Tutor2u Visits Madrid!

King’s School in Madrid was the setting for our Spanish AS/A2 Economics revision workshop today and we had a fabulous time thanks to the hospitality of resident Tutor2u blogger Ben Christopher and his team at the school. Students from King’s were joined for the day by economists from Runnymede College and Ruth Tarrant and I were hugely impressed with their energy, work-rate and the confidence that many of them had in their economics. It was a refreshing change to teach students who were in no way UK-centric and who naturally saw the bigger picture.

We ran through the five major sessions that together made up the revision workshops held recently at different venues in the UK. But this time there was a distinctly Spanish flavour to our discussions as we covered many key topics in AS and A2 macro.

Although we touched base in Madrid for just 36 hours, I was keen to get a better feel for what is happening to the Spanish economy at this critical moment for the future of the Euro Area. Top of the agenda is the staggeringly high rate of unemployment (easily the highest in the EU) and a problem that the departing Spanish Prime Minister has appeared reluctant to acknowledge.

Normally I dislike prescriptions from students as to how best to bring down unemployment that chose a default of “cut welfare benefits”! But in the case of Spain the relative generosity of unemployment benefit - in terms of level and the many months it can be paid - is a factor mentioned by many people living in Spain behind the twenty per cent jobless rate. High compulsory severance payments when making people redundant is also a barrier to new job creation and helps to explain the lengthy time lags between a macro recovery and a downward drift in unemployment.

Data from Timetric.

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Spain Real GDP Change from Previous Year from Timetric

What are the tell-tale signs of a Spanish economy that is struggling to escape from the damage of the global financial crisis and the slump? Madrid has its fair share of unfinished property developments (I am told it is worse, much worse on the coast) and there are more beggars on the streets and in Madrid’s network of subway stations, But not to the extent that downtown Madrid felt threatening in the evening - it did not. I noted too that both outward and return journeys from London to Madrid were half empty and that on a sunny spring weekend our centrally located hotel (the newly restored and affordable Radisson Blu) was almost deserted. This was in stark contrast to the incredible queue of people lining up for free entrance to 8pm on a Sunday - a queue that appeared almost from nowhere half an hour before (a wonderful example of the power of free and price elasticity of demand!)

Possibly the biggest danger facing the Spanish economy cannot be seen in the half finished housing developments or the shopping malls quietened by sizeable and significant cuts in wages and mass unemployment. Instead it lies in real doubts about whether the Spanish banking system is as healthy as many suppose. Will the new capital requirements and publication of banks’ reserves tell us that Spain’s much vaunted financial system is more fragile than we thought? We will find out soon enough as Spring turns into Summer.

Data from Timetric.

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ILO unemployment rate SA Spain - Eurostat: monthly from Timetric

Not one student in my A2 workshop group this afternoon thought that Spain will leave the Euro and engineer a competitive devaluation. Only one student forecast that there would be a partial breakup of the currency union in the next 3-5 years. Chats to teaching colleagues over lunched reinforced this view - namely that Spain is in the Euro Area for good despite what are difficult times for everyone. In which case the focus turns onto how Spain can generate fresh momentum into their economy. Exports have done better during the latter months of 2010 and the first quarter of 2011 but early rate hikes by the European Central Bank might accelerate another appreciation of the Euro and spike the guns of Spanish businesses targeting an export-led rebound?

Property price deflation (the actual scale of the collapse in housing values and activity is thought to be much steeper than painted by the official statistics) and real wage cuts are hitting consumer confidence and spending. The Spanish Government’s fiscal austerity programme has some way to go yet. And business capital spending is as weak as one might expect from a sluggish domestic economy operating with a large negative output gap.

So it is tough to see how Spain can get to and then sustain a rate of growth of 2% or more needed to bring unemployment down. Economic reform is a necessary condition for stronger growth but the politics in Spain do not look promising.

We greatly enjoyed our visit to Spain over the weekend and much credit for that goes to the nearly 100 strong groups of students who worked so hard during the day. There were some pretty full Tutor2u revision booklets being taken out of the auditorium as we finished this afternoon - testimony to the positive and enthusiastic approach taken from students who clearly enjoy their subject. Both Ruth and I came away with a stronger appreciation of developments in a Spanish economy that is a tremendously interesting one to analyse.

Who knows where the Tutor2u revision workshop will head to next? We have a team of presenters with passports primed and phrasebooks at the ready! I am sure that Jim and Michelle will be keen to see what can be organised for colleagues interested in organising another international event.