Title: The pain in Spain: political, social and foreign policy implications of the European economic crisis
Abstract:The global financial and economic crisis has exposed serious weaknesses in the performance of the Spanish economy. During the years 1995-2007, Spain recorded a long period of strong growth which was p...The global financial and economic crisis has exposed serious weaknesses in the performance of the Spanish economy. During the years 1995-2007, Spain recorded a long period of strong growth which was partly based on a credit-driven domestic demand boom resulting from the creation of the Euro. Very low real interest rates triggered the accumulation of high domestic and external imbalances as well as an unprecedented real estate bubble. (At its peak in 2007, the construction sector accounted for 16 percent of GDP and 12 percent of Spanish jobs). The sharp correction of that boom as of 2008 in the context of the international financial crisis has led to a double-dip recession and a spectacular increase in unemployment, which has tripled in five years (from 8 percent in 2007 to 24 percent in 2012). Youth unemployment (those aged 16 to 24) reached a staggering 51 percent in mid-2012 (though this figure does not take into account those who are studying and others not actively seeking work). In turn, this has led to a spectacular increase in unemployment benefit payments, which partly explains why Spain’s public debt will rise from 69 percent of GDP in 2011 to an anticipated 85 percent by the end of 2012. The unwinding of these economic imbalances is weighing heavily on Spain’s growth outlook. Private sector deleveraging implies subdued domestic demand in the medium term. Furthermore, sizeable external financing needs have increased the vulnerability of the Spanish economy. A shift to durable current account surpluses will be required to reduce external debt to a sustainable level. Public debt is increasing rapidly due to persistently high general government deficits since the beginning of the crisis, combined with the shift to a much less tax-rich growth pattern. The challenges facing large segments of the banking sector continue to bear negatively on the economy as the credit flow remains constrained. In particular, unhealthy exposure to the real estate and construction sectors have eroded investor and consumer confidence. As the linkages between the banking sector and the sovereign have increased, a negative feedback loop has emerged. Consequently, the restructuring and recapitalization of banks is the key to mitigating these linkages, increasing confidence, and spurring economic growth.Read More
Publication Year: 2012
Publication Date: 2012-01-01
Language: en
Type: article
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Cited By Count: 2
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