The economy of Spain is bustling in a prolonged recession ever since 2008 when the global crisis hit the world economy. The burst of housing boom and relentless domestic structural weaknesses, majorly in the labor market, have been aggravated by the European Debt Crisis. Deleveraging, which involves repayment of company’s debt to make it more attractive to the investors, evident in the private sector has caused a contraction in the domestic demand , thus exacerbating unemployment levels and generating huge government deficits.
The likelihood of fast recovery of Spain’s economy in the immediate future cannot be expected as deleveraging is most likely to persist in the private sector. The gravity of problem increases as the feedback loop between the government financial bodies and banking sector is strong;notwithstanding the loan of up-to EUR100 billion from the Euro area government to recapitalize the banks. These feedback loops must break.
|Year||GDP %||Inflation %||Year||GDP %||Inflation %|
Source: World Bank
• The Current Account Deficit (CAD) has fallen substantially but the trade balance needs to be improved further. Both falling exports and rising imports have contributed in significantly reducing CAD. To some degree the improvement in the balance of trade highlights the impact of the output gap in the trade balance. But there exists a scope of further contraction of CAD and improvement in trade balance.
• Restoring Bank’s access to funding is a key priority. Wholesale funding conditions have worsened significantly even in the largest internationally diversified banks which are only slightly exposed to domestic credit and housing market. However some kind of improvement can be expected following the announcement of new unlimited bond-buying program (OMT)in the context of an ESP or ESM program
• The National Budgetary rules that have been introduced in 2012 call for all kinds of budget , the general government budget,budget of each central government, the regions,the municipalities,social security system to be in balance structurally from 2020 onwards.
Economic Action Plan
• The financial crisis being faced needs to be addressed quickly. Some progress has been made in the comprehensive recognition of losses , which is imperative for restoring confidence in the banking sector. The government of Spain has adopted an important step in tightening the provisional rules on the Bank’s real estate associated exposure. The impaired housing related assets are required to be transferred to the planned asset management companies at prices low enough to limit the risks for public finances.
• The lost confidence in public finances is required to be restored. In order to restore its credibility the government of Spain should focus on meeting its new headline deficit targets adopted in July 2012.Reforms of budgetary rules across all the levels of government and recent consolidation measures mark a substantial growth.
• Addressing such a high level of unemployment requires a wide range of reforms. The unemployment rates in Spain has reached very high levels especially amongst young people. To raise employment levels government must reduce the costs and procedures required to create businesses and remove sector-specific entry barriers. Entry barriers existing for large-surface retail outlets obligated by regional governments should be lowered, and shop opening hours needs to be liberalized in those areas where rules and limitations remain. The 2012 labor market reforms,aimed at making a significant progress in addressing some key structural weaknesses of the labor market needs to be implemented seriously.
|Last Updated on : 23th February 2015||Next Update : February 2016|