ABSTRACT
In this contribution, we offer a non-orthodox interpretation of the causes that have driven the Spanish economy to a protracted state of recession. Next, we discuss what should be done in terms of economic policy to drive this economy to pre-downturn figures and review what has in fact been put in practice. We conclude that the measures adopted will neither bring prosperity to the Spanish economy (the ultimate goal), nor will they restore macroeconomic balances. In our view, the roots of the crisis are a rocketing private indebtedness and an excessively large size of the construction industry; these factors are located within the national borders and they have spilled over to the rest of the euro zone through a current account deficit and a highly negative financial investment position. The consequences of these imbalances have led to a problem of effective demand, a real estate bubble that burst and a lack of domestic credit and of funding in international markets. The institutional setting which frames the Spanish economy poses serious limits to the measures required to get out of this mess. Solving these problems would require a proactive fiscal authority, a central bank able to play the role of lender of last resort and a realignment of the real exchange rate. This we shall call the expansive option, and would require more political union than exists at the moment in the European Monetary Union (EMU onwards). There is an alternative option which consists of fiscal austerity measures, where public spending should be replaced by exports. This alternative requires prices to increase less than in neighbouring countries, something which could be attained through additional supply side reforms, particularly in the labour market. It can be implemented at the national level. And here is the dilemma: the expansive option requires the cooperation of all of the countries within the EMU and some institutional changes, pointing to more political union. But this is a slow process, and hard to achieve because of strong discrepancies (institutional, cultural, nationalistic sentiments, etc.). On the contrary, the austerity alternative can be put into practice at the national level, though its likely outcomes are stagnation and rising unemployment, because fiscal cuts and improving competitiveness to ease the balance of payments constraint will tighten domestic demand. Furthermore, the austerity option, which aims at balancing the public budget to avoid default risks as a precondition for restoring macroeconomic equilibrium, will fail to attain its target because public revenue will plummet.
