The Gain in Spain

MILAN – The Spanish economy is beginning to attract investors’ attention – and not only because asset prices are depressed in the current climate (arguably implying a good buy for longer-term, value investors). While there are huge problems that must still be overcome, there is also a clear sense on the ground that the economy has passed a turning point, roughly at the start of this year.

To skeptics, green shoots of recovery will not bloom without access to the credit spigot, which is still clogged by balance-sheet damage in many banks. But, though the road back to full employment and sustainable growth will not be built overnight, progress on it may be faster than most observers expect.

It is easy to get lost in the details of recovery patterns, so a sound framework for assessing potential growth helps. In fact, the Spanish economy is a classic case of a defective growth pattern followed by a predictable, policy-assisted recovery that is driven (with a delay) mostly by the tradable sector.

Prior to the crisis, Spain’s economy relied on demand created by a leveraged real-estate bubble – a pattern not dissimilar in some respects to that in the United States. Thus, both growth and employment came at the expense of the tradable side of the economy. Unit labor costs rose steadily relative to Germany – not only in Spain but also in all of southern Europe, and in France – in the decade beginning in 2000, following the euro’s introduction.