A Spanish austerity alternative that could restore full employment by 2018 has been proposed by the Center for Economic and Policy Research (CEPR).
The paper shows how the Spanish economy could grow and people could be put back to work without having to raise government debt levels.
David Rosnick and Mark Weisbrot, authors of ”Policy Alternatives for a Return to Full Employment in Spain”, disagree with Mariano Rajoy, Spain’s Prime Minister, who said “there is no other alternative (to Spanish austerity)”.
Their paper claims that feasible alterations could be made to Spain’s current economic policy that would not increase debt levels but would promote GDP growth and more jobs.
Co-Director of the CEPR, Mark Weisbrot, said:
“This paper shows that Spain’s 26 percent unemployment is an unnecessary human tragedy. It can be reduced dramatically with or without the co-operation of the European Central Bank.”
“However, this week the OCED called for the European Central Bank to engage in quantitative easing. As our paper shows, this would make Spain’s return to full employment much easier.”
Many economists globally argue that austerity, by raising unemployment, reduces tax revenues and thus becomes self-defeating.
Alternative to Spanish austerity could help GDP reach its full potential rapidly
According to the paper, Spanish GDP could reach its full potential by 2018, with less debt than even at baseline.
The authors proposed that the ECB (European Central Bank) purchase some of Spain’s debt with the intent of forgoing (or rebating) interest payments. This would reduce Spain’s levels of debt, allowing an increase in primary deficits.
There would be no real cost for the ECB because it is a money-creating central bank, the authors explain.
Lead author of the paper, David Rosnick, said:
“The European Central Bank should act as other central banks such as the U.S. and Japan have done, and help put the unemployed back to work in the Eurozone.”
Rosnick and Weisbrot say that the IMF’s (International Monetary Fund’s) diagnosis of Spain’s loss of output as being structural rather than cyclical is wrong. By using this misdiagnosis to then predict that the Spanish economy is close to its potential is another mistake.
During the last 24 months, the IMF has revised down Spain’s potential output by erasing more than half of the country’s under-performance. According to the IMF, the Spanish economy is running 3.6% short of potential, compared to an output gap of -9.4% estimated by the OECD (Organization for Economic Co-operation and Development).
If Spanish output is well below potential, the economy must be full of skilled workers without jobs because companies cannot see sales increasing enough to justify taking on more staff.
The only thing that will get unemployed people back to work is an increase in demand for goods and services, which usually means the government buying more domestic goods and hiring currently unemployed workers.
Spain cannot devalue its currency
If Spain still had the peseta instead of the euro as its currency, it could boost growth through devaluation. However, as it shares a common currency with its main trading partners this is not an option.
If you cannot devalue, the government-spending option becomes an even more important tool to boost GNP growth and create jobs.
In 2013 Spanish GDP is expected to shrink by 1.3%, while its unemployment rate stands at 26%, the second highest rate in the Eurozone after Greece.
“The IMF appears to have given up on the idea of many of Spain’s unemployed ever returning to work, and apparently so has the government. But this is a costly mistake.”