Double Trouble in Europe

IESE Prof. Alfredo Pastor on achieving market stability

24/04/2012

Double Trouble

Some countries in the European Union, Spain among them, face the double problem of a lack of competitiveness and debt, says Prof. Alfredo Pastor. The problem of competitiveness is that it requires internal differentiation and this is difficult to achieve within a monetary union. To be competitive Spain would need to devalue 20-30 percent. To pay off its debt, Spain would have to spend up to 3 percent of GDP for up to 20 years. These debts either need to be restructured or guaranteed by the resources of the Eurozone.

The EU will remain on an economic rollercoaster unless some kind of long-term stability mechanism is introduced, such as eurobonds, explains IESE Prof. Alfredo Pastor. In the meantime, European member states will continue to face two interrelated problems: lack of competitiveness and debt.

Austerity measures in Spain serve to give the impression that the government is doing its homework, but they will take a long time to produce the desired effects, he says. Competitiveness is the key issue, since it is "the basis for everything," says Pastor, who also notes that wages in Spain have not grown in a decade.

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