There is a myth going around that Greece went bust because of the size of its welfare state. And the extension of this myth is that sound finances are incompatible with a sizable welfare state. That it is the welfare state itself that is making other countries such as Spain and Italy approach bankruptcy. But this is not true, many European countries have a bigger welfare state in relation to GDP. Greece did not go bust because of the size of its welfare state in relation to GDP but because of the size of its debt in relation to GDP. Countries can choose to be more or less socialist. What they cannot choose is to be socialist when they can’t afford it. Nordic countries are more socialist than Greece, but they provision for their generosity.
For Spain to avoid default in its national debt two unrelated events must happen: one is that EU guarantees Spanish national debt lowering country risk, and the second one, which is even harder,is that Spain regains competitiveness.
Regaining competitiveness is the biggest challenge for Spain. To achieve this the country must focus on liberalizing its growing companies. I propose that all start ups be given 3 years in which their employees do not pay social charges nor receive forced severance pay in order for government to recognize the risks that VCs and entrepreneurs take in investing in new companies. This would be applied in start ups of up to 10 people and only while they are not profitable so it would have a negligible effect in the social security system overall initially and hopefully a very positive effect when start ups begin contributing. For those unfamiliar with the system Spanish social charges plus all other taxes, these can take up to 45% of what a person who costs €3000 per month to a company takes home. But so far PP, the conservatives now in power, has done little for new and growing companies focusing instead on measures that make firing, not hiring, cheaper.
I am normally quite an optimistic entrepreneur but right now I am sorry to say, I am not. We can still avoid the perfect storm, but it looks harder every day. Still as we know markets do turn around, and if Spanish unemployment numbers turned around, so would financial markets.