Labour reforms cannot tackle Spain's economic crisis

http://www.guardian.co.uk/commentisfree/2012/mar/30/labour-reforms-spain-general-strike

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There's at least one person in Spain who cannot claim that Thursday's general strike was unjustified. That person happens to be the prime minister, Mariano Rajoy. Weeks ago, during a meeting in Brussels, he was overheard muttering that he planned labour law changes that "will provoke a general strike". Neither can his finance minister pretend that the changes are not extremely aggressive. He also forgot that a microphone was on when he told an EU official just that: "Our labour reform is going to be extremely aggressive."

We have modern sound technology to thank for this useful window into the minds of those who rule us. It's like having access to the unconscious of the government, which interestingly coincides with what everyone else's conscious thinks: the changes are extremely aggressive, and industrial action was the least the government could expect. Moreover, in this same Freudian vein, the government probably wanted the general strike to come as quickly as possible, so that they could confront it with the clout of their recent electoral landslide. And it was the unions who had doubts, because their last strike in 2010 wasn't a lucky one. After learning the details of the labour laws shakeup (which is best described as an employer's wish-list gone mad) they had little choice but to go on the streets or risk irrelevance.

But isn't Spain in need of changes, however aggressive? Isn't Spain's economic situation serious enough? Sure it is. But the question is not how to reform, but what to reform and when; and, most of all, why – precisely because not all economic situations are the same situation only because they're serious.

First, forget about Greece. Spain's crisis is caused by a property bubble, not overspending. This is also the main factor behind Spain's high unemployment rates, since almost a third of the unemployed are construction workers dismissed when the financial crisis brought building to a halt. In its turn, the property bubble threatens the banking system while the unemployment reduces consumption, and the combination makes it difficult for Spain to borrow money internationally.

So, we get to the relevant question. What does a reform of the labour market has to do with it? The answer is: not much, really. Since wages are outrageously low in Spain (the lowest in the UE-15) and unemployment is at a staggering 23%, labour costs and "rigidity" can hardly be the problem we need to fix. Not that the changes will have no effects. They will, but in the wrong way. There's little doubt that in the context of a downturn, more flexibility means more lay-offs, more short-term contracts and lower wages. This will have the immediate effect of increasing earnings for employers, but this will come back to haunt them as households will have less disposable income. The employer's "wish-list" may turn into an employer's last wish.

Why, then, is the Spanish government focusing on this now? I'm afraid it wants to be seen as "doing something" to tackle the crisis, and tinkering with a law is much easier and visible than starting to change Spain's bricks-and-mortar-addicted economic model. This would take years, if it is possible at all. The changes also supposed to "send the right message" to the markets and hence help the government to borrow at cheaper rates.

But this isn't happening. Bond yields continue to soar and it's become increasingly clear that markets read the papers like my grandmother used to: only registering the bad news. Markets punish countries when they don't do what they want, but when they do it right, then they don't really care. It happened last year when the previous Socialist government attempted a milder changes to labour laws (they also wanted to be seen as doing something). The result? An increase in unemployment and a run on our public debt.

It is easy to understand why governments don't know what to do; after all, no one does. But we have to stop deluding ourselves. Maybe the problem, in Spain and the EU as a whole, is not whether we have got the right answers, but whether we are asking the right questions.

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