Lessons from Spain
The author is an editorial writer of the JoongAng Ilbo.
PIIGS is an acronym that refers to five distressed nations in the eurozone — Portugal, Italy, Ireland, Greece and Spain. They have been lumped together as a headache for the European Union (EU) after their debt crises began in the aftermath of the 2008-09 global financial meltdown. Their economies couldn’t take the external shock, underscoring how weak their underlying fundamentals had been under the façade of the EU. Their public sectors were oversized and labor markets rigid.
They had been warned by the Organization for Economic Cooperation and Development (OECD), the International Monetary Fund (IMF), and the EU years before their troubles deepened. All five governments turned a deaf year to calls for economic reform. They claimed their fundamentals were strong and went on their way. Such stubbornness was the common trait among all five states.
Spain underwent a dramatic transition after the conservative People’s Party ended the Socialist Party’s seven-year rule in 2011. The center-right government cut government employees and corporate taxes. It carried out labor reforms to help companies lay off workers and freeze wages at the recommendation of the OECD. In 2014, the economy turned around and began growing again. In the following three years, the economy grew at an annual rate of 3.2 percent. Thanks to the reforms, Spain became the third richest country in the eurozone in gross domestic product (GDP) in terms of per capita purchasing power in 2017.
Just as it was touted as a star pupil, Spain began to show symptoms of weakness once again from the second half of last year. The Socialist Workers’ Party revived its leftist agenda after returning to power in June 2018.
Under Prime Minister Pedro Sanchez, Spain’s monthly minimum wage shot up by 22.3 percent from 859 euro ($986) to 1,050 euro from the beginning of 2019 — the highest annual increase in more than 40 years. The adjustment was authorized by a royal decree that does not need approval from the opposition-controlled parliament. That jump, however, was a bit milder than the 23-percent spike in the monthly minimum wage in Korea. Declaring that “a rich country cannot have poor workers,” Sanchez plans to raise wages for government employees through a hike in corporate taxes.
In October, the IMF lowered its growth estimate for the Spanish economy to 2.7 percent for 2018 and 2.2 percent for 2019. It warned of the risk of reversing reforms. The IMF said the reform imperative is essential to preserve what had been achieved. It argued that the labor reforms must be preserved for mid-term growth and warned that the steep increase in the minimum wage could lessen job opportunities for unskilled and young people. That is a reminder that minimum wage increases should be linked to companies’ ability to raise productivity and not damage enterprises’ competitiveness.
The Spanish government returned to its populist platform as soon as the left-wing party took power. Korea is no different. Yet the Bank of Korea cannot outright criticize government policy. Even state-run think tanks trot out reports and studies tailored to please the liberal administration.
Spain may be headed back to the operating theater. Korea may be counting its days. Both governments are stubborn in their policy convictions and are unabashedly populist. It is obvious where the Korean economy is headed.
JoongAng Ilbo, Jan. 14, Page 27