Spains Macroeconomic Concerns - Coursework Example

Spain’s Macroeconomic Concerns Despite abundance of resources and talent, Spain is going through tough economic times. Spain was considerably affected by the global financial crisis of 2007. Since then the economy slowed down and entered recession during 2008. The major economic problems that have affected the Spanish economy are low GDP growth and high rate of unemployment. The interest rates on Spain’s debt are rising significantly, and in order to control government borrowing EU is insisting on an austerity plan which will force Spain to cut its government spending. However this might even backfire as reducing government spending tends to create unemployment and reduce the economic growth of the country which will bring lower tax revenues for the government. Generally governments inject money in under-performing economies and start new projects, because there is a multiplier effect which triggers growth. However in the case of the Spanish economy, with lower funds available to inject in the economy, government is cutting down its spending. It’s not easy to bring world’s 12th largest economy out of distress. Joint efforts by European Central Bank and IMF are required to ensure Spain’s economy is set afoot. The foremost need is to trigger growth and activity in the economy; it could be done through effective monetary as well as fiscal policies. In this situation hospitality businesses have an opportunity to grow very well due to a number of reasons. Firms in hospitality industry usually do not require huge capital investment like manufacturing and other industries, so the cost of startup is lower. Moreover, the exchange rate of Euro in terms of other currencies has fallen; this makes travelling and using services in Spain cheaper. So in my opinion marketing hospitality business in Spain especially tourism industry is a very lucrative option right now. About Spain Officially called the Kingdom of Spain, Spain is located in the southwestern part of Europe. It has a parliamentary form of government with the city of Madrid as its capital. It is the 51st largest country and 12th biggest economy in the world. Spain has a population of over 47 million, with 67.7% of the population comprising of working population between the ages of 15-64 years (CIA, 2012).The literacy rate is an impressive 97.9%. Spain is part of the Euro zone, and uses Euro as its currency. Issue identification Currently Spain is going through difficult economic times; its macroeconomic indicators are not in good shape. The major macroeconomic problems that Spain is facing at present are: Low GDP Growth Gross Domestic Product (GDP) refers to the total value of goods and services produced in a country within a year. Spain’s GDP has been under pressure especially after the recent financial crunch of 2008. Currently the economy is estimated to have a GDP of $1.411 trillion (CIA, 2012). Its GDP growth rates are given below: Spains GDP growth rate Year 2007 2008 2009 2010 2011 GDP Growth 3.6% 0.9% -3.7% -0.1% 0.8% High rate of Unemployment Unemployment is when people who are willing and able to work cannot find a job. Currently employment conditions in Spain are not very conducive. According to Reuters, the unemployment rate in Spain currently stands at 23.6% and youth unemployment of over 50%. (Freilich, 2012) Assessment Let’s have a look at them individually: Low GDP Growth Spain was considerably affected by the global financial crisis of 2007. Since then the economy slowed down and entered recession during 2008. The graph below shows Spain’s GDP growth rate which negative during 2009 and partly during 2008 and 2010. As the country’s performance is slow, it seems that business conditions aren’t very favorable. Foreign direct investment (FDI) refers to the inflows of investment into a country during a year (Graham & Spaulding, 2005). The graph shows how drastically the FDI has fallen from $78 billion in 2008 to $8.6 billion in 2009. Unemployment Spain’s economy has suffered from high unemployment since a long time now. This rate came down in 2007 to 8%, however the financial crisis crumbled Spanish economy badly. During 2009, the unemployment rate in Spain reached as high as 18.1%. (Watch, 2010) Due to cuts in education, a number of local government teachers have been laid-off. In the Southern region of Andalucia, nearly 31% of the workforce is unemployed. For youngsters’ under-25, unemployment rate is as high as 53.7%. (Rainsford, 2011) Spain’s labor laws do not allow employers to cut wages lower, as the minimum wage rate per hour is set by the government. Employers, who try to reduce their cost of production, prefer laying-off employees and cutting down their workforce rather than taking the extra burden of taxes and wages. Moreover, unemployment benefits reduce the incentive to actively search for jobs in the market because a steady source of income is guaranteed. As the burden of more unemployed lays on the working businesses, they avoid increasing costs and expanding business. Thus the economy tends to come under a viscous circle of low GDP growth and high unemployment. Another issue is the structural change in Spain’s economy, because its agricultural sector and traditional business industries are declining (Watch, 2010). This is causing a number of skills and professions to become obsolete and redundant. Analysis Low GDP Growth Gross Domestic Product or GDP as it is called is the measure of the value of goods and services produced in an economy (Callen, 2012). It is a standard measure used by most of the countries in the world and a very important indicator of economic progress. Spain being the 12th largest economy of the world has huge importance for the world, especially Euro Zone. Aggregate demand refers to the total demand for goods and services in an economy at a given point in time and at a certain price level. Its graph is made below. As the GDP of an economy comes down, so does the demand of most of the goods and services, and their demand curve shifts towards the left, as indicated in the graph below. This shows that at each level of price, the demand of shoes will go down. As we know that the GDP comprises of the following components: GDP = C + I + G + (X – M) Where C = Consumption I = Investment G = Government Expenditure X = Exports M = Imports (X – M) = Net Exports The Spanish economy is in recession, investment from locals and FDI in the economy is very low. As investment and consumption