What each Southern European country needs now is not to spend less. Spending less alone will only exacerbate the recessions and make the countries insolvent, default and leave the euro. This is true even if the cuts in spending are made in areas in which today there is corruption and waste: less spending leads to less consumption and so on. Austerity, if it’s used as the only medicine, could have the opposite effect desired and lead to an economic depression. What Southern European countries need to do is “selective austerity” in areas where there is clear waste complemented with increased spending in areas that have a strong multiplier effect for the economy. What these countries need more than austerity is economic reform. The following is a list of random ideas for Spain that will accelerate economic growth. Portugal, Italy and Greece should make their own lists many of which will be similar.
Measures to promote economic growth:
-allow companies not to pay social charges for increased payrolls during 2012, then normalize the situation of these workers gradually over 4 years. Make 2012 “el año del trabajo” the year of employment creation and move 1 million unemployed into the labor force. This is the proposal that I presented to both Rubalcaba and Mariano Rajoy via Luis de Guindos. It was well received and so far publicly endorsed by the PSOE.
-until unemployment falls below 12% have the government should guarantee forced severance pay (indemnización) so entrepreneurs and businesses risk hiring them. This measure should be applied only for increased payrolls or new employees additional to 2011 payroll.
-have credit available for new companies. The government has to make Spanish bank create a category of lending at high interest rates for new companies, it is acceptable that loans be offered at 18% for say half the funds necessary to start a new business if the entrepreneurs and investors are willing to risk the other half. If Spain said that from now on any business that raises say 1 million euros in equity gets another million at 18% default rate would still be reasonable as people don’t want to blow up their equity and at 18% winners could pay for losers. High interest rates for risky businesses makes sense and since the Spanish government has saved so many banks it can also force them to do this type of lending. Soon the banks may discover that it is a good line of business.
-make it much easier to open a pharmacy, now pharmacies in Spain make absurd profit margins and underserve the population. In fact, all required permits to open any type of business should be simplified as much as possible.
-make it easier to become a notary another profession with absurd profit margins, allow lawyers to do a lot of the work that notaries do. Believe it or not in Spain I have to leave my office and go and see a notary to go ahead with most transactions in business. The notary system is archaic.
-create a new company employment regime that allows new companies of up to 10 employees not to pay social charges nor pay forced severance pay in case of failure during the first 5 years of its life. Recognize that you cannot have the same labor laws for start ups than for established profitable companies.
-make it easier to get a driver’s license, currently absurdly hard compared to other countries and car sales are at an all time low. Making it hard for people to get their driver’s license won’t help to change this situation for the better. Also make it easier to get a boating license. Just as with the driver’s license, this is currently absurdly hard compared to other countries, and it likewise negatively affects boat sales which are at an all time low. The yachting industry is very important for Spain. Other countries like the UK or USA don’t have more accidents than Spain, even tough it’s much easier to obtain a license. In general, licenses and degrees in Spain, including teaching degrees or licensed interpreters, seem to be disconnected from the original purpose of the license. In order to become a pilot in Spain, I had to pass a total of 11 exams. In the US, it would have taken only 3 exams which are easier than those in Spain. There are many more pilots in the US than in Spain (relatively speaking), and in general they are better than their Spanish peers. The conclusion of my thoughts is: less theory, more practical experience.
-eliminate the 12% matriculación tax on yachts and planes that make both Spaniards and foreigners keep yachts and planes in other countries like Portugal, Italy and France destroying Spanish employment. In those countries, boat owners only pay VAT on their vessels. Instead, the Spanish government forces boat owners residing in Spain to pay VAT, and on top the 12% special tax. This has many negative consequences for Spanish companies in the boating industry, and also for tourism in general. A shipyard like Astilleros de Mallorca is getting much less contracts and has to cut jobs since many boat owners from Northern Europe end up sending their boats to France or Italy instead of Spain. The Spanish government’s intentions of increasing tax income have backfired completely, now the total income is lower than before. A higher property tax, on the other hand, would be a viable solution. While boats come and go, it’s not possible to move real estate. So instead of going against the current and weakening Spain’s attractiveness for boat owners vs. other countries, it would be much better to simply raise property taxes.
-allow companies and workers negotiate the right retirement age, not everyone ages the same way, companies may want to keep workers beyond retirement or negotiate early retirement for some.
-allow tenants and landlords on all NEW rental contracts to freely pact conditions of rent and make courts work fast on vacating apartments of those who don’t pay. Currently Spain has more vacant apartments in proportion to all apartments than any other country. People are still afraid of renting.
-allow anyone who has a work contract with a salary of over 50K euros a year to get immigration papers to come to Spain in 30 days. Right now it is very hard for companies to bring high paid employees from outside the EU. If a company wants to do so it’s because it can’t find the same talent in Spain. Bringing talented foreign workers will increase employment in Spain.
-as employment in the private sector grows reduce employment in the public sector. Reform the whole funcionario (public servant) system that is perverse in which state workers have benefits that are unheard of in the private sector. They basically get contracts for life, firing is almost impossible. Make it much easier to fire funcionarios who underperform. Allow citizens to dodge complains on funcionarios and after a certain number of complains have funcionarios lose their jobs. Promote good funcionarios, fire bad ones. Do a review periodically throughout the career of a public servant.
-drastically reduce military spending. In general I think it’s absurd that each European country retains an army. Europe should have one great European army and not many national armies. There would be a great economy of scale in one European army. But other than that I think that other than firing military personnel something that should be done with incentives but not actual reductions that Southern European countries should stop buying weapons for 5 years. Military spending is the spending with least social consequences for the rest of the nation. Military spending is in great part what brought Greece down.
