Does Spain’s surging economy show that a recipe of austerity and reform works?

Holger Schmieding is chief economist at Berenberg, says Yes

The Eurozone’s recipe of tough love, whereby members can get help if they accept tough conditions, is working. This means repairing their budgets and improving their growth potential through labour market and other supply-side reforms. The medicine tastes bitter for a while, as Britain discovered when Margaret Thatcher slashed inflation – the macroeconomic menace of her time – and tamed the trade unions. Much like Britain after the Thatcher reforms, Spain is now on the mend. Its economic growth could surpass 3 per cent this year, unemployment is coming down fast, the real estate market is bouncing back, and the banks are looking healthier once more. Even the Syriza-style populists of Podemos have been somewhat deflated. Portugal is following suit in a more muted fashion, Ireland is already out of the woods, and Cyprus is making a comeback. Only Greece is paying the price for having stopped its course of medicine in early 2015.

James Howat is Europe economist at Capital Economics, says No

As yesterday’s Purchasing Managers Index shows, Spain’s recovery has really picked up in recent months. Some of this reflects significant improvements to its economic fundamentals. The private sector has paid down debt and structural reforms have helped exporters regain competitiveness. But temporary factors are also responsible. Over the last year, the fall in energy prices has boosted real disposable incomes by 1 per cent, while the 5 per cent depreciation in Spain’s trade-weighted exchange rate has helped exports. These tailwinds will probably fade over the next year. And the economy’s return to growth last year coincided with a pause in its austerity drive. In fact, the government has loosened fiscal policy ahead of the election in late 2015, contributing to the recent acceleration in GDP growth. But given that the country’s budget deficit may be around 4.5 per cent of GDP this year, renewed austerity may soon weigh on economic activity again.

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