In this second article, Ramón TamamesProfessor of Economic Structure, Jean Monnet Chair of the European Union and member of the Royal Academy of Moral and Political Sciences, analyses together with Antonio Rueda the economic slowdown in Spain and the collapse of the stock market.
The state of alarm
The Spanish economy was already in a phase of exhaustion of the expansion in the fourth quarter of 2019, with symptoms such as a fall in investment due to institutional and international uncertainty, and stagnation in consumption. Variables that were offset by a very active foreign sector, and the increase in public spending.
The government's belated reaction began to be perceived with the first Royal Decree-Law of 10 March, with measures that did not cover the whole spectrum of problems to be tackled. The subsequent Royal Decree-Law of 13 March declared a state of alarm in accordance with Article 116 of the Constitution, point 2 of which states:
The state of alarm shall be declared by the Government by means of a decree agreed upon in the Council of Ministers for a maximum period of fifteen days, reporting to the Congress of Deputies, which shall immediately convene for this purpose and without whose authorisation this period may not be extended. The decree shall determine the territorial scope to which the effects of the declaration extend.
The ALARM STATE The government has recognised that there is a serious problem that requires all the resources of the state, without this leading to the suspension of any rights, as established in Article 55 of the Constitution. The result was the confinement of the population, a measure whose announcement was seen by more than 35 million television viewers.
Source: El País
The delay in the announcement after the Council of Ministers on Friday 13 March raises suspicions of internal discrepancies over the economic and social measures to be taken, measures with a strong impact on the levels of deficit and public debt established by the EU. Discrepancies, it seems, between the Podemos sector, which advocated focusing on social measures, and the socialist sector, or between the ministers of the economy, Nadia Calviño, and of Social Security, Jose Luis Escrivá.
Impact on the economy and markets
Tamames analyses the direct impact of the coronavirus on four key economic variables: unemployment, recession, deficit and debt, as well as on the stock market.
Unemployment will rise again due to the EREs and ERTEs, reaching around four million people. The recession will undoubtedly occur in 2020, due to the sharp fall in GDP of 12 per cent. The public deficit will exceed 1.5 per cent in terms of GDP, exceeding the 3 per cent limit set by the European Union, which is expected to relax its requirements.
Finally, public debt will grow, because the government will not be able to count on tax revenues (which will undoubtedly fall) to finance the welfare state. Spain could therefore exceed the 100 per cent debt/GDP threshold, albeit with a zero cost of financing from central banks. A scenario that already reflected the rise in the risk premium to 146.20 on 17 March.
The difference between the current crisis and the 2008/2013 financial crisis is the good health of the financial system. In the previous one, the state financed the sector with 61 billion euros - 40 billion from the ESM (European Financial Stability Mechanism) - and refloated the savings banks, affected by failed mortgage loans. And this despite the initial hesitation of Zapatero's government, which was slow to recognise the problem.
Therefore, the current crisis is being faced with a healthy credit system, and with the ECB as a guarantor for emergency actions.
However, the impact on the stock market has been much greater than that of the last financial crisis; in just one week, the Ibex-35 fell by 40 percent. On Monday 16 March, the selective index fell to levels of 5,900, levels not seen since 2012, after touching 10,000. A situation that only injections of liquidity to market makers will be able to alleviate.
Source: El País
As the Nobel economist Akerlof (husband of former Fed chair Janet Jellen) explains, such sharp falls in the stock market have a psychological impact on the economy, because they paralyse investment.
Ramón Tamames
Professor of Economic Structure
Jean Monnet EU Chair
From the Royal Academy of Moral and Political Sciences