Report on Spain Overlooks Larger Challenges Confronting EU

When someone else is setting your interest rates and controlling your currency it means there is a limit to how far fiscal reform can be pushed. This report on Spain does a good job of delving into electoral politics but avoids any substantive discussion of labor law and the long term viability of the European Union…

Spain could go the way of Greece unless it reverses course and forcefully confronts its growing debt and pushes through labor reform despite the difficult political terrain, The New York Times warns in a piece appearing in the business section. This is true as far as it goes and the article gives an informative account of the electoral environmental that current bedevils Jose Luis Rodriguez Zapatero, the center-left prime minister.

The reporter correctly recognizes that the economic can never be separated from the political.

“Perhaps the biggest obstacle to overhauling the economy is a Spanish electoral calendar likely to put regional priorities ahead of national ones,” the report says. “Though Mr. Zapatero has two years remaining as prime minister, most of Spain’s regions will have held their own elections by then, starting with Catalonia this autumn.”

The discussion of the nation’s banking crisis and its relationship with pending legislation is also helpful to readers. Regional financial institutions are collapsing and consolidation is desperately needed, according the Times.

“Investors and analysts say the lack of progress in tackling the banking issue underscores the Spanish government’s shortcomings in addressing its broader problem: crushing fiscal deficits arising from high unemployment and a persistent recession,” the report observes. “Spain risks falling into the same trap as Greece, these investors say, unless it takes more forceful action. It could find itself unable to raise money on the private markets at acceptable interest rates — even though its government debt burden, as a share of the overall economy, is only half what Greece carries.”

From here, the article moves into electoral politics where it should remain focused on economics. The fact the political class  is unwilling to move decisively in the face of fiscal challenges is not exactly news. But the relationship Zapatero has with trade unions that previously supported his government is worth a harder look. The power of organized labor has precluded meaningful reform in Greece and other parts of the European Union (EU).

Remarkably the labor legislation that could help alleviate pressure on the private sector gets only a passing mention when it should be the central thrust of the story. It is reported as follows:

“Federal and regional interests diverge on crucial issues, notably labor legislation, the overhaul of which is seen by economists as essential to reducing unemployment and increasing productivity,” the report says. “For instance, the regions of Andalusia and Extremadura in the southwest apply looser rules on eligibility for unemployment assistance than those in the rest of Spain. That assists the seasonal work forces that underpin their large but fragile farming sector.”

The problem with an interdependent political system like the EU is that each member must absorb the costs and missteps of its more profligate neighbors. By definition there is a lack of political autonomy that precludes member states from taking action that is free from the central planners in Brussels.

This reports skirts the edges of larger questions. The EU is experiencing an institutional crisis, which has thus far been ignored in the reporting.

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