The Pain in Spain Falls Mainly on the Young

For John, BLUF:  Spain is in deep economic trouble.  Nothing to see here; just move along.

"Spain Is Beyond Doomed:  The 2 Scariest Unemployment Charts Ever"

I don't include the two scary charts, which are available here, from The Atlantic Monthly.  The author, Matthew O'Brien, saw this published on 26 April 2013.  His sub-headline is "This is what a permanent underclass looks like."

Five years after its housing boom turned to bust, Spanish unemployment hit a record high of 27.2 percent in the first quarter of 2013. It's almost too horrible to comprehend, but 19.5 percent of the total workforce has not had a job in the past six months; 15.3 percent have not in the past year; and 9.2 percent have not in the past two years.  You can see this 1930s-style catastrophe in the chart below from the National Statistics Institute.

The author's recommendation is:

In an ideal world, Spain would pair major reforms with major stimulus; in the real world, it will drag its feet on reforms, try to cut its deficit, and fall deeper into depression.

Well, not everyone agrees with Mr O'Brien.  Here is an alternate view:

When one reads of high unemployment among youth in a European country, this usually means the main problem is not "stimulus vs. austerity."  Rather, it is structural.  Vested interests seek to protect through political means or monopoly power their economic rents at the expense of others who would do better if labor markets were more competitive.  Indeed, the author puts his finger on it:  "It's almost impossible for companies to get rid of older workers, which creates a horribly bifurcated labor market."

But when it comes to policy prescription, the author becomes confused:  "Spain needs shock therapy for its labor markets, but that's an impossible political sell when more than a quarter of the population is unemployed."

In fact, only when unemployment—and desperation—mount are some troubled European polities willing to reduce restrictions that stratify their labor market and to slash excessive regulations that burden the private sector and entrepreneurs.

Not until less competitive countries make substantial efforts to lessen labor and market rigidities and excessive state economic roles do they deserve bailouts from others.  This is why the IMF, ECB, and Mrs. Merkel are demanding structural reforms.  Welfare-laden polities are resisting, but most will fold their cards.  For example, [French President] Francois Hollande has done some embarrassing about-faces and he'll do more.

I suspect there is more faith displayed in discussions of economics than at Lourdes.

Regards  —  Cliff