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June 4, 2010

We Should Learn From Spain

Since the Greek bailout, the issue of sovereign debt has shifted to a new subset of European countries.  The newest member of the sovereign debt society is Spain.  The country continues to be ailing from banking and debt issues.  Politicians in the country are blaming these issues on a lack of investor confidence, but the numbers make another argument.
In the May 25th edition of the Wall Street Journal, the International Monetary Fund (IMF) issued a blunt warning about the state of Spain’s economy and its debt management.  Like Greece, Spain has a very liberal pension and employment system that allows public employees to retire young with massive pensions and incentivizes people to be unemployed. 
Just like Greece (and now the United States), the Spanish government is extremely socialist and has a love affair with labor unions.  According to this website, Spain’s workforce is 15% unionized and “workers receive 12 paid holidays per year and one month's paid vacation.”  Unions have threatened to strike if benefits are cut as a part of Spain’s austerity plan.
In terms of unemployment compensation and employment laws, Spain’s unemployment insurance pays out 65% of the country’s average wages.  Unemployed can collect these benefits for up to 2 years.  To make matters worse, Spain makes terminating employment very expensive, which means it is harder for private enterprises to create jobs.
To illustrate how bad Spain’s employment laws are, in 2008 Spain and Greece had the same unemployment rates at about 8%.  Today, Greece’s unemployment rate is around 12% while Spain’s unemployment rate recently reached 20% and is still growing.   Spain’s debt to GDP ratio has gone from 40% to 70% in the same period.  This may be better than Greece’s 130%, but with so many unemployed and growing, the benefits being paid out could easily bankrupt Spain’s economy before recovery.
Once again, we must advocate the responsibility of public pensions and unemployment away from the collective taxpayer and towards the individual.  Spain, Greece, and other countries with debt issues have one large factor in common, the lack of a self-employed workforce.  This is because of the large bureaucratic influence that government puts on creating a company (long patent, copyright, and incorporation waiting times), eliminating obsolete employment (high fines for terminating employees), and hiring (high taxes on labor wages).
These barriers to employment (including high amounts of unemployment benefits) need to be removed or reduced in order to give the labor market a chance to create jobs. 

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