During the early 1990’s, Spain was in prime time from its rapid economic growth. To which it became the 5th largest economy in the European Union. Spain’s economic growth encouraged a boom un property marketing. So, in 2006, Spain started to build 800,000 new homes. It is important to take note that this was more houses built than Germany, France, the UK combined (known as the core member states in the Eurozone) – but this I’ll explain in detail later!
Unfortunately for Spain, this economic growth wore thin and in 2008, Spain was seriously affected by the global credit crisis thought to have been the worst financial crisis since the Great Depression of the 1930’s. Therefore, the Spanish property market collapsed leading to a deep recession which lasted for several years.
Which as you can see in the image below, the recession had a negative impact on house investment for the Spanish property market. Yet with all those new houses built for citizens, the recession was so painful that nearly all interest in the property market disappeared. It leaves us wondering, where did it all go wrong for Spain? A time where they were once the country with the biggest economy in the Eurozone to now… unable to escape recession with the highest unemployment rates in the industrialized world to date.
According to many figures, 2008 marks the start of the recession for Spain when GDP shrank in the third quarter. Despite this, Spain’s economy still managed to grow by 0.9% and the Spanish banking system was considered solid (OECD). What wasn’t expected was budget deficit of 3.8% in 2008 due to tax receipts falling whilst queues lengthened with workers unable to find jobs outside of services. This is where Spain entered a full-blown recession in 2009 sinking the budget deficit to 11.1%. As a consequence, to this excessive recession, uproar was caused as socialist prime minister at the time Jose Luis Rodriguez Zapatero had to go against his election promises in 2010 and cut spending by 15 billion euros to try and balance the financing costs. In 2010, the rate at which the economy was falling in Spain was reduced by the government to 0.1% which reduced the deficit to 9.3%. However, Spain was still the country with the highest unemployment rates in Europe and was foreseen as a country with a continued spiral of falling revenue and a struggling economy.
In 2012, unemployment was at a new high of 24.3% and this figure was only expected to rise if Spain couldn’t overcome this recession. What’s more, youth unemployment was also taking a turn for the worse, since now more than 50% of 18-24 year olds are jobless in Spain. This is a vicious cycle for Spain since if young people can’t get themselves a job, they are unable to earn wages and therefore help out by supporting the economy and the country. Not only this but this also means young people don’t have the means to move out and be financially independent from their parents. With a loss of jobs, all these empty houses in Spain will remain that way as no one can afford to live in them. Already it is not unusual to go to Spain and see a grown man or woman living with their parent’s still due to their falling economy.
During this recession, Spain was forecasted to be the only country in the Eurozone still in recession in 2013, despite being the country with the 4th largest economy in the Eurozone. This recession didn’t just cause problems with housing and unemployment for Spain but greater issues regarding their politics too. The Spanish economic crisis in Spain left Catalan wanting independence as the wealthy Barcelona region is seen to be holding up the poorer rest of Spain. However, this crisis with Catalan means the Spanish economy could lose 3 billion euros. Unfortunately, there is a worst-case scenario for the Spanish economy if this conflict doesn’t subside which could leave Spain in a recession very similar to that of 2008-2009 with Catalan taking the biggest hit of it and risking entering a full-blown recession. One thing that can’t be certain is to what extent European and transnational factors determined this economic crash. So, let’s consider what information and statistical data we have and consider where Spain stands with regards to their responsibility to the economic crisis and recession in 2008-2009. Firstly, Spain joined the European Union in 1986. During this time, the European union was in a strong state and the Spanish economy had no signs of recession. However, at the end of 2009, the European sovereign debt crisis began. This meant the peripheral Eurozone member states like Greece, Portugal, Ireland, Cyprus and importantly for this podcast, Spain, were unable to repay and/ or refinance their government debt or bail out their banks without aid from third party financial institutions such as the European Central Bank, the International Monetary Fund and the European Financial Stability Facility (created to specifically assist the European sovereign debt crisis.)
The Spanish economy was more affected by this crisis since during the boom period, Spain had accumulated financial imbalances, therefore making Spain vulnerable to changes in financial conditions. The recession only got worse throughout the years 2010-2011 as the sovereign debt crisis heightened and started spreading to a large number of countries.
So why did this Eurozone have such a big impact on Spain’s economy during 2008? As I mentioned before, the capital rich countries were at the core of the Eurozone (Germany, France etc). when the periphery countries like Spain adopted the euro as their currency, it allowed the countries within the core of the Eurozone to take advantage of high rates of return. The periphery countries benefitted from the influx of capital flow which reduced the borrowing costs. The objective of the adoption of the euro was to cause large capital flows from the core to the periphery which contrastingly, caused such a crisis to begin with.
Spain took such an impact from the sovereign debt crisis as already the Spanish economy was less developed than other members of the European Union which only meant as there was to be greater investment opportunities within the country but a shortage in their own national saving to cover such extreme investment, the economy began to bust after a steady boom period. This is because the economy was unable to avail a sufficient degree of macroeconomic stability which lead to a loss of competitiveness within the markets.
But to some extent, the European Union provided a safety net for Spain’s economy since Spain was joining a single currency union which provided some confidence for the Spanish economy by eliminating possible further devaluation. Therefore, external investment in Spain wouldn’t have been as demanding on the country as for when the peseta was the currency which constantly fluctuated in value depending on solely Spain’s economy.
The problem was not with the spending of the Spanish government. In fact, before 2008, Spain was one of the least spendthrift countries in the eurozone. The real problem that Spain faces is who they share a currency with (most importantly Germany). As Germany are a thriving country within the eurozone whereas Spain is only a peripheral country. Therefore, imports to Spain are so cheap whereas exports are rather expensive, this meant the country’s economy as a whole has been spending 10% more than it was earning in comparison to the rest of the world.