What Southern Europe needs is not Austerity, it’s Economic Reform!
What each Southern European country needs now is not to spend less. Spending less alone will only exacerbate the recessions and make the countries insolvent, default and leave the euro. This is true even if the cuts in spending are made in areas in which today there is corruption and waste: less spending leads to less consumption and so on. Austerity, if it’s used as the only medicine, could have the opposite effect desired and lead to an economic depression. What Southern European countries need to do is “selective austerity” in areas where there is clear waste complemented with increased spending in areas that have a strong multiplier effect for the economy. What these countries need more than austerity is economic reform. The following is a list of random ideas for Spain that will accelerate economic growth. Portugal, Italy and Greece should make their own lists many of which will be similar.
Measures to promote economic growth:
-allow companies not to pay social charges for increased payrolls during 2012, then normalize the situation of these workers gradually over 4 years. Make 2012 “el año del trabajo” the year of employment creation and move 1 million unemployed into the labor force. This is the proposal that I presented to both Rubalcaba and Mariano Rajoy via Luis de Guindos. It was well received and so far publicly endorsed by the PSOE.
-until unemployment falls below 12% have the government should guarantee forced severance pay (indemnización) so entrepreneurs and businesses risk hiring them. This measure should be applied only for increased payrolls or new employees additional to 2011 payroll.
-have credit available for new companies. The government has to make Spanish bank create a category of lending at high interest rates for new companies, it is acceptable that loans be offered at 18% for say half the funds necessary to start a new business if the entrepreneurs and investors are willing to risk the other half. If Spain said that from now on any business that raises say 1 million euros in equity gets another million at 18% default rate would still be reasonable as people don’t want to blow up their equity and at 18% winners could pay for losers. High interest rates for risky businesses makes sense and since the Spanish government has saved so many banks it can also force them to do this type of lending. Soon the banks may discover that it is a good line of business.
