What does Spain need to do to get out of the crisis?

I just came back from a conference in Spain, where this was the question on the table. I made the following points.

First, expenditure cuts are not going to do the job on their own, unless accompanied by policies targeted directly at improving competitiveness.

Second, "structural reforms" (which in the Spanish context means largely labor market reforms that aim to reduce firing costs and decentralize wage bargaining to the firm level) are not a substitute for competitiveness policies. Insofar as they eat up political capital, they may even backfire in the short-run.

Third, there are no easy solutions to Spain's competitiveness conundrum. But the least bad solution is to engineer an economy-wide reduction in nominal wages and the prices of services (utilities, etc.) through some kind of social compact.

Easy? No. Any other practical alternative to a prolonged period of recession and high unemployment? Probably not.

Spain could always exit the eurozone of course. But the acrimony and uncertainty that this will cause in the short-run does not make it a practical alternative to incomes policies in my view.

Here is my presentation at the conference.

http://rodrik.typepad.com/dani_rodriks_weblog/2010/05/what-does-spain-need-to-do-to-get-out-of-the-crisis.html