Spain’s austerity measures are working, recent figures show

Spaniards didn't want the cuts, but has the medicine been working?

Nobody ever wants austerity. People would rather a golden goose continued to lay golden eggs, but every successful economy in the world today has – at some point – gone through the pain of reform so that they can emerge stronger for it.

Germany did so around the turn of the millennium. The USA has had to reassess just what the ‘American Dream’ means at least three times since the Great Depression, and even in China, where the economy is roaring, most adults will be able to remember a time when things looked incredibly bleak indeed.

And so to Spain…

Only a democracy as recently as 1978, the country’s spectacular, EU-aided growth is starting to look more and more like classic ‘boom and bust’. The heady post-millennium years were followed quickly by five years of recession and depression.

As ever in these situations, something had to be done. That something was harsh labour reform and stringent levels of austerity. It is not a popular policy but – just like a painful medical procedure or a teaspoon of sour medicine – it is all for the good of the patient.

So the recent news that the austerity measures appear to be working for Spain must be music to the ears of the Prime Minister, Mariano Rajoy, and the population at large, who have suffered through record levels of unemployment over the last 24 months.

The Wall Street Journal has labelled Spain’s monumental reforms as something of a giant laboratory experiment – something which no modern democracy has ever attempted. Spain’s aim has been well documented: an attempt to achieve internal devaluation by cutting wages and boosting productivity in order to restore competitiveness.

And it appears to be working. The Bank of Spain has reported that the economy shrunk by just 0.1 per cent in the second quarter of the year, which is down from 0.5 per cent on the first quarter. It is going in the right direction, at last. Unemployment – boosted by an upswell of summer jobs – has decreased, with 77,000 new positions filled in the past four months. Property prices have also stabilised, while the rate of exports has increased by eight per cent to levels that now match Germany’s.

The Wall Street Journal interestingly attributes the mini recovery to the complete crash of the construction industry which, for so long, artificially inflated Spain’s economy and then, like a sinking ship, dragged down many constituent parts with it. Now, they say, it has reached the bottom of the seabed and can do damage no longer.

So while the Germans suffered stagnating wages and high exports throughout the early years of the millennium and are now being applauded for their foresightedness, perhaps it is time to view Spain’s current reforms as the first of many steps being taken along a similar path?

Who knows, give it four or five years and it could be that Europeans flock to Spain for its robust and rewarding job market, not the other way around…