Catalan Economist Edward Hugh answers questions about the Spanish economy

By Jaime Ortega Simo.

Edward Hugh Economist Edward Hugh

    • Q – 1) Some people blame José Maria Aznar for the economic problems Spain currently experiences. Others (most people) blame Jose Luis Rodriguez Zapatero for the economic crisis. In your view who of the two ex-presidents had a bigger impact on Spain’s economic crisis and why? 

      Basically I don’t agree with this way of looking at the problem. This crisis is an economic one, not a political one, and to one degree or another effects all developed economies. The crisis is about debt, aging populations, and the ability to meet growing pension and health liabilities. Politicians, both Jose Luis Rodriguez Zapatero and Mariano Rajoy have had a major impact on the crisis after it started, and in both cases their role has been lamentable. The principle responsibility for the Spanish property bubble, which is the key to the specifically Spanish (or Irish) part of this crisis must lie at the doors of the ECB. They should have seen the problem coming as a result of the application of their one size fits all interest rate policy, and advised the Spanish authorities to take specific measures to counteract the impact. They did not.

      The government of José Maria Aznar has responsibility in that it failed to carry through the necessary reforms in labour and product markets, in the pension system etc, which is why the country is so badly prepared at this moment. The Zapatero government failed to heed the warnings of the inspectors at the bank of Spain, who advised in 2006 that a bubble was building that would have major consequences. The Rajoy government, after years of criticizing its opposition, has shown a lamentable lack of understanding of what the country’s problems are and an amazing ability to fool itself that it can fail to act and all will turn out well.

      There is a lot of propaganda to the effect that “Spain is doing its homework”, especially from the IMF, which is mainly public relations aimed at maintaining confidence in the country. This is not what is being said behind the scenes, and it is this other reality which makes Mariano Rajoy delay asking for a rescue for so long. He knows the conditionality will be tough, very tough.

      All in all, a lamentable performance by Spain’s politicians, but I emphasize they are responsible for not acting adequately. They are not the cause of the crisis, which goes much deeper.

      Q – 2) President Hollande and Chancellor Merkel seem to hold the strings of the European Union and its policies inside the ECB. But could it be said, they also control a lot of Spain’s decision making inside the European Union? Is that really fair? 

      One of the problems the European Union has is that there are too many voices all trying to speak at once. Fairness is not the issue here, effectiveness is. If Spain’s politicians are incapable of handling this crisis, someone else has to help them. That someone is the EU. Francois Hollande and Angela Merkel need to help Mariano Rajoy to take difficult decisions he doesn’t want to take. This doesn’t mean the French and German leaders are always right, but what alternative is there? Spain could default on its debts and leave the Euro. I think that would be a bad outcome for everyone. So if Spain needs finance and the markets won’t give the country access at a reasonable price then it needs to ask for help, and it is natural that this help comes with conditions.

      Q – 3) Should Spain leave the Euro and go back to the “Old Peseta”? 

      No. This would be a bad decision, since it would mean default on the country’s debts in the international arena. Even country’s like the UK who have their own currency, and their own central bank to buy their debt are struggling economically, as is Japan. Things aren’t so easy and so evident as they were in the last century. Naturally that doesn’t mean that this outcome won’t happen. There is a high risk that it will, but the result would be highly negative for everyone, since the Euro would surely cease to exist in its present form.

      Q – 4) The unemployment rate in Spain is staggering at a high level, credit ratings from Standards and Poor’s and Moody’s have lowered Spain’s ratings, and the political turmoil inside “La Moncloa” is a constant debacle. In your opinion what would it take to get Spain back on track? 

      This is a hard question. I’m not really sure the country can be gotten back on track, this is the worry, and this is why their is a risk of disorderly Euro exit. The country needs to deal with the crisis in its financial sector. Steps are being taken, but they are not yet sufficient, and they are being implemented painfully slowly. The reason I am not optimistic relates to the issues about the political class I have spoken about earlier. The country is simply trying to stagger through to tomorrow, and hope something turns up. The only way forward for Spain is to become an export machine like Germany. This, if it is possible, will need many years still, and a major reduction in wages and prices (known as an internal devaluation) which will be pretty painful. I am not sure Spain’s citizens will accept so much pain for so long. Too many years have been wasted.

      Q – 5) If the Catalans were to separate from Spain, and become independent, would that hurt the Spanish economy or Catalunya? 

      Well, it would hurt both countries at the start, but it would hurt Spain more than Catalonia since Catalonia pays money into Spain, so Spain would have less and Catalunya more. A move towards independence is far from improbable, and in my opinion Europe should step in under the bailout terms and oversee an orderly divorce within the structure of the new United States of the Euro Area which is going to be necessary if the Euro is to continue.

