WP_Post Object
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    [ID] => 6587
    [post_author] => 28822
    [post_date] => 2010-03-16 17:03:31
    [post_date_gmt] => 2010-03-16 16:03:31
    [post_content] => Economists are asking themselves where the impulse will come from to return an economy like Spain´s to growth.  With monetary policy practically impotent and fiscal policy strapped by high debt, and with no currency to devalue, Spain has few tools to reactivate growth.

One obvious answer is structural reform.  There are plenty of candidates in the Spanish economy for structural reform, the main one being the labor market.  But reforms of this sort, while needed, are unlikely to give an immediate impulse to growth.  The best they can do is set the foundations for stronger and more lasting employment growth once the economy begins to grow again at or near potential.

However, there is a candidate that is not talked about much due to its high potential political cost.  What about a wage cut, like Ireland imposed in the depths of the crisis, and like Portugal is discussing now?  The government could start by cutting its own salaries –larger cuts for higher incomes—and ask the private sector to follow its example.

What a wage cut could do for Spain is to help restore the competitiveness that it has lost over the years, as wages have climbed at rates faster than its trade partners, while productivity has stagnated.  Wage cuts would act almost like a devaluation, giving Spanish goods more attractive prices and making them competitive again in foreign markets.  This would enable Spain to reignite the economy through export-led growth.

Granted, lower wages could reduce domestic consumption.  But with luck, domestic prices would also fall, leaving consumers with similar purchasing power in the best-case scenario.

And the biggest advantage would be that finally markets would see that the government was doing something to boost Spain out of the crisis.  That could mean lower interest rates and easier financing.  And Spanish citizens would see that their government at last was providing leadership and a plan, which could restore confidence.

It´s not a likely initiative, but if the government would take the first step, it might work.
    [post_title] => Getting Spain out of the Great Recession:  how about a wage cut?
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    [post_name] => getting-spain-out-of-the-great-recession-how-about-a-wage-cut
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    [post_modified] => 2023-12-13 13:43:01
    [post_modified_gmt] => 2023-12-13 12:43:01
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    [guid] => https://economy.blogs.ie.edu/?p=6587
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)

Economists are asking themselves where the impulse will come from to return an economy like Spain´s to growth.  With monetary policy practically impotent and fiscal policy strapped by high debt, and with no currency to devalue, Spain has few tools to reactivate growth.

One obvious answer is structural reform.  There are plenty of candidates in the Spanish economy for structural reform, the main one being the labor market.  But reforms of this sort, while needed, are unlikely to give an immediate impulse to growth.  The best they can do is set the foundations for stronger and more lasting employment growth once the economy begins to grow again at or near potential.

However, there is a candidate that is not talked about much due to its high potential political cost.  What about a wage cut, like Ireland imposed in the depths of the crisis, and like Portugal is discussing now?  The government could start by cutting its own salaries –larger cuts for higher incomes—and ask the private sector to follow its example.

What a wage cut could do for Spain is to help restore the competitiveness that it has lost over the years, as wages have climbed at rates faster than its trade partners, while productivity has stagnated.  Wage cuts would act almost like a devaluation, giving Spanish goods more attractive prices and making them competitive again in foreign markets.  This would enable Spain to reignite the economy through export-led growth.

Granted, lower wages could reduce domestic consumption.  But with luck, domestic prices would also fall, leaving consumers with similar purchasing power in the best-case scenario.

And the biggest advantage would be that finally markets would see that the government was doing something to boost Spain out of the crisis.  That could mean lower interest rates and easier financing.  And Spanish citizens would see that their government at last was providing leadership and a plan, which could restore confidence.

It´s not a likely initiative, but if the government would take the first step, it might work.