A long way to go

I found this interesting comment on the financial situation that Spain finds itself in.

Well it is now official - or at least as official as it is going to get: the Spanish economy sneaked back into growth by a short head during the first three months of this year. According to data published in the Bank of Spain's quarterly report on the Spanish economy, Spain's GDP grew by 0.1% in the first quarter. Interannually output was still down by 1.3%, but this is evidently a considerable improvement on the 4.2% annual drop registered in the second quarter of last year, and much better than the 3.1% fall seen in the last three months of 2009

So that's it. Spain is out of the woods, the worst is now over, and the Spanish economy can now get back to the agreeable business of growing, and putting people back to work? Or can it? We don't have all the details yet, but from the information the Bank of Spain does provide we already have a sufficient information base to start asking ourselves just how sustainable this quarter's numbers actually are. In the present case it is the how, just as much as the what, that matters.

Obviously, and as everyone by now surely knows only too well, what little growth Spain is able to eke out at this point takes place on the back of massive government deficit spending (estimated at 11.2% of GDP in 2009), but even this is only one part of the picture, since we need to ask ourselves, outside the government contribution, what is actually driving the growth at this point?

Here the bank of Spain is reasonably helpful, since they tell us that, on the demand side, the decline in domestic demand eased (on an interannual basis) to a 2.6% fall (from a 5% one in Q4 2009), while the positive contribution from net external demand weakened to 1.4 percentage points (from 2.2 percentage points in the three previous months).

The net external demand component is simply the difference between the rates of change in exports and imports. These are year on year numbers, but we can deduce what the situation must have been (more or less) on a quarter by quarter basis: domestic demand (which includes government consumption, as well as private consumption and investment) grew on the quarter, while the net trade contribution was negative, since while both exports and imports increased, imports increased more than exports, and as a result the trade deficit deteriorated, which is, of course, for a country with a heavily indebted external position, not good news at all.

The principal reforms that Spain currently needs have been made abundantly clear by both the IMF and the EU Commission, so now is the time to implement them. Only this week the IMF urged the Spanish government to be more vigorous in implementing its fiscal correction programme, so why not spell out line by line where the cuts will come? It is no longer sufficient, as Miguel-Anxo Murado so ironically puts it in the Guardian newspaper, to simply say time and time again "all repeat after me, ‘Spain is not Greece’". This is clear to all. What is worrying people is whether or not Spain could become another Greece in the future, and whether or not the country’s present leaders have the determination needed to take the steps to ensure it won’t. Confidence in Spain’s economy is at a low level, and confidence in Mr Zapatero’s ability to do what is needed is at an even lower one. If Spain’s Prime Minister finds he is no longer able to convince external observers that he can do the job which needs to be done, then in the interest of all Spaniards and all Europeans he should offer to stand down at the and of the European Presidency in July and pass the rudder over to someone who can.

Harsh words indeed but then Spain is in a harsh situation. The problems that the country faces are not going to go away of their own accord. It will take drastic steps to put the country on the road to full recovery.