Austerity fatigue

The OECD’s forecasts for Spain and its diagnosis of the economic situation follow the general lines set by other international bodies such as the IMF. Although the institution foresees a slight improvement over previous forecasts, it maintains its prediction of growth rates languishing at low levels. It estimates that this year GDP will contract by 1.3 percent — four-tenths of a point less than its May forecast — while for 2014 it predicts growth of 0.5 percent, one-tenth of a point more than in May. In consequence, the unemployment rate is also set to ease slightly, although since it is coming off such a high base it will come in at 25.6 percent, better than this year’s forecast of a rate of 26.4 percent.

The message, from the viewpoint of these economic projections is that the coming year will see a positive evolution of the economy from a situation of recession in year-on-year terms to one of moderate growth — throughout the euro area the trend will be similar — and that unemployment will start to fall.

According to the OECD, the principal drags on growth in the case of Spain are the process of fiscal consolidation and the absence of credit. If its general diagnosis is correct, we can deduce that the time has come to moderate the policy of adjustment (in theory because countries such as Spain still have very high public deficits and debt) with certain budgetary stimulus measures to favor demand and employment. Monetary policy after the latest reduction of interest rates has less leeway.

Insufficient job creation

The OECD, like other institutions, still insists that we must persevere with fiscal adjustment. It declines to take the step of admitting that contractive fiscal policies have not produced the effects expected of them; that they are delaying recovery and that, what is worse, the prospect they offer for the future is insufficient growth to generate a reasonable volume of employment for jobless Europeans.

The scenario, in spite of the supposed improvement (measured in tenths of a point) that it portrays, reflects a certain weariness in the formula “adjustment plus reforms.” After two years of spending cuts and uncoordinated tax hikes, there are no expectations for solid growth in the medium term that would produce any substantial fall in unemployment in the years to come. The euro zone, and Spain as part of it, runs the risk of settling into a chronic state of insufficient growth.