The Spanish Economy- Going Under

Spain experienced a ‘booming’ economy from 1990 to 2007, when growth declined and dipped into negative growth in 2008. It has remained stagnant ever since. Unemployment in Spain has been relatively high constantly, but it peaked in 1994 and again 2008 onwards. It still has not stopped rising. Spain had high inflation in the early 90s, but from 1996 onwards in stayed between 2. 5% and 4. 5%. From 2008 – at present Spain has had very low inflation, which is expected with high unemployment. Inflation has a loose relationship with unemployment, when unemployment is up, inflation is down and visa versa.

Government spending was in decline between 1995 and 2006 (data does not show pre 1995) but had risen dramatically since 2007 due to high unemployment. It is starting to decline again (2010 onwards) due to government austerity programs. Between 1997 and 2008, the Spanish government were in surplus due to a booming economy. But since 2008 it has run at a budget deficit, spending more than it receives. (Data starts at 1995). Debt peaked in 1996, and reduced yearly until 2007. The recession hit and it rose rapidly and is still rising. It is also worth noting that it behaves inversely with level of government spending.

Structural problems in the Spanish Economy The Spanish economy is riddled with problems that cause its poor economic performance in recent years. The government has worked up an enormous debt as it combats some of these problems, whilst worsening some economic variables in the process of combatting others. When considering the Spanish economy, unemployment is the main problem affecting the population. With the unemployment rate at 26% (Trading Economics 2013) in the last quarter of 2012, a quarter of the workforce is without work.

This is incredibly unproductive as the skills and output of this labour is wasted, bad for individuals as they have less disposable income, and bad for government debt as welfare payments higher when unemployment high (coupled with loss in income tax revenue from the loss in jobs). This unemployment, caused by stagnation and recession in economic growth, is especially bad in Spain for a number of reasons, some cyclical and predicable, some structural and less typical of recession. When the recession hit Spain, businesses (as in all economies in recession) made efficiency cuts and changes.

One change businesses make when trying to improve efficiency is shedding employees that are not essential. Before the recession, Spain had an enormous case of over-employment: businesses had more workers employed than necessary in almost every sector. This was most notable in service industry booming off of tourism- shops often had three or four security guards ect. When Spanish business became more efficient, a huge amount of people were ‘laid off’ as business found they could run effectively with far less staff than they had. This helped contribute to the 15. 8% rise in the unemployment rate in seven years.

All economic sectors downsized their workforce, but construction almost collapsed completely. After the enormous growth experienced in the last decade in the Spanish property market (house prices rose 44% between 2004 and 2008), an enormous construction sector had developed. This is to be expected as it conforms with the law of supply, suppliers supplied more at higher prices. When the property bubble burst, demand for construction workers and building materials fell drastically- 45% less output in 4 years (graph below. ) This loss in output has of course left many skilled construction workers, from architects to brick- layers, unemployed.

(www. spanishpropertyinsight. com 2010) Youth unemployment in Spain is more than double the European national average; 51. 4% in December 2012 (Telegraph 2013). This is the most worrying statistic in Spain at present. Of the most educated generation yet, over half of those willing and able to work do not have a job. This does not bode well for the economy. Hysteresis (skills becoming outdated and useless for employment) could affect these young people before they even get their first job, which wastes the money spent on education and the potential output of the young.

It also acts as a disincentive for further education; Spain has over 50 public universities (an exceptionally good education service) , and they are receiving less applications for IT courses as a common belief is that by the time the economy picks up, the skills acquired will be useless. Youth unemployment also has detrimental effects socially- unemployed young people are more likely to take up indulgent activities like binge drinking and drug taking- Spain already has the highest rates of Cannabis and Cocaine use by young people in Europe and this problem is still increasing (Narcanon 2012).

This is largely because most Cocaine, and a significant amount of Cannabis, coming into Europe comes through Spain due to its connections with Spanish speaking South American drug producers, making it easy to attain for young people. Now Spain is experiencing stagnation, many would argue that government expenditure needs to increase to stimulate the economy, as government expenditure is a large part of aggregate demand. The spending should be targeted on areas that will create long term growth beyond the initial government spending (spending where the multiplier is high).

Projects such as infrastructure expansion tend to be typically backed in a stagnating economy and would be perfect in Spain as their construction industry in particular needs a large boost. The problem is that the Spanish government are running an austerity program (much like the UK government austerity program) to reduce government debt. VAT is up 3% to 21%, (Karen Dominguez Burke 2012) and cuts in public spending, some as much as 12. 5% to entire budget sectors, are further pushing down GDP and thus growth.

