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Home Press Center Press Releases New Report Suggests Stimulus Better for Spanish Economy, Debt Burden, Than Austerity

New Report Suggests Stimulus Better for Spanish Economy, Debt Burden, Than Austerity

For Immediate Release: July 22, 2010
Contact: Dan Beeton, 202-239-1460

Washington, D.C. - A new report from the Center for Economic and Policy Research (CEPR) shows that Spain, under pressure to cut spending and raise taxes while its economy is barely recovering, might be better off with a continued stimulus.

"The planned budget cuts and tax increases in Spain are not only unnecessary, but socially and economically destructive," said economist Mark Weisbrot, Co-Director of CEPR and lead author of the report, "Alternatives to Fiscal Austerity in Spain". "They also could easily leave Spain with a worse debt problem than they would have with a continued fiscal stimulus."

Spain's unemployment rate has shot up from 8.5 percent in 2007 to more than 20 percent today after the collapse of large housing and stock market bubbles. The paper shows that the bursting of these bubbles, and the resulting collapse of private demand, is the cause of Spain's current economic and budget problems - not government overspending.

The report argues that continued fiscal stimulus could be financed by the European Central Bank, through money creation, much as the U.S. Federal reserve has done over the past three years, and the Bank of Japan has done since the 1990s. Even if financed through ordinary borrowing, the projections in the paper find that Spain's debt-to-GDP ratio would not end up much higher in 2020 if the government continued a stimulus over the next two years, than under the current planned fiscal tightening.

The report provides projections for scenarios in which the fiscal tightening leads to slower growth and, therefore, higher borrowing costs for the government. These lead to higher debt-to-GDP ratios than would occur under a continued stimulus program.

"With these depression-level unemployment rates, the government's first priority should be creating and maintaining employment, not fiscal tightening," said Weisbrot.

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