More good news for Spain economy, but when will wages rise?

Falling wages simply mean the money in Spain’s economy is currently being directed elsewhere, and that has to stop

Spain’s miraculous economic turnaround in the past 12 months has largely been a result of direct government action designed to shake up the labour market.

In aiding the car manufacturing industry with its scrappage scheme, the sector rebounded to become one of the country’s key economic successes. In overhauling antiquated labour laws, companies had more freedom to fire workers, cut wages and hire fresh faces – the result being an upturn in job creation and a boost for the national GDP…

But neither of these measures are sustainable, and Prime Minister Mariano Rajoy has recently been urged by leading Spanish economists to introduce longer-term programmes designed to revive some areas of the economy that are essential to continued growth, such as research and development, innovation, and a properly regulated housing and construction market.

Having expanded by 0.4 per cent in the second quarter of the year, Spain’s economy has now outperformed the euro-region average for two straight quarters. The last time this happened was in 2007, before the economic crash. Encouraging, but unsustainable with current policies, argue economists.

The main tenet of their argument is that the continuing fall in wages, spurred by government policies that encouraged companies to employ more staff more cheaply, cannot drive a continued revival of an economy because a population without the means to invest in property, cars, consumer goods or leisure spending will not be able to pour sufficient money back into the country’s coffers.

Instead, the government must switch its attentions to aiding product innovation sooner rather than later, many argue. “Seeking competitiveness through lower labour costs will eventually backfire unless there is an effort to encourage better quality and higher technology products,” María Yolanda Fernández Jurado, a professor at Madrid’s Pontificia Comillas University, told Bloomberg.

Rafael Pampilon, an economy professor at IE Business School, put it like this: “Spain is recovering lost competitiveness – it’ll take time for spending to recover,” he told Bloomberg. “There is an improvement – income is increasing, house purchases are rising – but you can’t expect a patient to eat a paella straight out of intensive care.”

The real question is: do Spain’s lawmakers have the foresight to make these economists eat their words?