The Crisis and Its Management
Spain:
I. The Road to Crisis
Spanish Economy Prior to 1999
5% of GDP and 14% of labor force
Agriculture:
(1996 est.)
11% of GDP and 9% of labor force(2010 est.)
Tourism:
Unemployment in Spain (1970 – 2005)
Spanish Economy Prior to 1999
Spain Joining EMU in 1999
Low Interest Rate
Long-term Mortgage
Loans
More investment, particularly in
construction & real estate
Any side effects?
The Golden Decade (1995-2007)
1995 2007
The Golden Decade (1995-2007)
II. The Crisis and Its Management
Industry Structure: Dependence on Construction Industry
Financial Crisis of 2008 – Why Spain? • Sub-prime credits not popular in Spain
• Bank of Spain required high reserve rates for major banks
Very Nature of Construction/Real Estate Industry
• Highly oriented to its own final demand-Very vulnerable to any fall in demand for houses
• Responds little to positive demand shocks to other sectors
Industry Structure: Dependence on Construction Industry
Five Possible Causes1. Recently joined advanced economy
2. Immigrants need home
3. Sociological change(# of people/household decreases)
4. Demand for 2nd houses in other EU nations
5. SPECULATION
Industry Structure: Further Complications
• Worsening current account deficit: Even before the burst• Imports > Exports: Trade account deficit
Labor Structure
Construction workers: Mostly on temporary contracts
Elastic demand for labor, easily laid off when demand falls
Jobs Directly/Indirectly Concerned with Construction Sector
USA Belgium UK Norway Sweden Spain
8.8 8.1 7.9 7.75.5
15.5
% (2000 est.)
Labor Structure
Employment in Construction Industry
From 2000 to 2004,
Total employment increased by 23.14%Employment in construction increased by 37.84%
1 in 5 new jobs created belongs to the construction industry
Labor Structure
2000 2004
While employment ↑, growth in labor productivity actually ↓
New jobs created: Low-skilled construction jobs
Labor Structure
Bubble bursts
In 2010:
Unemployment rate: 20%Youth unemployment rate: 41.6%
Unemployment rate: 21.3%Youth unemployment rate: 45%
In April 2010:
Labor Structure
ImmigrantsGolden Decade: Massive inflow of immigrants
Weight of Immigrants in Employment:
* 50% of new jobs were taken by immigrants
When the crisis happened, it was these immigrants who got fired first
Clip: "Crisis in Spain Hits Migrants"
1%(2000) to 14.8%(2008)
Government ManagementInitial Response
• Goal: Mitigate the crisis• Plan: Fiscal Stimulus 2008-2009• Scope:
– “Unprecendented in magnitude” (Socialist PM Za-patero)
– Represented 9% of GDP by 2009– Highest share in EU
Fiscal Stimulus2008-2009
•40bn euro•Measures under taken to offset recession and falling domestic demand
•6 billion Euros in tax cuts•Subsidies to create jobs•Unemployment assistance•Improved liquidity of banks & guaranteed debt issuance
Fiscal Stimulus2008-2009
• Consequence– Budget deficit increase from 4.2% in 2008 to 11% in – 2009– Public debt increased from 39.8% in 2008 to 60.1% in
2010• Fiscal stimulus exhausted by June 2009
– “Any chance of using fiscal policy to increase spending has now been exhausted”
– Governor of Spain’s central bank
Austerity Measures2010
• Goal: Reduce deficit to 6% of GDP in 2011 and 3% of GDP in 2013*
• Plan: Fiscal constraints• Major measures
– Wages– Taxes– Pensions
* Maastricht Treaty
Austerity Measures2011
Constitutional Amendment passed in September 2011
Promoted during European Summit (summer 2011)and fast tracked through Spanish Parliament
Followed German model of a constitutionally mandated balanced budget
Supported further austerity measuresand reassured investors concerned about the country’s debt
Required balanced budget at national and regional levelCapped public debt at 60% of GDP with exceptions for recessions & national emergenciesRequired the government to adhere to EU annual deficit levels of 3%
Austerity Measures2012 Reform Bill
Further budgetary cuts
Tougher oversight of central & regional public accounts
Targets for central & regional budgets:Debt to GDP ratio cut to 60%Deficit to 0 by 2020
Penalties for overspending in regional accounts
Banking ReformCajas
1. Regional savings & loans banks
2. Not publicly traded3. Controlled by regional
politicians4. Relatively unregulated5. Not required to
disclose loan information
1. Central government unaware of depth of cajas’ investment in real estate market
2. 2009– Owned 56% country’s
mortgages– Loans to developers
accounted for 1/5 of cajas’ assets
Banking ReformFund for Orderly Bank Restructuring
2009
Reform of Spanish Banking SystemPhase One: Consolidation in the savings bank sector (mergers)
June 2010
45 savings banks
March 2012
11 savings banks
Phase Two: Improve solvency
Raised core capital requirements to 8% of risk-weighted assets and to10% for banks that heavily rely on wholesale markets or where private investment is less than 20%
Phase Three: Clean up balance sheets
Prompted entities to dispose of non core assets and required additionalcapital requirements for certain types of property exposures
Labor Reform
Labor Market Reform20102012
Spain experienced the sharpest rise in unemployment
Unemployment was amplified by the structural problems in the labor market
Duality of the workforceRestrictive collective bargaining system
Labor Reform2010
Expanded the conditions under which employee dismissals are justified for economic reasons
Permanent contracts with reduced severance pay for 33 instead of 45 days
Use of temporary contracts more restrictive
Wage Guarantee FundEstablishment of a worker’s capital fund where employers pay into it at regular intervals instead of paying severance
at dismissal
Labor Reform2012
Simplified reasons and process for carrying out collective dismissals
Compensation for unfair dismissal was reduced
Official authorization to temporarily suspend worker’s contracts no longer required
Net affectAllows firms to more easily and cheaply dismiss redundant employees
III. What’s Next?
In Search of a New Model
Long-term Commitments• New Industries (Competitive Exports)• More Investments in Education • More R&D
Short-term Constraints
• Budget Reform (Austerity measures) - Debt/deficit management
Dilemma Exists
Proposed Solution
• Balancing long-term and short term concerns
• Usage of economic strengths of Spain to survive through austerity measures - Internalization of small-medium sized firms - Promoting tourism industry
Aim for Long-Term Improvement of the Economy Goal: Sustainable Long-Term Growth
Works Cited