Cinzia Alcidi and Daniel Gros call an 80% decline of construction orders in Spain ‘some’ adjustment… (4 charts)
from Merijn Knibbe
Help. Help! HELP!
“Spain faces high unemployment and slow growth. This column focuses on an important sources of those problems – its housing market. While some adjustment has occurred since Spain’s housing bubble burst in 2008, house prices and construction need to decrease more to slow Spain’s unsustainable accumulation of foreign debt.”
The authors compare Spain with Ireland where, according to them, adjustment was faster and more ‘succesful’. Are they right that adjustment in Spain was ‘too little to late’? NO. Their idea that Spain only had a ‘bustlet’, especially when compared with Ireland, is ridiculous (see the graphs, all data Eurostat). Yes, prices of new residential buildings declined less as well as less fast than in Ireland – but only because they also increased less as well as less fast as in Ireland. And calling an 80% (EIGHTY PERCENT) decline in orders ‘some adjustment’… be serious. EIGHTY PERCENT! Though production and labor use declined ‘only’ sixty and fifty percent – further decline seems inevitable.
The authors also implicitly state that, as the present 24% unemployment rate in Spain is not enough to lower the wage rate, it has to go up even further… Mind numbing. First, the authors show that they are not aware of ‘downward rigidity of wages’, a very strong empirical fact not only characteristic of modern western labor markets but also of Indian labor markets or historical labor markets in Europe. People, including employers, somehow have difficulties to decrease wages. And Spain does not need lower wages, it needs higher private and public investment in education, technology, training on the job and whatever. And a reduction of the workweek. And five years of 6% real growth. Wages will always be undercut by countries like Romania and Poland and Turkey, which have the ability to devaluate. Only mass emigration and superior products will get Spain out of its present trouble.