The economic recovery that began in the second half of 2013 is not the result of austerity policies, and is unlikely to rescue Spain from mass unemployment in the foreseeable future, a new paper from the Center for Economic and Policy Research (CEPR) concludes.
“The fiscal tightening mostly ended after 2013, and this — combined with favorable external factors and election year tax cuts — probably accounts for the recovery of economic growth,” said Mark Weisbrot, CEPR Co-Director and co-author of the paper, “Has Austerity Worked in Spain?” “The idea that austerity brought about recovery by increasing investor confidence seems to be no more true in Spain than anywhere else,” he added.
A number of economists and officials have maintained that Spain’s fiscal consolidation, despite the losses of output and huge declines in employment, has spurred economic recovery by restoring the confidence of markets, investors, and consumers in the Spanish economy.
The favorable external factors include lower interest rates, helped along by the ECB’s quantitative easing, lower oil prices (which contributed to increased consumer spending), and a depreciating euro.
The authors also call attention to the European Union’s estimate that net fiscal consolidation measures by the government for 2013-15 fell short of the target by 2.8 percentage points of GDP. (The target is set by the Excessive Deficit Procedure of the Stability and Growth Pact.) This differs from the Spanish government’s estimates, and is another indication that the government’s let-up on budget tightening could be a main cause of the recovery.
“It wouldn’t be surprising to see more spending cuts after the election, depending on the outcome,” said Weisbrot.
The paper, co-authored by economists David Rosnick and Mark Weisbrot, focuses on employment, contributions to GDP growth, and the current account balance to analyze the current recovery.
According to IMF estimates, Spain will have 16.5 percent unemployment when it reaches its potential output, which means that this is basically considered a full-employment level of GDP. Unemployment is currently at 21.6 percent, with youth unemployment at 47.7 percent. About 60 percent of the unemployed have been out of work for more than a year. The number of people who are classified as at risk of poverty and social exclusion has risen with unemployment, by three million people from 2007-2014.
The paper notes that “relying on continued ‘growth-friendly fiscal consolidation’ — as the IMF recommends — as well as efficiency gains from further labor market or other reforms, is unlikely to move the economy toward reasonable levels of employment in the foreseeable future. A strategy of fiscal stimulus and public investment, combined with revenue increases that maintain a sustainable debt burden, present a much more effective alternative.”