Spain’s Labor Markets: The Disregarded Solution of Economic Recovery

Despite the anti-austerity protests from thousands of unemployed Spaniards in recent months, Spain is moving towards cutting social programs in its most severe austerity budget plan in history in order to receive bailouts for its banks and government debt. Spain is considering to apply for the Enhanced Conditions Credit Line (ECCL), a euro-zone bailout fund that would grant money to Spain’s government with the condition that it imposes more fiscal austerity. More than $50 billion worth of budget cuts in education, healthcare, welfare, and pensions are expected and unemployment benefits and civil servant wages have already frozen.

However, as long as the labor market in Spain remains uncompetitive, Spain has little hope in recovering from its economic crisis in the long term. Restoration of the labor market, rather than its banks and bond market, is what will ultimately bring Spain out of its suffering. With nearly a 25% unemployment rate, Spain is making a serious mistake in cutting the social programs that are the lifeline of thousands of unemployed people. Moreover, borrowing money from the rest of the world to grant these bailouts to banks does not consider the future of its youth in the job market. According to the Wall Street Journal, “workers ages 16 to 24 face an astronomical 53.3% unemployment rate and for 25- to 34-year-olds, the rate is 27%.”

UCLA Economics Professor Aaron Tornell explains that high unemployment in Spain’s youth is due to a situation of “insiders” and “outsiders.”

“An insider is someone who is ensured a job for life; many insiders are union members,” said Dr. Tornell. “An outsider, particularly a young person, is someone who will not have a job regardless of whether the person is educated or not. The power of unions is protecting the insiders from getting fired. In order to fix unemployment, you have to weaken the power of the unions to make sure companies can hire younger, more productive people.”

Another problem that the Spanish youth faces stems from the housing bubble that burst in 2008. When Spain joined the euro in 1999, low interest rates brought banks to lend an unprecedented number of property loans and the boom years of this period caused wages to rise quickly within the labor market. As a result, Spain has been exporting less of its own, more expensive goods and importing more of cheaper products from its European counterparts. This trend resulted in Spain’s government overspending, but more importantly, Spain’s labor market became highly uncompetitive.

In the long term, giving salvation only to banks with bailouts all the while punishing the Spanish people through austerity measures serves in no interest of the Spanish people, government, or even banks. Nobel Peace Prize Laureate in Economics, Paul Krugman wrote in a New York Times op-ed article that fiscal austerity in Spain’s current economic state is simply, “just insane.”

“Europe has had several years of experience with harsh austerity programs, and the results are exactly what students of history told you would happen: such programs push depressed economies even deeper into depression,” said Mr. Krugman. “And because investors look at the state of a nation’s economy when assessing its ability to repay debt, austerity programs haven’t even worked as a way to reduce borrowing costs.”

However, the general trend throughout the world, not just in Spain, has been that bailing out banks has preceded the need to support social programs. The banking system has become monopolized so that banks are too large to fail when they are in trouble. Smaller banks around the world have merged together into larger banks in order to increase their assets to a point where defaults in these banks can risk a financial collapse. In addition, the risk of having these banks default could lead to a greater catastrophe of foreign investors pulling out their money from banks and government bonds. No investments cause reserves of banks to shrink, which would in turn increase interest rates and stiffen lending to consumers. Therefore, the banking system has become so essential to capital of the economy that bailouts have become the insurance banks can rely on when their loans are in trouble.

As a prime example, Spain’s government is applying for an ECCL to bring foreign investors, or at least keep the ones it already has, and maintain its credibility to repay debt. Moreover, if there are no foreign investors, there is a risk that Spain will default on its loans to France and Germany, which can spread Spain’s economic crisis into an epidemic throughout Europe. Consequently, further downgrades of Spain’s bonds—which are currently one notch above junk status according to Moody’s and Standard and Poor’s—will not only drive foreign investors further away from its bond market, but also bring other European Union countries down with it.

For these reasons, although banks are responsible for the housing bubble, they will receive the aid that they need even though austerity measures will make taxpayers’ lives harder. Since big banks are nearly guaranteed bailouts, there are no incentives to prevent banks from issuing out risky loans when the economy recovers and interest rates are low again. But for how long can this vicious cycle last? Already there are violent protests of hundreds of thousands all around the world. If governments wish to ensure the future of its citizens, the cries of the poor, young, and unemployed must be heard.

A strong, competitive labor market is what will bring revenue and ultimately restore the economy. Spain can start with not cutting social programs that are the support systems for the thousands of unemployed and struggling citizens. Secondly, laws must be set in place to prevent unions from not hiring the unemployed youth in Spain. Thirdly, although bailouts must be administered, social programs should take priority before banks are given aid. Finally, there must be laws or a set of incentives that will prevent banks from giving out such toxic loans that start such housing bubbles and financial crises. The people of Spain have been hurting long enough and it is time the government supports and invests in the people who can restore the economy for what it once was.

Tina Kim is a second year Communications major and Public Policy and Urban Planning double minor. She is a co-editor and writer for The Generation.