War in Ukraine exacerbates the Spanish economy’s weaknesses

by Lorraine Williamson
Spanish economy weaknesses

MADRID – The Russian invasion of Ukraine exacerbates the weaknesses to which the Spanish economy was already exposed. That is why the Council of Economists would like to see a broad pact between social and economic agents to turn the tide. 

That is what Salvador Marín, Research Director of this General Council of Economists, says in the newspaper Expansión. The war has exacerbated the pre-existing problems of stock depletion and energy problems. This has carried over to the entire supply chain. “What the invasion of Ukraine is doing is exacerbating all the problems of an economy that was already showing signs of weakness,” Marín said. 

The side effects of war

Marín states that only the side effects of the war hurt the economic growth by 1.5 points. “Without adding the other factors” that would put the Spanish economy in a growth scenario between 3.7 and 3.9%. 

These new conditions, together with the pre-war problems, have resulted in prices showing unknown growth rates for half a century. For example, industrial product prices rose 40.7% year-on-year in February as a result of the rise in fuel prices. The increase also shows a pace that has not been seen since the oil crisis of 1973. 

The Consumer Price Index (CPI) also reflects these strong commodity price increases, with general inflation at 9.8% in March. 

According to the calculations of the Council of Economists, the effect of the Russian invasion of Ukraine would have an additional impact on inflation of two points. Marín calls it “something unaffordable” for the Spanish economy. 

The economist deems it necessary to “soften this storm,” which extends to commodities such as wheat, sunflower, corn, and metals such as nickel. To this can also be added the weakness of China, which is having an impact on the global economy. 

Public administration must set an example 

According to the Efe agency, the director of the Research Department of the General Council of Economists finds it necessary to look beyond the so-called “income pact” for solutions. In addition to employees and entrepreneurs, public administration should also be included. “It must set an example”, as well as all types of income “seeking equality”. 

“Everyone must contribute” 

According to Marín, a plan needs to be made of “how we see Spain in 5-10 years”. This requires “everyone’s effort” because “society must recognize that everyone must contribute”. 

Measures were taken only as “very temporary solutions” 

The measures taken by the government this week are “only a very temporary solution”. “There is a certain consensus among economists that it does not address the structural problems of our economy,” says Marín. 

The low effective power of measures 

He also predicts that “due to the complexity of the moment, our budget deficits and differences in the prioritisation of government spending”, the effective strength of these measures will be “very low”. 

Structural reforms 

The Spanish economy has additional weaknesses compared to those of the major European Union (EU) countries, according to Marín. “We have not spent all the time and sufficient resources on the necessary structural reforms (labour, tax and pension systems), and public spending”. 

Impending recession 

Marín assures that “if this scenario of war and no medium and long-term agreements with a horizon of prosperity for all continues”, the Spanish economy could end up in a recession. Particularly if, in a context of rising interest rates, inflationary pressures are passed on to salaries and when government services “don’t tighten their belts”. 

“We don’t have as much power as Germany, which also had much more controlled government deficits and debts.” This is because Spain has not experienced productivity gains or significant fiscal reform. The fiscal pressure in Spain is very high.” 

Not all EU funds used yet 

At the same time, Marín says that “the general feeling is that the various government agencies are not yet ready to bring the European funds into the system”. They should make faster and better use of the Next Generation funds to build a model for long-term growth. 

The economy must be more resilient 

The Spanish economy must become more resilient. When deploying these Next Generation funds, the government should prioritize “transformative investments, not short-term decisions and unproductive spending”. Fundraising programs “should have matured and launched for the most part in 2021. Now in 2022 we are lagging behind schedule,” said Marín. 

A faster and more powerful governance mechanism needed 

According to data from the Council of Economists, Spain exported 47% of Feder funds between 2014 and 2020, while the European average was 57%. Spain must create “a faster, more flexible and more powerful governance mechanism for the Next Generation funds”. 

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