Spain's Dire Choice: Flee The Euro Or Crush Its Own Wages

Reform Spain 913

Spain’s position as one of Europe’s fringe states is best exemplified by one statistic: an unemployment rate of 20.1%. It gets even worse for 16-24 year olds, who face an unemployment rate of over 40% through 2011.

But how did Spain get here, and how can it hope to get out?

The reality is Spain has been hampered by its position in the eurozone, and ECB policies that powered the credit boom in the previous decade. That credit boom bust hard in Spain, and left in its wake a crushed real estate sector, a weakened manufacturing industry, and an economy too hampered by debt to pull itself out of the doldrums.

Instead Spain has been left with two options to revive its economic fortunes, according to Harvard Economist Dani Rodrik: quit the euro or reduce wages and the cost of services.

Some disagree with the way Rodrik displays his data, but it’s hard to begrudge him his dramatic conclusion.

Spain is in need of some serious adjustments if it is to survive this downturn.

Spain continues to bring in more goods and services than it sells

Source: Harvard via Ibex Salad

And the export sector, which can fix that imbalance, has continued to shrink

Source: Harvard via Ibex Salad

Spain's GDP per capita is high

Source: Harvard via Ibex Salad

But the share of that from industry, which includes exports, is limited lower than most

Source: Harvard via Ibex Salad

Spain has to reduce the cost of the goods it exports

Source: Harvard via Ibex Salad

And its position to start with is poor, so it should be able to cut costs

Source: Harvard via Ibex Salad

Structural reforms can't fix this problem swiftly enough, however

Source: Harvard via Ibex Salad

Spain could cut the costs of producing goods, but there is no fast way to achieve this

Source: Harvard via Ibex Salad

Spain's productivity has increased, but it has done so through mass unemployment

Source: Harvard via Ibex Salad

Spain could devalue its currency, but...

Source: Harvard via Ibex Salad

A fiscal devaluation could, potentially work, but...

Source: Harvard via Ibex Salad

Spain could cut wages, but it would mean private sector cuts too, or real wage losses would be massive

Source: Harvard via Ibex Salad

Spain could inspire new industry, but it is in a difficult fiscal position and this is time consuming

Source: Harvard via Ibex Salad

Spain faces two terrible choices

Source: Harvard via Ibex Salad

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