Cause and Effect in European Politics and Law

The end of Spanish siesta

Ralitsa Kovacheva, June 11, 2010

Can you imagine what kind of spending of money is happening in Greece, since the discussions on all austerity measures like reducing pensions for divorced daughters of civil servants is yet to start? Perhaps such frivolous spending was happening in other European countries also like Spain and Portugal, who have all been forced to impose stringent restrictions. Spain, for instance, has announced a decrease of 5% (only!) of public sector wages and had frozen them, together with pensions. Madrid has also introduced cuts of the assistance for childbirth of 2.500 euro and other social privileges.

The spending cuts, however, are only one side of the medal. The key word is work. If we want to live well, we must work, furthermore - to work longer and highly productive. This truth, so unpopular in our country as well, was told to Spain in the plain text in the last IMF report on May 24. The fund explicitly states that it fully supports measures to cut expenditure undertaken by the government. But the key to a lasting solution to the problems is an urgent reform of labour market and the pension system.

And, as this could fully refer to Bulgaria, I will pay particular attention to this particular part of the IMF report.

The Spanish diagnosis, according to the IMF, reads: "a dysfunctional labor market, the deflating property bubble, a large fiscal deficit, heavy private sector and external indebtedness, anemic productivity growth, weak competitiveness, and a banking sector with pockets of weakness".

The conclusion: “Spain’s economy needs far-reaching and comprehensive reforms”.

Policy should focus on fostering smooth rebalancing of the economy, that calls for making labour market more flexible to promote employment and its reallocation across sectors, consolidation of public finances and banking sector consolidation. Fiscal consolidation should be accompanied by urgent reforms of labour market and the pension systems, which need a broad political and social support, the report says. (Remember the public reaction in Bulgaria when some ideas for increasing retirement age have been insinuated!)

Then this is no accident that Spain is suffering 20% unemployment, which is the highest in the EU and more than twice the Community average. The reason, according to IMF: “The labor market is not working. Unemployment is structurally high and excessively cyclical, reflecting the high degree of duality in labor markets. The wage bargaining system, which hamstrings wage and firms’ flexibility, is ill-suited to membership of a currency union.” (It is another question why this monetary union - the euro area - has not been able to set the issue decisively on the table). According to the fund, it is not about just cosmetic changes, but “a radical and comprehensive overhaul of the labor market”.

IMF recommends the country to encourage permanent hires through lowering severance payments to at least EU average levels (?!); preventing excessive use of unfair dismissals; boosting wage flexibility and employment requires coupling this reduced protection of permanent contracts with decentralizing wage setting (for example by moving to an “opt-in” rather than “opt-out” system for collective bargaining) and eliminating indexation.

The government has provided some broad guidelines for reforming the labour market to be negotiated by the social partners and an agreement was expected by the end of May, the report notes. “Ideally the social partners will quickly deliver such an overhaul, but if not, the government will need to follow through on its commitment to take action itself, including on collective bargaining”, the IMF states. And specifically notes, that the reform should not increase the fiscal cost of the pension system or encourage temporary unemployment.

Now is the time to ask about the role of our, Bulgarian trade unions, in the"reform" of the labour market - perhaps their contribution is the constant insistence on increasing minimum wage?!)

Together with labour market, bold pension reform should also be implemented, the IMF report says. “Spain faces strong spending pressures over the longer term due to aging and slower population growth.” (This refers to Bulgaria too, but so far the government is only succeeding in thrashing over old straw - from the budget to the pension system). According to the IMF, it is necessary the retirement age to be raised up to 67 years and to be automatically linked to life expectancy. These and other possible measures, outlined by the Spanish government, “would strengthen the sustainability of the system and bring Spain closer in line with European peers that have already reformed their pension systems”, the Fund's experts conclude.

The question that is literally pressing from all the above is why, since Spain is an EU member since 1986 and an euro area member since 1999, The Big Crisis had to happen to make the experts from the Washington-based IMF tell Spain it should even up to its partners in Europe. The same of course applies to other countries in the EU, especially in the euro area. The notorious “compromise”-ness of the Community policies on sensitive national areas, namely labour market and the pension system has allowed such "islands of welfare” to exist, where public sector is large and well-paid, career is short, but pensions are high and where the desire to work increasingly gave way to the desire for a Siesta.

And, as the Bulgarians envy the Greeks and have searched for work in Spain, now we have to be the first to learn. Because clearly this is not the way. The illusion that we can work less but spend more burst like the property bubble (on which there are also similarities to Spain). And in Bulgaria, unfortunately, this is not simply a matter of political decision, but a “civilization choice”, which should be made by any government on behalf of citizens.