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'There is no quick fix for Spain's problems'

George Mills · 19 Jul 2013, 10:23

Published: 19 Jul 2013 10:23 GMT+02:00

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Englishman Edward Hugh is a self-taught economist, although he uses the term 'economist' only reluctantly.  

He says that while many economists try and change the world, the important thing is to try and understand it. 

Hugh first rose to prominence in 2010.  

For years he had been warning of imbalances between the economies in the eurozone.  But international analysts only picked up on his message when the eurozone crisis kicked in.

Here he tells The Local why Spain is not out of the economic woods just yet.

Recently you said Spain's economic problems are becoming so complicated it's difficult for journalists, politicians and laymen to understand them. So let's go back to basics. What are those problems? 

Spain's economic problems are a knock-on effect of the end of Spain's property boom (in 2007).

The collapse of the property market at that time led to a drop in incomes, depressed demand for goods, and produced — slightly — lower wages.

At the same time, prices, apart from in the property sector, haven't come down.

In addition, over one adult in four isn't working so consumption is steadily falling.
On top of that we have a debt overhang — which means it is difficult for Spain to borrow.

Larger companies are struggling to get credit so they are delaying payments to smaller suppliers, which means smaller companies are finding it harder to get money.

It's a vicious cycle.

We are also seeing imbalances within Europe with the Germans doing 'well' and young Spaniards leaving the country to work elsewhere.

And how has Spain's Popular Party (PP) government led by Prime Minister Mariano Rajoy tackled these problems?

One of the main objectives has been to avoid a financial rescue from the European Union. This was important for a number of reasons.

National pride was definitely one factor. Also, it is unlikely any Spanish government could have survived a bailout.

Then there is the fact that Europe would have had a greater say in how the Spanish economy operated if a bailout had taken place.

The EU Commission would have been telling Spain which taxes to raise or lower, for example.

How do you rate the government's attempts to cut spending?

At the end of the day, this government is made up of 'middle of the road politicians' and they are basically economically liberal.

This means they would like to see less government, so if the deficit hasn't come down it hasn't been for want of trying.

I would probably have to say their least recognized achievement has been their attempt to reform the public administration.

This hasn't been easy for the PP as some of the areas where the party has a lot of support are also places where there is not a lot of industry, and where government is a big employer.

But Spain still had the biggest deficit in the EU last year (government spending exceeded tax revenue by 10.6 percent).

In addition, reform of the financial sector still has a long way to go as well because while there is increased liquidity in the system, more recapitalization is constantly required.

This is because high unemployment and low demand for products means more bad loans are created with each passing day.

Recently, Spain's Economy Minister Luis de Guindos asserted the recession may be over. He didn't mention the crisis though.

That's an important distinction. Luis de Guindos is an intelligent man and recognizes that while the crisis is ongoing, recessions are a normal part of the business cycle.

Spain's second recession since the crisis began could well be over. And yes, we could well see two, or three, or even four quarters of weak economic growth but this is just part of the cycle.

Indeed, our double-dip recession could eventually turn into a triple-dip one.

This is because none of the underlying problems have been adequately addressed.

We were told house prices would bottom out with the creation of the bad bank, but they are still falling.

There is probably some way to go still — maybe two or three more years of falling prices.

The organization charged with handling failed banks' property assets, Sareb, isn't operating very well either.

Sales are very low, and the costs for potential buyers from Sareb are too expensive as the organization doesn't have depositors and has to make deals with other banks to give mortgages.

This ends up being expensive.

And while some of the old imbalances are adjusting, it appears new ones are being created since young people are now leaving Spain to work elsewhere in ever greater numbers.

What do you make of the recent spate of claims the crisis is over?

I believe these predictions play to two audiences.

The first issue is a confidence issue. Politicians would like to give the impression to the Spanish people that the crisis is ending to encourage them to spend.

At the same time, Prime Minister Rajoy is fighting for his political survival.

So what does the term crisis actually mean after five years?

My feeling is that it's totally unrealistic to expect a 'return to the old reality'. We now need a change of paradigm.

We all need to change our expectations and find ways to live with the new situation, since whether we like it or not, we will have to.

Story continues below…

There is no quick fix. They have all been tried and failed and Spain is now condemned to going through a painful long-term shift.

The country will have to deal with its legacy debt.

To what extent is Spain responsible for its crisis, and to what degree are international circumstances to blame?

When the Euro was rolled out, the single currency idea clearly wasn't thought through well enough.

The EU leaders didn't envisage the problems that have arisen.

Another part of the problem lies in an idea that existed in Europe before the crisis — this was the idea that all countries all had equal levels of risk.

And this clearly wasn't true. So to some extent the EU needs to assume responsibility.

But on the Spanish side, it's obvious the political parties were up to their necks in fomenting the boom by letting regional savings banks keep lending money, and by allowing builders to keep building.

During the building boom, many Spaniards also became property speculators in their own right, buying more houses than they needed.

As the saying goes, "When the music plays you have to dance."

George Mills (george.mills@thelocal.com)

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