-charge 10 euros for any visit to any medical facility in Spain. 10 euros is a symbolic amount but it will deter some people from going to seek medical care when they truly don’t need it. Allow all the unemployed to continue going for free. Of course it would be better not having to charge anything, and for some people even 10 euros are a lot. There should be a way to identify those and exclude them from having to pay. But we all know that the healthcare sector in Spain is broken. Doctors don’t get paid, the healthcare providers don’t get paid and go out of business. This is an emergency situation, so we have to make sure that the public health sector can generate some income to improve its situation and that doctors won’t have to worry about their salaries and can concentrate on helping people.
-raise property taxes in Spain accross the board on all properties by 20% but eliminate the controversial wealth tax that is so much harder to collect. Property taxes are fair as they are paid in relation to the value of the property and are easy to collect. The state of Florida collects so much tax via property taxes a lot from out of state residents that it is then able not to charge its own taxes as NY and California and many other states do. And since we are going through exceptional times, it would even be possible to levy an additional tax of 2000 euros per year for all secondary residences. In addition to Spaniards, many foreigners would end up paying this additional charge. To provide a simplified sample calculation, 1 million secondary residences would translate into an extra income of 2 billion euros. The wealth tax, instead, would only generate an estimated income of 500 million euros.
-raise taxes on all cars with engines bigger than 2000cc or a certain amount of HP by 20%.
-raise taxes on tobacco and all liquor except wine and bear by 20%.
-liberalize opening hours of all shops in Spain, allow shop owners to decide when they open and close.
-allow the construction of one homes of up to 1000m2 per every 10 hectares or 100,000 square meters in the countryside of Spain. Right now no homes can be build in the countryside but one home every 10 hectares is an ultralow density and it may still create a lot of new jobs both in construction and in home maintenance. Spain has traditionally forced clustering of new homes not being able to enter the “estate home” market which is ecologically sound and creates a lot of employment. Moreover many foreigners do not like to buy clustered homes. Allow countryside hotels of no more than 15 rooms every 20 hectares of land.
-create a category of summer employment in Spain for jobs no longer than 90 days a year and people under 27 years old that is completely unregulated that would allow students to earn extra income in the summer without employers having to pay social charges or students having to report their income. It is important that jobs would last a maximum of 90 days in order to prevent abuse of the system. Also jobs like this can only be had in June, July and August and cater to Spanish largest industry, tourism.
-copy the tax resident non dom system of UK and make it applicable to all of those who do not have a Spanish nationality. This system is perfect for Spain because many want to retire or live in Spain and now do but illegally. The law is never enforced but I can see why many law abiding foreigners would not want to move permanently to Spain for fear of being taxed. Spain already has the Beckham law but a non dom tax resident system such as the one of the UK may make it easier for more foreigners of means to move here.
-implement stricter controls on corporate and individual tax evasion. It is well known that in Spain many people with jobs also collect unemployment insurance, and that many companies hire employees off the books. Especially these two sources of evasion should be stopped.
-legalize and tax the sale of soft drugs, thereby taking this business away from organized crime. A part of the resulting income could be used to combat addition to hard drugs.
-Spain has been too generous with its banks, who on the other hand have not been generous with their own clients. It’s time to completely restructure the rules and laws governing mortgage lending. The new system should be like the one in the USA, where borrowers who are unable to meet their mortgage payments should simply be able to get rid of their debt by giving up ownership of their house. If the bank loses money with the sale, it’s the bank’s problem, not the borrower’s. Government should save banks, but not the banks’ shareholders. Spanish banks engaged in irresponsible lending and as a consequence, millions of people are now trapped in their own homes, resulting in a high rate of labor immobility. People can’t afford to live anywhere else but in their own properties, thus they can’t move to the regions where the jobs are. Unemployment in Spain is therefore distributed very unevenly, the unemployment rate in the north being about half as high as that of the south. But many people simply can’t afford to move out of their own home due to their mortgages. Losing a house alone is already a tough loss, but losing the house and everything else on top is simply intolerable.
-tax energy progressively. What Spain and other Southern European countries need to do is to publicly announce a plan to progressively tax energy with a clear 10 year strategy. In order for the economy to adjust and become more energy efficient, the taxes on all forms of energy coming from fossil fuels like electricity, gas, gasoline, diesel, etc. should be increased gradually over a decade. The first measure should be to take advantage of the decreased oil price and fix the prices of gasoline and diesel at a certain level by introducing a flexible tax rate. As a result, consumers would always pay the same price of gasoline regardless of the oil price and the country could earn more taxes when oil prices go down. But on top of that, all fossil fuels should be subject to an annual tax increase of 10% over the next decade, so even if oil prices go to $30 per barrel consumers and businesses alike will know in advance exactly what energy will cost them and the government can get a great deal of its revenues from energy taxes. In addition, energy consumption will be greatly reduced. Consequently, energy consumption per unit of GDP will decrease and the country will be greener. People will automatically buy more energy-efficient light bulbs, cars, etc. As an early investor in Eolia and other alternative energy companies, I know that confusing pricing scenarios kill those kinds of projects. So this proposed measure of long-term price stability would be a great help for the entire alternative energy sector. If people know in advance how much more they will have to pay for energy in the future, they will start much earlier to demand more energy-efficient solutions. The result will be reduced energy consumption, a market pull that will accelerate development of energy-efficient products, and at the same time governments implementing this measure would benefit from the increasing spread between the crude oil price and the price paid by the end customer.
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