Yes, growth is up. But your young people are still leaving.

Photograph: GERARD JULIEN/AFP/Getty Images

Spain's Brain Drain Is a Eurozone Problem

Jean-Michel Paul is founder and Chief Executive of Acheron Capital in London.
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Even if it manages to pacify Catalonia's separatists, Spain's government faces a more insidious kind of separatism that diminishes the country's economic strength and potential for growth. Young Spanish engineers, and other professionals, are increasingly leaving home to find jobs elsewhere. Who can blame them when starting wages offered in Bavaria are twice as high as what they can earn in Spanish industry? They are part of a new kind of emigration -- that of educated and skilled workers moving from Europe's periphery to its core. The implications of this migration for the Spanish economy, and the euro zone, shouldn't be underestimated.

QuickTake Lost Generation

Spain, which had positive net migration until 2010, has since seen its population markedly decline, with a negative balance to other euro region countries of about 40,000 people in 2013, according to a Deutsche Bank research report. Worse, while retirees still come to Spain, it is often the more motivated and best-educated youth who are leaving. The trend repeats across the Club Med. The proportion of highly educated migrants from Spain, Italy, Greece and Portugal to the rest of Europe increased to 51 percent in 2011-2012 from 23 percent in 2005-2006:

While Europe's economic core -- principally Germany, and to some extent the UK -- benefit from this influx of talent and energy, the Spanish economic engine is being hollowed out. This has triggered a vicious circle with productivity growth in the economy virtually coming to a halt. Since the 1990s, Spain has been the worst performer among the major European economies in terms of productivity gains: 

Source: IMF

The worse part is that Spain has limited room for maneuver. Since the introduction of the euro, removing the ability to cheapen its currency to compete, Spain has been importing German goods and accumulating current account deficits. The country's net international investment position (NIIP), or the balance of what Spain owes to other countries, rose to 94 percent of GDP from 34 percent in 2000, by far the largest net debt of all the major world economies. To sustain and service this liability, Spain has to further increase its now small current account surplus. But given the lack of productivity growth this means the Spanish government will have to further deflate the economy, putting additional pressure on wages and pushing young, educated, productive Spaniards out:

Spain's recent economic performance has vindicated the tax cuts and labor market reforms of the government of Prime Minister Mariano Rajoy. Economic growth is expected to be about 3 percent this year and the current account balance shows a marginal surplus. Even Spain's famously high unemployment rate, while still at about 20 percent, is moving in the right direction. Unfortunately, these results have been achieved at huge economic and social cost and will not be enough to create conditions that keep Spain's youth at home.

 In order to absorb the shock of the banking and real estate crises, the government incurred a ballooning government debt, to 98 percent of GDP today from 69 percent in 2011. At the same time, despite some labor market reforms and tax cuts, labor laws remain stubbornly restrictive. Indeed, Spain was recently ranked worst in an OECD review of barriers to entrepreneurship: 

In a July report on Spain's external position, the IMF put it in unusually blunt language:

“Despite the strong improvement in the current account since the pre-crisis peak deficit in 2007, achieving both a sufficiently declining NIIP and much lower unemployment would require a substantially weaker real effective exchange rate.”

In other words, Spanish production prices compared with those of its main European partners need to drop. The logical solution for Spain is also the impossible one -- devaluation. This is indeed something Spain did regularly back when it still had the peseta. Today the balancing mechanism is the steady hollowing out of its human capital. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Jean-Michel Paul at JPaul@acheroncapital.com

To contact the editor responsible for this story:
Therese Raphael at traphael4@bloomberg.net