20 April 2019
Fiscal controls and labor reforms have helped the Spanish economy bounce back, but the nation cannot afford to rest easy yet. Photo: Bloomberg
Fiscal controls and labor reforms have helped the Spanish economy bounce back, but the nation cannot afford to rest easy yet. Photo: Bloomberg

Europe’s prospects: Why Spain needs to do more

European Central Bank President Mario Draghi said recently that the bank is prepared to step up quantitative easing to ward off the risk of a fresh economic downturn in the eurozone.

Many investors expect the central bank to announce new QE measures on Dec. 3, as the monetary regulator needs to defend its credibility given persistently low inflation.

The ECB has three options to ramp up QE: expanding the size of its debt purchases, enlarging the scope of such activity, or extending the deadline beyond the previously set September 2016.

We believe extending the deadline is the most viable option, as it’s the safest and most conservative one. However, it is also possible that the ECB might expand the scope of debt purchasing, as well as extend the deadline. It remains to be seen what route it eventually chooses.

The euro weakened 1.67 percent against the US dollar immediately after Draghi’s comments. And the bond yields of several European nations tumbled to their lowest levels since April. Weaker euro would benefit exports, which would help stimulate growth in the region, Germany in particular.

Now, let us look at Spain. The nation has posted growth of 3 percent for two straight years, the fastest expansion among developed economies. And its unemployment rate also dropped to 20 percent from 28 percent in 2012. Many have attributed that to rising exports and wage adjustments.

Spain’s GDP reached 1.04 trillion euros in 2014, below the pre-crisis level of 2007 but still a significant achievement considering the problems that it was mired in.

Now, why did only Spain outperform, and not the other nations in the region?

The Spanish government introduced various reforms, including halving the fiscal deficit to 4.4 percent from 8.9 percent in 2011. 

The government also introduced various labor reforms, which allow local firms to hire and downsize more easily. And falling wages also helped beef up the competitiveness of the firms.

Also, the nation’s exports surged 30 percent after the financial crisis, representing 23 percent of GDP as opposed to 17 percent in 2007.

But these measures may be not enough to sustain the economic recovery.

The Spanish government now has to invest more in education, provide better legal environment, break monopolies and reduce unemployment rate further.

Only if it does all that, can Spain lead a European economic recovery.

Excerpted from an article that appeared in the Hong Kong Economic Journal on Oct. 29.

Translation by Julie Zhu

[Chinese version中文版]

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Founder and Managing Director of Pegasus Fund Managers Ltd.

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