Advice from a ‘very serious European’.
Picking up on the IMF’s report on the Spanish economy and its call for a social partner agreement to cut nominal wages by 10%, European commissioner Olli Rehn raises the following question: “What if Spain yet can achieve what Ireland and Latvia did?”
In the Commissioner’s view, Ireland and Latvia are success stories because they showed a strong sense of responsibility in implementing economic reform and internal devaluation. His blog implicitly suggests that these measures, wage squeezes in particular, are paying off in Ireland and Latvia. Spain would therefore do well to follow their example and go for such a social pact cutting wages significantly.
So what exactly did Ireland and Latvia achieve?
A look at the change in employment since the start of the crisis (see first graph below) shows that employment performance in Ireland and Latvia has actually been disastrous. Since the start of the financial crisis, the number of jobs has fallen by 15 and 20% respectively.
But perhaps Ireland and Latvia, thanks to their acceptance of structural reforms, still did better than other financially distressed countries? This isn’t the case either. Jobs destruction over this period has been similar, if not higher, in Latvia and Ireland compared to Greece, Spain or Portugal.
Moreover, the picture presented in the graph above is even too ‘optimistic’. Indeed, the collapse in the number of full time jobs has been bigger than the fall in jobs in general in all these countries. In Ireland, one fifth of all full time jobs has disappeared. In Latvia, it’s almost one third. Since full time jobs are what matters most when households have to guarantee the pay back of huge private and/or public debt loads, this does not bode well for the future. If the banks aren’t paid back in full, they get into even deeper trouble, dragging down the rest of the economy.
There is nothing in these pictures to suggest that Commissioner’s Rehn assertion that those economies which embraced the agenda of structural reform and wage devaluation have done really better in terms of jobs performance. What Latvia and Ireland ‘managed to achieve’ was to destroy around one fifth of jobs. Spain would do well to stay clear from the type of reform measures the Commission and the IMF are trying to sell to economies in distress. In the best case, the reforms suggested are irrelevant and do not make any difference. In the worst case, these reforms may even push the economy and job performance further down.