Posted by: Dirk | July 1, 2011

News from Españistán

I was at a conference in Madrid last weekend and later on in Valencia. In both cities, protesters (‘Los indignados’) were camping on the main square, Puerta del Sol in Madrid and Plaza de Ayuntamiento en Valencia. Here are some numbers from Eurostat concerning unemployment (Unemployment rates by sex, age groups and nationality (%), upper graph 15-19, lower graph 15-24, source):

An unemployment rate of 72.5% for ages 15-19 is a catastrophe. It can be considered normal when it is somewhere in the 30s, but now it is double. The unemployment rate for ages 15-24 stands at 48.4, which is also very high. It seems that both statistics are not improving lately (in the graph I chose Q1s only to have a longer timeframe). The people in the camps have banners flying reading “We don’t pay for your crisis”. Actually, they do. High unemployment is the price of the financial disaster, as households pay off debt and cut consumption. The most vulnerable in the labor market are the young, and it shows.

The basic story of the Españistán video is correct, although I am not so sure about the details. Spain has no monetary policy options, it has no room for fiscal policy – quite the opposite, actually – and supply side reforms won’t translate into the labor market in years. Even if they were quick, they probably would produce even more unemployment since the limited demand is the problem. Those arguing that prices would fall when productivity goes up tend to forget the financial side, where debt levels are fixed and rise in real terms when productivity and wages fall.

What we see is a political problem. The distribution of the economic hardship of the crisis is divided in an asymmetric way, with those that participated in the boom the least – the young – being hit hardest. Spanish unemployment insurance runs for 6 months, if you had a job for a year, and then it is back to Mom and Pop. You can imagine the social stress arising on Spanish family tables. The recent book “Crematorio” by Rafael Chirbes (now a TV series) nicely portraits the life of a real estate developer and his clan.

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