Monday, April 30, 2012

How structural reforms could make things worse for Spain

For the last year, the mantra of “structural reforms” (euphemism for reducing the bargaining power of workers) and “fiscal consolidation” (euphemism for huge government cuts) have been pitched as the solution to the debt crisis here in Spain.

We’ve already seen the pointlessness of government cutbacks, since the level of debt is usually measured by the ratio of debt to GDP, reducing GDP by cutting spending is just a really painful way to get right back where you started.

What about these structural reforms? Just like a good diet and exercise are generally a good idea, these prescriptions don’t always apply in extreme circumstances. In Spain’s case, there is a huge overhang of private debt, much of it indirectly owed to banks outside of Spain.

So how can it end? Either people start defaulting on their debts in a serious way (which will make the economic situation even worse, since the people owed money will then start defaulting as well), or a big bout of inflation washes the slate clean.

However, inflation only fixes the problem if workers have the bargaining power to get their wages to rise with inflation! If you’ve just kneecapped workers so that companies can keep salaries the same even as inflation rages, you’ve just made the country even poorer as people start not to be able to afford basic necessities.

Of course, there is that other tiny problem of the Germans accepting a higher level of inflation, but if France gets onside, it could get ugly in Germany as people realize that it has lost control of the ECB.

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