Considering the amount of discussion my earlier post on Austerity vs. Stimulus generated this is a very timely article. So here you go.
Understanding the Spanish Debt Crisis
Spain has been experiencing a tumultuous and increasingly severe economic crisis since 2011. After the real estate and banking crisis plunged the country back into recession, it seems the austerity measures have only hastened the economy’s decline. While the government has maintained these policies, it is becoming increasingly clear that austerity alone will not save Spain’s faltering economy nor will it solve the mounting social issues facing the country. However, in the past year there has been cause to be optimistic about Spain’s economic future. Despite the new reports about the increasing unemployment and contracting economy there are those who predict that the economy is due for growth beginning in 2014.
The new Germany?
An article earlier this year by Morgan Stanley posited that Spain is currently in the position that Germany was a decade ago and is poised for a stunning recovery. Joachim Fels who supports this argument states, "Spain, where unit labor costs are falling due to recession and reforms, and where exports performance is strong, is on its way to become the euro area's next Germany”. He attributes this to Spain’s high unemployment which has led to a decrease in productivity costs, yet there are many who would argue that high unemployment is not beneficial to an economy that has seen a collapse in consumer spending since the austerity measures were introduced. It may be too early to claim that Spain is the new Germany; more likely is that it will take some years before the Spanish economy will stabilize.
Austerity alone isn’t enough
As the austerity measures continue to be ineffective in getting the economy back on track. There has been a recent unveiling of programs, which may pave the way for Spain to become more stable. The recently published statistics from CNNmoney predict that the country’s GDP will shrink by 1.3% before returning to growth in 2014. It also includes numbers on government borrowing which reports that the deficit presently is 6.3% of GDP with predictions that it will fall to 5.5% next year but may be another two years until the government reaches the EU target of 3%. These new numbers reveal that the over emphasis of austerity isn’t enough to fuel rapid growth but maintains an optimistic look for growth in the next two years. Given the dire circumstances of the euro zone, EU officials seem more willing to allow Spain and other countries the time to develop more slowly in order to maintain long-term stability, although an official decision won’t be issued until the end of May. However, the hints at recovery may not be enough for the vast numbers of Spaniards currently out of work.
New numbers give bleak report of unemployment rates
Unemployment numbers have been abysmal as approximately six million people are out of work; this has understandably caused a decline in consumer spending and limits productivity. The Prime Minister Mariano Rajoy’s adamant use of austerity to propel growth is being met with growing social tension. Spain has had relatively little social unrest as the recession got worse in 2011, however, the staggering rate of unemployment and the perception that austerity is to blame may lead to more troubles in Spain if more efforts aren’t made to create more jobs. The road to Spain’s economic recovery has been uneasy with no simple solutions. With growing social discontent, Spain may have to refocus its priorities in order to avoid greater unrest caused by the shockingly high number of unemployed, half of which have been out of work for over a year. Thus austerity seems to have been unsuccessful in an economy that needs growth as well as deficit reduction. The future is tentatively bright for Europe’s fourth largest economy; however, the government must now deal with rising social tensions in addition to its continuing economic troubles.
Angie Picardo is a writer at NerdWallet, a personal finance website where you can find financial advice on how to manage your money and best analyze investments.