The burden of unemployment

The Bank of Spain has cooled political expectations of a recovery for the Spanish economy during 2011. In its March economic bulletin, the country's monetary authority has aligned itself with the current economic consensus, and calculates that growth for this year will be around 0.8 percent, 0.5 percentage points below government's prediction.

The realist approach of the bank is based on the obvious problems regarding domestic demand, which will not positively contribute to GDP until 2012. But the worst diagnosis relates to unemployment. This year and the next, the unemployment rate will be around 20 percent, most likely slightly higher.

Once again, the bank's analysis correctly brings into focus a political analysis that appears to be unnecessarily optimistic, simply due to the fact that growth figures are now positive. It is even possible to conceive that by the end of 2011, positive quarterly growth rates of 0.3 percent or 0.4 percent are possible. But the statistic that casts a shadow over everything is unemployment.

The current jobless levels of 20 percent are a massive draw on the public sector, and demonstrate the fact that internal demand has not recovered, and nor will it recover in coming months. Growth is being sustained exclusively thanks to the pull of foreign markets. As such, there is hope that between the end of 2011 and the start of 2012 the deadly scenario of high unemployment and low internal demand will be broken, giving way to a recovery that is able to generate employment. Reforms to collective negotiation, which have been announced but are yet to be fixed, should facilitate a rise in economic activity.

In spite of the oppressive weight of unemployment, the most sensible option today is to maintain the objectives of economic policy (sustained reduction of the public deficit via an austerity plan, along with reforms to the labor market and financial sector), putting faith in the fact that public finances will adequately support a possible reactivation in 2012.

It would not be convenient to lose sight of the fact that uncertainty over the cost of money is hanging over the chances of recovery (the ECB is insisting on raising interest rates in April, and it is far from certain as to whether that rise can be easily absorbed by Spanish private debt).

There are also concerns over the price of oil, which had until now been compensated in part thanks to the appreciation of the euro. An obvious improvement in activity will not be expected until the end of 2012; at that point it will be possible to talk about recovery.