This article, “Eurozone crisis roars back to savage Spain”, highlights the economic indicators which do not seem good for Spain and how these indicators have worsened in the recent past to push the Spanish economy deeper into trouble. These indicators include the unemployment, debt-to-GDP ratio…
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Spain is considered one of the most important economies of the world. Considering this importance of the Spanish economy, several economies of the Eurozone as well as of the world have expressed concerns regarding the effects this economic trouble this will create throughout the world. These factors will be discussed in this assignment in detail later and economic theories will be presented to analyze if the Spanish government has been right in implementing its policies or not.
The article which will be discussed in this assignment is regarding the economic crisis which Spain is facing and the troubles that lie ahead for Spain in the foreseeable future. The article was written by Liam Halligan who is the chief economist at the Prosperity Capital Management, and this article was published in the Daily Telegraph.
Spain as mentioned above has long been considered one of the world’s most important economies with its great potential in real estate and investments from foreign companies. Spain is the fourth largest economy in the Eurozone and the world’s twelfth biggest economy. This has actually raised more fears that if such a huge economy goes bust, then to what extent will it negatively affect the European and worldwide economies. The Spain crisis started in 2008 when the worldwide and European recession arose and the debt crisis began to take dominance. All of a sudden, the unemployment rates increased drastically and the burden fell on the people as well as the government because it had much lower tax revenues and a lot of social benefits to distribute in addition to the repayment of debts which were previously borrowed in the early 2000’s.
In the early 2000’s, the Spanish economy went through a boom in real estate and this triggered a huge amount of private borrowing from European Central Banks (ECB). At that point, no one had predicted that the year 2008 will prove to be a disaster for most of the European economies. When the Eurozone crisis struck, the banks and financial institutions started to demand their money back due to funds shortage. Also several economies who had lend the money to Spain asked for servicing its debts due to the fact that they needed money to counter the recession. At this point, the prices of property began to fall due to the recession and the borrowers were finding it harder to service the debts because the investments for which they had borrowed money were turning out to be bad investments. Today, the private sector debt in Spain is around 300 percent of the Gross Domestic Product (GDP) which is considered extremely high. Figure 1: Spain government Debt to GDP Ratio (Trading Economics) The Figure 1 above shows that the Spanish government debt to GDP ratio stands at 60% which is high for a country whose private sector is leveraged with debt to an astonishing figure of 300 percent. With Spain being indebted to other economies, mostly European, to such an extent, the time was fast approaching when it had to repay its debt gradually year by year. When the time of servicing the debts came, it had to borrow more money from other sources so that it could repay the previously borrowed money. With the Spanish economy already so highly leveraged, the European Central Bank and financial institutions were reluctant to give them the money. With this reluctance, the
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