It’s the same with Eurobonds. It can encourage excessive debt and can cause that kind of attitude, expecting that someone else will pay your bill. This would spark misunderstandings and lead to more tension in the euro zone, I have no doubt, so please, let us not use the plague to cure the flu.
The crisis has put Europe at a crossroads, and beyond the euro’s design problems, some politicians have opened talk about creating a new capitalism. What do you think? To what kind of capitalism are we headed?
It is an interesting question, but also a very difficult one. Now it happens that we’re all a little tired of capitalism and its crises: the banking crisis, the crisis of the construction sector, the Euro crisis… But let’s not forget that even the most closed communist economic system has its crises. If we look to my country, we’ll see that Germany’s liberalism and our social market economy, with its faults, has provided a whole society with welfare levels unknown just a few decades ago. And if you look above the current crises, it is clear that the financial sector has assumed an important role. So you have to study why and reach appropriate conclusions.
The SPD wants to make of bank regulation a central issue of its campaign, along with the dilemma of increased social inequality in Germany…
The issue of banking regulation, while important, it’s too complicated to make electoral slogans. It appears that the inequality of wages will be the dominant theme in this election.
The SPD speaks of welfare levels. What do you think is the key to the German success?
I don’t think we want to get too many medals, actually. Right now, we enjoy in Germany acceptable economic conditions and a labour market that works pretty well. But not long ago, less than ten years, we were called “the sick man of Europe”. Germany has no raw materials or large-scale tourism, so we have to invest in infrastructure and science, innovation, and so on. As for infrastructure, Germany has plenty, especially since there is no single big core or centre. There are several major cities: Berlin for politics, Frankfurt for the financial world, Hamburg is the city of maritime trade, and Cologne for the media… And more important than those cities, for the German economic development model, are the regions. Thus, rural areas as West Westphalia, have enough people, with enough schools and colleges, with adequate public transport and the necessary infrastructure to host some of the most successful companies in Germany, even though they are not the largest.
You’ve lived in Spain. What should the government do next to ensure the future of its economy?
First, it needs to communicate well. Spain is going through a process of adaptation that is painful for many Spaniards. Those who suffer unemployment or state spending cuts deserve that the government explains its decisions. It shows respect for the citizen. Second, it must nurture investor confidence. The Spanish government needs a coherent strategy and decide where to cut now and where to invest later. That strategy is now hardly visible. Third, it must take the long view.
Previous governments–and I say this without preferences on the right or the left–sometimes chose short-term decisions instead of having a vision. Spain is a country with great potential. It has a well-trained youth, has a sector that will always be there, tourism, and has the Castilian, a language spoken in most of Latin America, a region that is likely to grow. Once the crisis abates, Spain must realise that potential. I think Spain has to invest in R & D and facilities to innovative companies and help young jobseekers.
And foster unity. From the outside it looks like a divided country. It is also very negative the level of political quarrels between right and left, quarrels that we don’t see in Germany. Nor have we so much division between regions. Here in Germany, we have a crucial growth factor: the principle of consensus in the company, the mutual respect between employers and workers. This implies that, within the range of normal rivalries, Germany is a relatively united state, which facilitates changes and reforms.
What does the future hold for Europe’s welfare state system?
The question is whether we can afford it. All that social assistance, everyone has to pay for it with his taxes. If Europe maintains its competitiveness, there will be no problems.