Eurozone Crisis Roars Back to Savage Spain - Article Example

This article, “Eurozone crisis roars back to savage Spain” (Halligan, , highlights the unimpressive economic indicators of Spain and how these indicators have gone from bad to worse in the recent past to push the Spanish economy deeper into trouble. The economic indicators of the introduction of austerity packages, unemployment and debt-to-GDP ratio by the Spanish government have not been popular among the majority of the population. Spain’s economy is becoming more and more leveraged day by day as they continue to borrow to run their economy and this has eventually resulted in denting the confidence of the investors who are now reluctant to invest and save their money into the country. Even after all these troubles, Spanish economy is considered as one of the major economies of the world. Due to its contribution throughout the several economies of the world, voices have been raised over numerous forums and concerns have been raised as to the effect it will have on the world economics if something bad happens to the Spanish economy. These factors will be considered in the assignment later economic theories will be discussed as to evaluate if the Spanish government has successfully been able to address these concerns and introduced appropriate economic policies. The article under discussion in this assignment relates to the economic crisis faced by Spain in the present time and the potential obstacles that could come into play in the near future for Spain. The author of this article is Liam Halligan who is the chief economist at the Prosperity Capital Management, and this article was published in the Daily Telegraph. Spain has been considered as one of the best places for investments with its great potential in real estate and investment of consumer product manufacturers, and due to these reasons, Spain has long been mentioned among the world’s most important economies. Spain is the fourth largest economy in the Eurozone and the world’s twelfth biggest economy. This is exactly what has sent waves of fear as to what will happen to the European and worldwide economies in case the Spanish economy goes bust. The Spain crisis started in 2008 when the worldwide and European recession arose and the debt crisis began to take dominance. Due to this recession, many people lost their jobs in Spain because of the Eurozone crisis as well. This recession resulted in an increase in unemployment rates and this created problems for people and government alike, because at that time Spain offered numerous social security benefits and with lower tax revenues, it became a difficult task for the government. Not just this but the Spanish government also had to repay the previous loans which it was unable to do so and this created further problems for Spain. 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). The Spanish economy was doing so good that it borrowed more and more money from external sources and injected all of it into the economy. 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 recession struck, the lenders which were usually the banks and financial institutions started demanding the repayment of their provided loans to address the issue of liquidity. 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 in their respective countries. At this point, the prices of property in Spain began to fall due to the recession and the Spanish government was finding it harder to service the debts because the investments for which they had borrowed money were turning out to be unprofitable and bad investments. Such was the expectations from Spain in early 2000’s that some years later when the recession struck, it faced extremely high debt-to-GDP ratio. 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 economy is so highly leveraged that its official public 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. Obviously since Spain had borrowed the money from different economies, especially from Eurozone members, it eventually had to repay some of the loans either in full or partially. In order to service their debts, the Spanish government had no choice but to borrow more money from lenders so that it could be used to 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 with more loans and this reluctance had to be countered by offering higher rates of return to tempt the investors to take this risk. 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.). Spains 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 PMs 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