      Q – 6) Historically speaking has nationalism in Spain been one of the main factors since Spain has never become that powerful economic power which the French, the English and Germans currently enjoy? 

      I think Spanish nationalism has been a problem in the country’s history, since there has been little tolerance for the national minorities. Spain has had a difficulty across its history in implementing reform, which is why it didn’t enjoy the same trajectory as countries like Germany and France. Then came the greatest expression of Spanish nationalism, Don Francisco Franco, and the country was cast into utter backwardness for 40 years. That is the principle background to Spain’s late development, and peculiar path. Strange to think we are a product of our past, but sometimes it is just like this.

3 Responses to "Catalan Economist Edward Hugh answers questions about the Spanish economy"

  1. Simon Harris says:

    A fantastic analysis of Spain’s current economic problems. As a resident of Catalunya, I was particularly interested to read Edward’s very concise summary of how Catalan Independence might affect the local economy.

  2. Rod Younger says:

    All well and good until: Don Francisco Franco, and the country was cast into utter backwardness for 40 years.

    Which is not the case, at least as far as the economy was concerned in 1960s. Read “los anos de desarollo” Franco’s economic miracle??:

    As Edward correctly states the problem with the Spanish economy is deep seated and long term it goes way back beyond Franco from the dominance of the Catholic Church and its refusal to embrace the reforms of the Renaissance to its topography, geographic location and landownership structure, all of which have contributed to its delayed socio, economic and political development.

    In 1976 Spain became a tentative democracy and a constitutional monarchy and in 1986 joined the then EEC becoming the single biggest recipient of EU funds, whilst having only gone through a short, sharp learning curve in political and economic terms. This has had its pros, for example, reinforcement of democracy, a huge improvement in the national transport infrastructure network, etc. but also its cons, for example, a false sense of economic security (made worse as I stated at the time and many more times since, by joining the euro), which in turn has led to an unwillingness to take difficult decisions to improve the long term competitiveness and flexibility of the economy – a situation which exists to this day.

    n talking with Professor Andrew Kakabadse, Professor of International Development at Cranfield University School of Management, about what influences the development of culture, national characteristics and leadership skills (he has written a book on the reality of cultural differences using several countries as examples) one of his principle conclusions is that the re-distribution of wealth, combined with sustained investment in social and economic “assets”, e.g. education, healthcare, infrastructure, etc., are major factors for any country.

    He cited Germany as a good example where, over a relatively short period of time, approximately two generations, such policies have successfully created a unified country whose citizens, on the whole, feel they are part of one large family. As he puts it – it has moved from a shareholder to stakeholder model. On the other side of the coin, Ireland and Spain both appeared to be moving in this direction with their new found wealth after joining the EU but now, as we know, their economies are collapsing with, in Spain at least, “legacy” socio-economic characteristics coming to the surface because the re-distribution of wealth has not been sufficiently wide spread and investment has been poorly targeted.

    Using all the information above, and your own knowledge and experience of Spain, I’ll leave you to come to your own conclusions about what the future holds for Spain!

    My article Why is Spain politically and economically bankrupt? explores this in more detail

  3. A few things Edward.

    “this crisis must lie at the doors of the ECB. They should have seen the problem coming as a result of the application of their one size fits all interest rate policy, and advised the Spanish authorities to take specific measures to counteract the impact.”

    So it’s the ECB’s fault because they didn’t keep a better eye on the corrupt tendencies of Spanish and Catalan politicians who mismanaged the money? Should they have set up a board in Brussels that oversaw spending? How would local politicians have felt about that? I’m curious, did you raise these objections at the time or only now with the benefit of hindsight?

    Then there is this, “Even country’s like the UK who have their own currency, and their own central bank to buy their debt are struggling economically…” As the esteemed economist Paul Krugman has pointed out, repeatedly, the UK’s woes are a result of policy decisions made by the conservative led government. Having their own currency meant that they could have handled the crisis in a different way. Same with Japan. I’ll be happy to provide links.

    Finally, the “new United States of the Euro Area” do you think countries such as Holland, Germany and France are willing to give up more sovereignty to create this? Not based on the last Dutch elections, where despite electing pro-European parties, a line in the sand was drawn that this is it as far a integration. Should Spain continue to deteriorate, it’s just as likely it become part of a new southern euro-zone with Italy and Portugal. Of course, if Greece leaves the EU, which has lost its “horror” according to a German minister, then chances increase dramatically that Spain follows.

Leave a Reply

You must be Logged in to post comment.

What Next?

Recent Articles