are basic components of GDP hence the economy has slowed down during recent years and GDP has fallen. Since the economy is operating at low production and consumption levels, the government is unable to generate adequate tax revenues to fulfill its expenditures. Spanish government has run into budget deficits and requires borrowing from either the private sector or other governments. High Rates of Unemployment Generally governments inject money in under-performing economies and start new projects, because there is a multiplier effect which triggers growth. However in the case of the Spanish economy, with lower funds available to inject in the economy, government is cutting down its spending. Austerity packages include policies that restrict government spending on developmental and non-developmental expenditures. Wage-Price spiral is a Keynesian economic theory about the relationship between rising wages and inflation. It states that as disposable incomes increase, it raises the demand for goods and causes prices to rise. Higher prices cause workers to demand higher wages which leads to higher costs of production and put pressure on prices. (Investopedia, 2012) Spain is going through structural changes in the economy, because its agricultural sector and traditional business industries are declining (Watch, 2010). This is causing structural unemployment as people with farming and agricultural field are being laid-off. Solutions It’s not easy to bring world’s 12th largest economy out of distress. Joint efforts by European Central Bank and IMF are required to ensure Spain’s economy is set afoot. The foremost need is to trigger growth and activity in the economy; it could be done through effective monetary as well as fiscal policies. Fiscal policies are the use of government spending and taxation plans to influence the economy. In situations like this it is recommended to implement expansionary fiscal policy whereby cutting down government taxation and increasing spending; however considering the high public debt, this option is not viable. In my opinion the government will be better off if it strategizes towards an expansionary monetary policy. If the Spanish government could manage its own expansionary monetary policy, the government can reduce its reserve requirement and interest rates. This will reduce the cost of doing business and people might opt for self-employment rather that searching for jobs. The fiscal policies can be used to redistribute wealth by levying progressive taxes, by which the tax rate increases for higher income brackets. The government can provide opportunities and support to businesses for exports and investment instead of providing subsidies directly. The Spanish government should utilize the abundance of scenic beauty and rich cultural heritage of Spain and promote tourism industry as it is a source of foreign exchange for the country and income for local people. The government should also promote the services sector by providing trainings to youngsters, this will enable them to equip with valuable skills and be more employable and capable of starting their own businesses. Hospitality businesses such as restaurants, travel agencies and theme parks have an opportunity to grow very well due to a number of reasons. Firms in hospitality industry usually do not require huge capital investment like manufacturing and other industries, so the cost of startup is lower and they might not need to borrow huge sums of money. Moreover, the exchange rate of Euro in terms of other currencies has fallen; this makes travelling and using services in Spain cheaper for foreigners. So in my opinion marketing hospitality business in Spain especially tourism industry is a very lucrative option. Works Cited Callen, T. (2012, March 28). Gross Domestic Product: An Economy’s All. Retrieved April 16, 2012, from IMF: http://www.imf.org/external/pubs/ft/fandd/basics/gdp.htm Carlstrom, J., & Janis, L. (2012, April). Spain, Italy Need to Reinforce Economic Growth, Borg Says. Retrieved April 2012, from Bloomberg.com: http://www.bloomberg.com/news/2012-04-16/spain-italy-need-to-reinforce-economic-growth-borg-says-1-.html Charlton, E., & Mnyanda, L. (2012, April ). Spanish Bonds Slide as Minister Seeks Greater ECB Effort. Retrieved April 2012, from Bloomberg.com: http://www.bloomberg.com/news/2012-04-16/bunds-rise-as-spanish-minister-seeks-greater-ecb-effort.html CIA. (2012). Spain. Retrieved April 15, 2012, from CIA World Factbook: https://www.cia.gov/library/publications/the-world-factbook/geos/sp.html Freilich, E. (2012, April 16). TREASURIES-Bonds rally,10-yr yield below 2 pct on Spain worry. Retrieved April 16, 2012, from Reuters: http://www.reuters.com/article/2012/04/16/markets-usa-bonds-idUSL2E8FG2J420120416 Gailliard, F. (n.d.). The Hospitality Industry. Retrieved April 2012, from Black-Collegian: http://www.black-collegian.com/career/hospitality-199806.shtml Graham, J. P., & Spaulding, R. B. (2005, June 18). Understanding Foreign Direct Investment (FDI). Retrieved April 16, 2012, from Going Global: http://www.going-global.com/articles/understanding_foreign_direct_investment.htm Halligan, L. (2012, April 14). Eurozone crisis roars back to savage Spain. Retrieved April 16, 2012, from Telegraph: http://www.telegraph.co.uk/finance/comment/liamhalligan/9204702/Eurozone-crisis-roars-back-to-savage-Spain.html Investopedia. (2012). Wage-Price Spiral. Retrieved April 16, 2012, from Investopedia: http://www.investopedia.com/terms/w/wage-price-spiral.asp#axzz1sAP9BhYT Rainsford, S. (2011, November 17). Spain economic crisis: Young, professional and jobless. Retrieved April 15, 2012, from BBC: www.bbc.co.uk/news/business-15762517 Sills, B. (2012, April 15). Rajoy’s Party Sees Support Slump in Poll as Austerity Bites. Retrieved April 16, 2012, from Bloomberg.com: http://www.bloomberg.com/news/2012-04-15/rajoy-s-party-sees-support-slump-in-poll-as-austerity-bites.html Toyer, J. (2012, April 3). Spains debt to jump to 78 percent of GDP: De Guindos. Retrieved April 16, 2012, from Reuters: http://www.reuters.com/article/2012/04/03/us-spain-debt-idUSBRE83205F20120403 Watch, E. (2010, March 30). Spain Economy. Retrieved April 15, 2012, from Economy Watch: http://www.economywatch.com/world_economy/spain/ Wikipedia. (n.d.). Spain. Retrieved April 2012, from Wikipedia: http://en.wikipedia.org/wiki/Spain words, I. (n.d.). Unemployment. Retrieved 2012, from Investor words: http://www.investopedia.com/terms/u/unemployment.asp#axzz1sAP9BhYT Read More