Spain’s Problem Isn’t the Deficit, It’s Jobs, Says Ciudadanos

Spain needs to strip away the barriers to creating high-quality jobs instead of focusing on budget cutting if the country is to tackle its deficit problem, according to Luis Garicano, the economic policy chief at pro-market party Ciudadanos.

If Spain reforms its universities, reduces the cost of permanent labor contracts and creates incentives for business start-ups, the budget deficit will take care of itself, said Garicano, who is also a professor at the London School of Economics. The lure of making easy money through political contracts is diverting ambitious young people who might otherwise be starting businesses and creating jobs, he added.

“The problem of Spain is really an unemployment problem,” Garicano said in a June 2 interview in Madrid. Instead of more budget cuts, Spain needs to “make the labor market work, as it should, like in every other country in the world.”

Spain has been under the European Commission’s deficit surveillance program since 2009 and posted a shortfall last year of 5.8 percent of its output, the second-highest in Europe after Cyprus. The country remains in breach of the euro area’s 3 percent limit even after Prime Minister Mariano Rajoy imposed the harshest budget cuts in a generation over the past three years.

The 23 percent unemployment rate has almost tripled since the start of the crisis and peaked at 26 percent in 2013. That compares with 11 percent across the euro region as a whole.

While Spain is growing at about 3 percent pace, the most since 2007, the challenge for policy makers is to sustain that expansion in the long run, said Garicano.

“Once we reach the structural unemployment level which is at 17 or 18 percent” the growth could slowdown, said Garicano. In the long run, Spain needs to boost productivity and reduce long-term unemployment to consolidate its economic recovery, he said.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE