August 23, 2011
Morning Edition told listeners that Spain has built up huge debt. This is not true. Spain actually was lowering its debt prior to the collapse of its housing bubble in 2007. The recession that resulted from this collapse has led the country to run large deficits, however with four years of large deficits its debt to GDP ratio is still just 52.6 percent of GDP, well below the level in the United States.
It then interviewed an economist who said that Spain’s main need was to reform its labor market. While there may be useful labor market reforms that Spain can implement, arguably its biggest problem is the contractionary monetary policy of the European Central Bank (ECB). The ECB is run by a perverse cult that worships 2.0 percent inflation and is prepared to sacrifice almost all other economic goals to meet this target.
This is especially harmful to countries like Spain with large trade deficits. Since Spain shares a currency with the rest of the euro zone, the most effective way for it to gain competitiveness is to have its wage growth lag the growth in surplus countries like Germany.
If overall inflation were 3-4 percent, as advocated by many economists, it would be possible for Spain to increase its competitiveness with low positive wage growth. However, with inflation near zero, Spain must actually see wage declines in order to increase its competitiveness. This process of deflation tends to be slow and painful, involving high unemployment for long periods of time. It would have been helpful if Morning Edition had made this basic point to its listeners.
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