The Spanish crisis

In light of its prolonged recession, Spain must act.

by Ronald Dixon

The Spanish government reported last week that their gross domestic product will contract by more than 1 percent in 2013, despite austerity measures. Moreover, the unemployment rate has risen to 27.2 percent, with 57.22 percent of its youth lacking work.

This begs the question: Has their current economic approach worked? From the data above, we find that it has not.

Prime Minister Mariano Rajoy and the conservative Legislature have been strong advocates for fiscal austerity. Not only has this not helped Spaniards find work, but it has made the economy worse, and Rajoy is now beginning to realize this fact.

Recessions typically bring about a lack of demand, but austerity, which reduces benefits, services, public-sector jobs and subsidies while also increasing taxes on small businesses, only furthers the loss of demand. This perpetual downward spiral is the “paradox of thrift,” which can be avoided through two solutions.

First, Spain must leave the European Union and its euro behind. Spain’s capacity to improve its own economy is heavily restricted by the stringent demands that Germany has placed upon the nation. Because the Germans are demanding harsh austerity measures in exchange for any forms of aid, Spain has had to comply with their will and enact economically devastating cuts. Leaving the EU would allow them to declare their own economic solutions.

Once they leave the EU and return to their own currency, then they should enact Keynesian economic stimulation. This is the best way to prevent the paradox of thrift and to spur demand. With capital accumulated from public welfare projects, aid, construction and other forms that the government could disperse, there would be a stronger framework with which Spain could recover. Debt wouldn’t be an issue because they would be borrowing in their own currency.

Believe it or not, this is the simplest way the Spaniards could improve their economy. The austerity experiment has failed — both in Europe and in the U.S. It is time to bring independent currencies and Keynesian economics back to the economic roundtable.