Six urgent reforms

The troika (European Commission, European Central Bank and International Monetary Fund), mastermind of the Spanish bank bailout, has confirmed that Spain’s banks have emerged in a healthy condition from the costly (41 billion euros) recapitalization, and can formally be said to have overcome the crisis. This assessment by no means guarantees that Spanish lenders are going to receive good marks in the still-pending stress tests, though it does suggest they have a high likelihood of success. But the report says something more. It warns of certain obvious facts, such as that credit is still falling and the real estate market as well, even though housing prices rallied by 0.7 percent in the third quarter.

The pièce de résistance of the report is the far-reaching economic policies that it proposes, giving us to understand that the time of strict demands on reducing the deficit has ended and the moment of reforms has arrived. It proposes five, almost all of them sound. Administrative reform is necessary because political management in Spain entails a high proportion of chaos; in the power sector, the report demands the suppression of the tariff deficit, though it is public knowledge that the energy reform that aimed at this objective failed before even beginning; and the troika calls for the liberalization of professional services, so often promised and never carried out.

It also speaks of fiscal reform, in generic terms. Probably the troika’s principal interest — the correction of the deficit — does not coincide with the actual needs of the Spanish corporate and social situation. But in any case, the report takes it as given that while financial stability (still to be achieved) is the first condition for growth, the second and no less important is a new fiscal model — less rigid, more productive in terms of revenue gathering, and less damaging to savings and investment. The main criteria are well known: simplification of income tax and reduction of taxation categories; the reduction of corporate tax in exchange for elimination of the bewildering clutter of bonuses and deductions which minimize revenue; and a VAT hike, more suitably staggered so as not to punish the most sensitive market sectors.

The fifth proposal is the most questionable: the report proposes another turn of the labor market screw, along the lines of further wage reductions to boost employment. Concerning this proposal, at least two observations are in order to the effect that it seems ill-advised to push any further toward a recovery based on reducing labor costs. The first is that the mediocre legal mechanisms involved have raised the incidence of litigation, and diminished the direct effect that was sought in the government’s previous reform (reducing the cost of firing). The second and more important point is that there is no evidence that the drop in wages has translated into more employment. It has increased competitiveness, but also the profits of those companies and markets that are shielded from competition. Hence the desirability of a sixth reform: effective liberalization of markets and services.