Peripheral Europe beyond the Troika: assessing the ‘success’ of structural reforms in driving the Spanish recovery

Abstract

Since 2014 the Spanish economy has recovered positive GDP growth, and the country has been growing well above the eurozone average. This recovery has sparked an academic and political debate concerning the role that structural reforms, prescribed by the ‘Troika,’ have played in peripheral Europe. For certain scholars and institutions, these structural reforms have allowed the market, through greater wage flexibility, to make the necessary adjustments to restore economic growth, resulting in a ‘healthy’ economic recovery. But to what extent is this mainstream narrative solidly backed up by the empirical evidence? Can Spain be held up as an international example of the ‘success’ of these reforms? The aim of this paper is to shed light on this debate. We consider that labor market reforms and wage devaluation policy are not the drivers of economic recovery. Instead, we offer an alternative explanation for recovery based on the theory of demand-led growth.

The results of internal devaluation policy as a crisis exit strategy: The case of Spain

“…These results evidence how little influence wage costs had on export price formation (indeed, an inverse link is actually detected) and the balance of trade, compared to greater dynamism in foreign markets, the sharp fall in oil prices, the appreciation of the euro and non-price competitiveness factors. This is in line with most of the empirical studies mentioned here which question the effectiveness of wage devaluation (Álvarez Peralta, 2014;Álvarez et al, 2019;Cárdenas et al, 2020;Fernández, 2014b;Gracia & Paz, 2013;Janssen, 2013;Mariolis et al, 2019;Rísquez, 2016;Villanueva et al, 2020;Villanueva & Cárdenas, 2021;Weisbrot & Ray, 2011;Xifré, 2021). It also coincides with the conclusions of a report by the McKinsey Global Institute (2019) in that only about 18 per cent of global goods trade is now driven by labour-cost arbitrage.…”

“…In the case of the five largest euro area economies in 2000-2018 these factors seem to have improved significantly in the Netherlands and Spain, improved slightly in Italy and Germany and worsened slightly in France. • Cárdenas et al (2020) argue that labour market reforms and widespread wage reduction were not the drivers of Spanish economic recovery, but that recovery stems from the demand-side of the economy. The expansionary effect of the autonomous components of aggregate demand, and particularly of exports, had a positive impact on the capacity utilisation rate, and there is an upturn in equipment investment.…”

Unemployment in Spain: The failure of wage devaluation

“…There are previous Bhaduri-Marglin estimations for the Spanish economy, the most relevant being Naastepad and Storm (2006), Storm and Naastepad (2012), Onaran and Obst (2016), Álvarez et al (2018) andVillanueva et al (2020). All of them find the demand regime in Spain to be wage-led.…”

“…Prior to the outbreak of the economic crisis, the Spanish economy was registering increasing external deficits, along with a large accumulation of private debt. Nevertheless, the restrictive macroeconomic policies that were passed to boost the economy and recover from the crisis and the sovereign bond crisis generated new imbalances such as high levels of public deficit and debt, which caused the post-2010 crisis (Cárdenas et al, 2020). After the outbreak of the economic crisis, the diagnosis of domestic and international authorities pointed to the inadequacy of Spanish labour market institutions, as real wages did not fall sufficiently, or fast enough, to prevent the unemployment rate from rising and to restore price-competitiveness (EC, 2012).…”

“…We have included as explanatory variables both the contemporaneous value and the first lag of the variables, keeping finally those that were statistically significant. Autocorrelation has been corrected through the Cochrane-Orcutt transformation (Villanueva et al, 2020) when the autoregressive term is AR(1). We have estimated the following six equations First, equations ( 5) and ( 6) measure the extent to which consumption and investment are affected by changes in functional distribution.…”