To restore competitiveness it's obvious that certain reforms must be done. The problem is the nature of them: when Brussels or the current Govermnent in Madrid talk about reforms usually are talking about savage cuts and hardening working conditions. Nothing has been said about reform our banking system until it was too late. In my opinion the business culture in Spain must be reformed too, despite some succesful examples many of our entrepeneurs have a wrong mentality and are far away of being competitive.
Yes, the banking system's problem is that it caught itself up in a big real estate bubble. But hardening working conditions is pretty much necessary. In a market economy this should happen naturally as unemployment goes up, as those who are desperate to find work will accept harder conditions in exchange for pay. But that Spain's unemployment is 24% and rising suggests the labor market mechanism is broken. Those who are already working are too comfortable, while those who have no work are shut out. Labor market flexibility seems to be the key reform.
In Latvia's successful adjustment, the "real" unit labor cost fell 6.7 pct in 2009, 7.7 pct in 2010, and 3.2 pct in 2011, a total of about 15.6 pct in three years. In contrast, Spain was +1.2 (2009), -3.0 (2010) and -3.2 (2011), so far only adjusted 5 percent. Spain will not need an adjustment as much as Latvia, but compensation as a share of productivity will have to fall to restore competitiveness.
Beet, wouldn't you agree that there is a problem that there is this kind of unwillingness to reform in countries like Spain (as showcased in that post)? You're usually taking the Krugman stance on the crisis (and I'm not necessarily disagreeing - I'm far from a hardline austerity guy) but can you understand the wariness of Germany et al to pay for countries that might be very unwilling to actually reform?
