In this paper we try to shed some light on the effect of the European integration on price, wage, and unemployment dynamics in Spain. Spain is the largest of the four “peripheral” countries that joined the European Union and her experience has been successful in curbing inflation and promoting economic growth and employment.
The question is whether there are useful lessons to be learnt from the Spanish experience in connection with the next round of enlargement of the EMU with the new member states from Central and Eastern Europe. By understanding the historical changes in the macroeconomic mechanisms in Spain during the convergence period, we might be able to better foresee (and hopefully avoid) future problems for the new member states. For this purpose, we will address a large number of empirical questions based on a dynamic interdependent system consisting of consumer and producer prices, wages, productivity, interest rates and exchange rates.
The following questions seem particularly important:
- 1. Why were the Spanish unemployment rates so persistently high until the mid-nineties and why did they decrease so remarkably from the midnineties onwards?
2. Which were the mechanisms behind the steady decline of the Spanish inflation rate until its final convergence to a sustainable European level?
3. Which were the mechanisms behind the improvement in labour productivity over this period?
Our sample begins in 1983:1, a few years after the EMS regime became effective with 11 member states adopting themselves to the ERM exchange rate arrangement. Spain did not become a member in the first round: the Spanish inflation was too high and the economy suffered from various structural imbalances. When our sample starts, the Spanish Purchasing Power Parity (hereafter PPP) was at a much lower level than most of the more prosperous EEC member states. When our sample ends in 2003:3, Spain has achieved a PPP level similar to the other European member states. In this sense the Spanish experience is clearly a success story.
The question is whether there are useful lessons to be learnt by a historical analysis of the nominal and real convergence that obviously took place over this period. The purpose of this paper is to empirically identify successes and failures and how these influenced the path towards a common European purchasing parity level.
The remainder of the paper is organized as follows. In section 2, we discuss the Balassa-Samuelsson effect for the convergence of prices and productivity in Spain. Section 3 provides a graphical analysis of the major key variables and discusses their co-movements. Section 4 discusses a theoretical background for the relations to be tested. Section 5 contains the empirical analysis of the wage, price and unemployment dynamics including an identified long-run cointegration structure and the corresponding adjustment dynamics. Section 6 concludes.
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