Eurozone crisis roars back to savage Spain Article Analysis - Essay Example

? This article, “Eurozone crisis roars back to savage Spain” (Halligan, , highlights the economic indicators which do not seem good forSpain 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 and the austerity packages introduced by the Spanish finance ministry and government time and time again, which have not been popular among the general public. The borrowing of Spain has increased drastically in past few months and this has reduced the investors’ confidence in the economy making the situation worse for the government since there is less investment and savings in the economy. 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 Spanish government had to borrow money by offering higher return to lenders. The government had to offer 6 percent to borrow the money from lending institutions and this created more burdens on the economy because it had to offer more interest payments now in addition to the newly borrowed principal. The difficult time through which Spain economy is going through is not limited to the financing part of its debts. The problem is actually much worse with the internal policies of the government not really working out for the betterment of the economy. The recession obviously results in a decrease in the investments in industries and real estate. When the bubble of real estate burst, the investors, both locals and foreigners, were unwilling to invest too much money into the economy. As it is well known that investments form a very important part of the Gross Domestic Product, it directly influenced the GDP of the Spanish economy and the economic growth slowed down. There was less injection of money into the economy and this resulted in the GDP rate going down by 0.3 percent which hampers the economy a lot in the long run. Indeed the Spanish government has predicted a decrease of 1.7 percent in the GDP by the end of 2012. This decrease in the GDP rates is actually very harmful for the economy because it can have several negative repercussions. When the GDP slows down, this means that there is less quantity and value of goods and services produced in the economy. When such is the case, the tax revenue decreases and the country goes into deep trouble since it now faces the possibility of current account deficit. The governments theoretically need to cover their current account deficits by raising money either from borrowing the private sector, the public through issuance of bonds, or either through borrowing from other governments. Spain as explained above is clearly not in an ideal position to borrow money from outside the country since it is already so leveraged. Also it cannot borrow from the private sector because the private sector is already indebted and has pressure to return the money to European Central Bank and Eurozone economies. This means that the only option available for Spanish government is to borrow the money from the public, and actually that is also not really a very good idea as we will see a bit later. Figure 2: Spain GDP growth rate year-by-year (Trading Economics) Figure 2 above shows that since the year 2008, Spain has either faced negative GDP growth rates or very small positive values. This means that the tax revenues for the government have either been declining or not increasing much and this has forced the government to look for alternate sources of money. With lower tax revenue, the government now has less amount of money to spend in the economy. It is well known that another major element of the Gross Domestic Product is the government expenditure, which helps in injecting the money into an economy when it is under-performing. When the economy is generally on a low and there are few investments, the government can trigger the economic growth by injecting funds into different projects which results in increase in unemployment and increases the confidence of the investors, after which they can invest the money into the economy. This therefore usually has a multiplier effect where the injection of money into the economy by government triggers several other sources of money and eventually the economy reaches its optimal point. In this case unfortunately, the government is not in a situation to inject the money into the economy by spending on different projects due to the fact that it itself does not have sufficient money. The tax revenues have declined and this has been aggregated by the fact that the government has loads of borrowed money to return to its lenders. In such a situation, the government has no option but to cut down its expenditure so that it does not have to borrow more money. The government as a result of this policy of cutting its expenses has already introduced two austerity packages while the passing of a third austerity package is very much on the cards in the near future. Austerity packages are the policies introduced to reduce the government expenditure either by reducing the investments in developmental projects or ceasing the benefits offered to the society on grounds of being disadvantaged. These benefits include the unemployment benefit, old age pensions and several others. When austerity packages are introduced, the first thing that the government looks to save from is cutting the social benefits. Spain is the recent past has introduced a couple of austerity packages and as expected; these announcements have not been well received by the public since it will have a direct impact on them and their social security reduces as a result of these packages. As a matter of fact, another austerity package by Spanish government is being proposed and discussed which will again cut the government expenditures (Toyer). The situation of no more social security benefits is actually very dreadful for the Spanish people given the fact that Spain consists of a very high percentage of unemployed people. Unemployment is the state when a person is willing to work and is actively looking for a job but is unable to find one. Unemployment in Spain has reached a mammoth figure of 22.9% in the second quarter of the 2011-12 financial year which is also the highest among all the Eurozone economies (The Independent). As a matter of fact, nearly half of all the young people in Spain are unemployed and are desperately looking for a job. These young people will only get demotivated when they do not find a job, and in addition they face the problem of not getting the unemployment benefits. In one of the austerity packages, the Spanish government decided to reduce the labor laws in the statute. This action involved the removal of minimum wage laws and increased the retirement age. Another set of laws introduced by the Spanish Prime Minister Mariano Rajoy passed laws which gave the companies the right to cut the wages it offered and fire people off their jobs. This was done so in an effort to increase the employment as the government thought that the freedom to offer lower wages will result in more number of people being employed. However, this was received by anger from the labor unions and country-wide protests were staged out of which several protests also turned out to be violent and created destruction in several cities. Figure 3: Spain Unemployment Rate (Trading Economics) The figure above, Figure 3, shows that the unemployment has been on a rise in Spain since the past couple of years. This has created unrest among the Spanish public and after some time, it gave strength to the national separatist movements such as the movement for independence of Catalonia and Basque provinces. This unemployment has also contributed to the fiscal issues faced by the Spanish government and mentioned earlier in the assignment, because with more and more people unemployed, there are much less people who are eligible to pay taxes to the government and this has contributed to the reduction of tax revenues. In addition, it has increased the burden on the economy because unemployed people mean unused resources and waste of potential output. Thus this article and the author have quite well explained and connected the several issues faced by the Spanish government and its economy during the period from 2008 to present. The author has also highlighted the issues, which went unattended by numerous other economists, with great awareness and made sure that these issues are well explained. Works Cited Halligan, L. (2012, April 14). Eurozone crisis roars back to savage Spain. Retrieved from The Telegraph: http://www.telegraph.co.uk/finance/comment/liamhalligan/9204702/Eurozone-crisis-roars-back-to-savage-Spain.html The Independent. (n.d.). Spain's unemployment rate hits 22.9%. Retrieved from The Independent: http://www.independent.co.uk/news/world/europe/spains-unemployment-rate-hits-229-7469750.html Toyer, J. (n.d.). Spain regions stage backing for PM's austerity bid. Retrieved from Reuters: http://www.reuters.com/article/2012/04/14/us-spain-regions-idUSBRE83D09120120414 Trading Economics. (n.d.). Spain GDP Growth Rate. Retrieved from Trading Economics: http://www.tradingeconomics.com/spain/gdp-growth Trading Economics. (n.d.). Spain Government Debt to GDP. Retrieved from Trading Economics: http://www.tradingeconomics.com/spain/government-debt-to-gdp Trading Economics. (n.d.). Spain Unemployment Rate. Retrieved from Trading Economics: http://www.tradingeconomics.com/spain/unemployment-rate Read More