Spain: Rising from the Rubble

Troubled with the a triple shock of property values crash, the global financial crisis, and a frail Eurozone, Spain is facing unemployment that tops 25%. According to the Keynesian course of action, the government is required to instill policies that can raise unemployment and instill a prosperous outlook for domestic companies. However, many of the larger companies in Spain are balancing their losses in the domestic market with foreign gains. Spain’s largest retail bank, Santander, was able to handle a 6.5% loss in the European markets with a 5.5% gain in Latin America. Along with other major companies, these foreign gains are raising the stability of domestic producers by promoting foreign investment. Spain has taken a different approach than a traditional Keynesian one by loosening their restrictions on many monetary policies, specifically their national wage agreements. This has created a situation that has allowed for lower unit labor costs. The Keynesian cycle claims a high unemployment rate creates a scenario that results in a cycle of low demand and continued unemployment. Rather than attempt to adjust wages domestically to increase demand, Spain is allowing wages to continue to drop in order to increase foreign investment. Doing so has already resulted in Renault, Nissan, and Ford to invest in production facilities throughout Spain, mirroring Germany’s course of action in the past decades. Coupled with the increasing revenue from international companies, Spain is poised to rise out of its devastating position.

The problem arises when attempting to balance domestic woes and promoting local stability. The EU is pressing Spain to change their sales tax and wage laws to reflect IMF standards. Bonds in Spain are holding the lowest yields in 14 months. In order to create lower borrowing costs, Spain recently sold €803 million in both long term and short term bonds. Together with wage reforms, they are attempting to promote a stronger domestic market. Germany has warned Spain against this course of action; they claim that the only reason such reforms are passing is due to strong political stability, compared to Italy’s predicament. Germany asserts that by creating such low interest rates and wage costs, it detracts from the stability of the EU as a whole. Spain and Italy are in similar situations, and if Spain continues down this path it has the potential to offset production in Italy. This poses the threat that if Italy were to decline once again, it would drag Spain down with it, and in turn lower the value of the Euro.

Spain has a promising future, as they are increasing textile and manufacturing jobs to ail the high unemployment rate. They are lowering borrowing costs and using their strongest companies to act as a beacon for sustained growth. Realistically, they can’t act so selfishly in the global market. Lowering their costs and selling their bonds are having direct effects on the gains in Italy. This threatens market stability in hopes of raising domestic stability. There is growing concern, especially among Germany and the UK, that Spain’s new reforms are overly expansive. Due to the nature of the Euro, Spain’s actions have the potential to cause devaluation, holding drastic consequences for the hard fought gains of other EU nations. Is there course of action the right one? Should they be fixing the home front before adjusting fully to assist their neighbors, or should they adjust their laws to reflect IMF averages, which may cause long term stability, but handicap domestic producers.