Merkel in Madrid

The German chancellor Angela Merkel has arrived in Madrid with a set of proposals whose importance should not be underestimated. Firstly, this is a visit aimed at on-the-spot confirmation of the state of the Spanish government's reforms, these being the framework essential for the stability of the euro in these times of financial turmoil. The most recent reform plan, concerning pensions, was signed as recently as Wednesday.

The result of the round of checks, something more than a routine examination considering that the chancellor landed here with a substantial entourage of her ministerial technical team, seems to have been satisfactory. Merkel announced her congratulations (of which, it may be hoped, the markets will take note) on Spain's "important reforms"- congratulations which, added to those of Sarkozy and of Van Rompuy, somewhat resemble the kindhearted encouragement that teachers lavish on underachieving pupils.

But there is more. We must not forget that a part of the Spanish financial system, the cajas de ahorro (publicly administered regional savings banks) awaits capital to restructure their finances once and for all. Besides, the chancellor has a settled (some say an obsessive) scheme for European financial stability, and wishes to sound out the possibilities of this plan being adopted. Part of the scheme is correct, because it imposes changes and austerity plans which are desirable for combating the recession. For example, to limit the deficits accumulated by states (and by regional governments where these exist) is a proposal that any sensible government would adopt, with all the more reason if it is tied to a common currency. A reform of the financial system is indispensable if upsets in the euro zone are to be avoided, and if many Spanish firms are to survive; and a reform of the labor market will limit inflationary effects during the recovery. Up to here the Merkel scheme only deserves approval, which would turn to enthusiasm if she dropped her stubborn opposition to eurobonds.

But other proposals advanced by Merkel, which overstep the bounds of economic coordination and fiscal homogeneity, may be more questionable.

Such is the case of her plan, politely ruled out be the Spanish government, businessmen and labor unions, to untie salary increases from the inflation rate as one of the conditions for approving the enlargement of the European rescue fund.

The Spanish economy does need to reform its pattern of growth, save more and increase productivity. To this end many changes are required, and much discussion of what Merkel proposes. But in the end, every country must arrive at its own formula for improving productivity. Spain has chosen to raise productivity by improving education, investing in technological capital and infrastructures: something that Germany did in the 1960s. For the moment, though pegged to the Consumer Price Index (CPI), Spanish salaries in 2010 have increased well below the rate of inflation. However, it has not always been this way. Nor is there any assurance that it will go on being this way.