Can Spain be Germany?
While the Spanish economy shrank by close to seven percent between 2008 and 2013, the German economy expanded three percent. How far has Spain come in the government's plan?
This government's economic policy has been to turn Spain into a kind of "Germany of the southern Mediterranean." And one can see why. While the Spanish economy shrank by close to seven percent between 2008 and 2013, following the collapse of a lopsided economic model excessively based on bricks and mortar, and the seasonally adjusted unemployment rate more than tripled to 26 percent, the German economy expanded three percent and its jobless rate dropped to 6.9 percent. How far has Spain come in the government's plan?
The most notable success has been in exports of goods and services (particularly the former) whose share of GDP rose significantly to an estimated 35 percent in 2013. Spain is still far from approaching the German export powerhouse (50 percent of GDP), but it is moving in the right direction. Spain's export growth, fueled by gains in productivity and competitiveness from wage cuts or a freeze, has been faster than Germany's, albeit from a much lower base. Spain's relative unit labor costs (ULCs) fell below Germany's in 2012 for the first time since 2005. ULCs continued to fall in 2013 and are forecast to do so again this year, while Germany's are rising. Germany's competitiveness capacity, however, is not only due to its wage costs, but mainly to its high technological component and the quality of its products. Moreover, Spaniards worked on average 1,686 hours in 2012, 289 more than Germans, according to the latest OECD figures, belying the commonly held perception among German taxpayers that they are "supporting" a country of siesta and fiesta.
The most glaring difference between Spain and Germany is the gulf between the unemployment rates.
Spain, however, is still far from the German model. The share of Spanish industry (including energy and excluding construction) in GDP in 2012 was 17.4 percent compared to 25.8 percent in Germany. Fourteen days are required to start a business in Germany compared to 23 in Spain, according to the World Bank's latest Ease of Doing Business report. Spain's tax system is also weak: public revenues will only account for 36.4 percent of GDP in 2014 as against 44.8 in Germany, according to OECD forecasts.
The most glaring difference between Spain and Germany is the gulf between the unemployment rates. The depth of Spain's unemployment crisis is such that the country, with around 11 percent of the euro zone's GDP and a population of 47 million, accounted at the end of 2013 for 31 percent of the area's 19 million total jobless (5.9 million), whereas Germany (population 82 million and 30 percent of the GDP) accounted for only 15 percent of the unemployed (2.9 million). This disproportionate difference cannot be explained away by Germany's kurzarbeit system, under which companies agree to avoid laying off workers and instead reduce their working hours, with the government making up some of the employees' lost income, or by Spain's labor market laws. Even when the Spanish economy was growing at a brisk pace before the crisis, unemployment never dropped below eight percent on a sustained basis (one percentage point above German's current level), which suggests the labor market is structurally dysfunctional. This problem is related to the economic model and, in turn, to an education system that produces too many people who leave school early.
No wonder Germany has become the favored country for young, often well-educated and unemployed Spaniards. The flow to Germany is large, but so too is the number who return as they are unable to find a suitable job (it is estimated that two out of every three people emigrating there return to Spain). According to the Germany's Federal Employment Agency, there were almost 50,000 Spaniards with jobs in 2012 - not a huge number and far from an exodus. The challenge for Spain is to create a sustainable economic model, unlike the one that collapsed, so that so many people do not feel the urge or the need to emigrate.
William Chislett is the author of Spain. What Everyone Needs to Know (Oxford University Press, 2013).