Even if the Spanish government did want to effectively invest in infrastructure construction, it would be difficult build anything effective as the infrastructure in Spain is, some argue, already overly extensive. It has massive modern highways, a 2000km high speed rail network (the largest in Europe) and has had 48 new airports built in the last 20 years. Some of these airports were so poorly thought through that there is zero demand for them- not one plane has landed (famously the Castellon airport which still is not in use and cost 30 Billion Euros to build).

The reason building roads and airports is usually so effective is because they have such an effective multiplier- the entire local area can receive employment from them and improve business connections further afield due to ease of travel. With these projects unavailable to the government, effective alternatives must be found to help stimulate grown. With over a third of Spain at risk of becoming officially classed as ‘desert’ (highly unproductive land economically and with high risk of bush fires), an irrigation system could be built.

Other possible enterprises could be put into action- more extensive re-cycling across the country, as only 27% of waste is recycled (Greenwise business 2012), could create thousands of jobs and achieve a more efficient economy long term. Here in lies the problem – these projects tend to affect the economy in the very long term and take a long time to pay off, when at present increased demand beyond the fiscal stimulus is needed. Even if the government decided to increase public spending, they do not have an easy source of credit.

Spanish government bonds are considered unsafe, making firms unwilling to buy them, which is reflected in the high interest rates the Spanish government must pay on borrowed money. Spain’s average interest rate between 1991-2013 was 6. 2% with highs of as much as 14% (Trading Economics 2013). The UK was paying 1. 4% interest on government bonds in 2012 where as Spain was paying over 6%. Spain actually asked the ECB for a $125 Billion dollar bailout due to its fragile banking sector in 2012 (Bloomberg 2012). This is yet another problem Spain has with regard fiscal stimulus.

This being the case, Spain must find a way to inject fiscal stimulus into the economy as its austerity program is doing nothing but stifle growth. Spain’s economic prospects in the next three years are not promising. EU forecasts are bleak all around, and Spain is no exception, forecasting further economic stagnation- further negative growth of -0. 4% in 2014 and yet more unemployment (DG ECFIN 2012). The euro is still unstable making Spanish export forecasts bleak (on top of an already declining export industry) which is likely to hamper their trade balance.

No pick up in employment has been witnessed as yet are there are no indicators to suggest it will pick up any time soon. With brain drain seriously starting to take effect, Spain’s economic capacity is falling, making a true recovery even more unlikely. The Conservative government’s austerity program is not going to help growth, so another component of aggregate demand must be relied upon. With so many unemployed, consumer expenditure is highly unlikely to increase. Investment in Spain may be the only hope- between 2004 and 2008 foreign investment in Spain rose 250%.

Many believe this is due to the government elected in 2004 liberalising investment laws through deregulation. 88% of the investment was in Madrid and tended to focus on water and electrical supply (EU Business 2012). If this increases, we could see foreign investment boosting demand. But this alone is not enough to boost the economy any time soon, perhaps in the long run, but over the next three years we should expect little more than further stagnation in the Spanish economy. References The Spanish Economy. com (Author), February 2013 ‘The Spanish economy overview’ – Thespanisheconomy.

com http://www. thespanisheconomy. com/en-GB/Paginas/home. aspx C. Penty, E. Ross, B. Sills, June 2012 ‘Spain asks for $125 Billion Bank Bailout as crisis worsens’ – Bloomberg. (http://www. bloomberg. com/news/2012-06-09/spain-asks-for-125-billion-bank-bailout-as-crisis-worsens-1-. html) Trading economics (author), September 2012, ‘Spain 10yr Bonds’ – Trading economics . http://www. tradingeconomics. com/spain/government-bond-yield Karen Dominguez.

Burke, August 2012, ‘From collapse to austerity in Spain’- Socialistworker.orghttp://socialistworker. org/2012/07/31/from-collapse-to-austerity-in-spain DG ECFIN (Author), February 2013, ‘Economic forcasts- Spain’ – DG ECFIN. http://ec. europa. eu/economy_finance/eu/forecasts/index_en. htm Narcon Drug information department, Febuary 2012 ‘Spain drug addiction’- Narcon http://www. narconon. org/drug-information/spain-drug-addiction-treatment. html Carlos Muella, December 2012, Espana recycle –Greenwisebusiness. http://www. greenwisebusiness. co. uk Student no: 1200 5746.