Despite domestic turmoil, Rajoy is right

As Stock Exchanges plunge on both sides of the Atlantic, many observers tends to cast an acrimonious appraisal on domestic conditions. It is true that political instability in Italy at the eve of the forthcoming general elections doesn’t help to provide comfort for investors. It can’t be denied that the current scandal surrounding the party in power in Spain doesn’t contribute to bolster confidence.

For all these internal troubles, we are witnessing the unavoidable correction that follows the four years heights attained by listed shares in most countries. Such a rally was bound to come to a sudden end, especially taking into account the sluggish mood in economic performance that is hitting developed countries. One is tempted to believe that the downwards pressure was waiting too much to become apparent.

Investors may have indulged in a frenzied attempt to sink into oblivion past miseries and market turmoil. But the fact remains that recovery is not at bay. In countries like Spain it will take a heavy toll to redress competitiveness before current levels of unemployment and a marked production gap can be tackled. All in all, this will stand as a lost year in terms of growth. No wonder Stocks were doomed to match their fancy expectations with a sour reality.

It is on the real economy front that battles are currently lost. Notwithstanding a better outlook in the financial system, so long growth fails to come to rescue, any upsurge in confidence will prove short-lived.  But delivering an effective remedy for this shortcoming proves close to illusion. Unless a coordinated approach is implemented at least at EU level, there is no hope to get out of trouble.

It’s a pity that Mr Rajoy’s message on this key issue has become blurred by his domestic problems. For unless those having more ample room to invigorate their demand do so, we are in for a long period of strenuous struggles to undertake a painful real adjustment with no firm assurances the sacrifices attached to it  may work.

No one rejects the idea that budget consolidation and structural reforms prove vital to ensure a solid economic performance in future. But unless this drive is coupled with a helping hand from those apt to increase demand, we may fall in a vicious circle of further income cuts fuelling recessionary bouts. Adjusting conditions, while necessary, prove to be insufficient. Unless a shared pooling of potential growth policies is urgently put in place, the future of developed economies seems rather grim.

About the Author

JP Marin Arrese
Juan Pedro Marín Arrese is a Madrid-based economic analyst and observer. He regularly publishes articles in the Spanish leading financial newspaper 'Expansión'.

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