Spain’s Economic Performance Between 2011 and 2015, Essay Example

Economic performance is an important factor of wellbeing of any given nation. Spain was one of the most affected nations by the 2008 global recession. This paper seeks to provide an analysis of Spain’s economy using three indicators; Inflation rate, unemployment rate and growth rate.

Inflation Rate

Inflation is defined as the gradual and sustained increase in the general price levels of commodities. The prices increase due to a various number of reasons and they affect demand and prices of commodities. The increase in price can be due to the situation when demand for goods and services surpasses supply. This creates a shortage which in turn causes the prices of commodities to increase. Inflation can be caused by an increase in money supply in the market (Meltzer, 2009). This means that there is too much currency chasing too few goods, this lowers the value of the currency and thus its purchasing power. This means consumers will require more currency to purchase the similar amount of goods, raising prices in essence. By increasing reserve requirements, banks will be required to increase their deposits with the Federal Reserve, reducing the amount of money banks have, thus reducing the money supply in the market to increase value of the currency and its purchasing power.

Unemployment Rate

The 2008 Great Recession marked a time of considerable economic and financial turmoil all over the world. Spain’s economy was affected by the recession. A number of Spanish banks experienced failures leading to the eventual drop in international trade as credit continued to be tightened. The fallout of the failure of a number of European banks led to economic and financial turmoil, riddled with high rates of unemployment and the eventual strain in the fundamental ties between the member states of the European Union (EU) (Quaglia & Royo, 2014).

The high unemployment rates in Spain recorded from the onset of 2011 were as a result of a generally weak correlation between the labour market requirements and workforce training. By November 2012, unemployment in the country had reached 26.6% with youth unemployment placing more than half (55%) of the youth jobless (Vives, 2015). This meant that over 6 million within the demographic were not engaging in economic activity. Spain has since become one of the leading countries in unemployment within the Eurozone.

In Q2 FY2015. Spain recorded a drop in unemployment to 22.4%. While this was one of the highest levels of unemployment recorded in the Eurozone, This was the lowest in four years. This decline in unemployment can be credited to labour-market liberalization policies and improved tourism within the Eurozone.

The burgeoning unemployment rate between 2011 and late 2013 can be attributed to the effects of the2008 housing bubble. As most banks suffered and credit became tighter, businesses were forced to cut back on expenditure, eventually leading to the massive lay-offs and retrenchments (Harrison & Corkill, 2013). As the economy was largely dependent on foreign investments and credit financing, most business, companies, factories and especially banks had heavily been supported by either foreign investments or foreign debt. The collapse of some of the major banks in the United States caused a sudden scarcity of credit to finance these operations. Operations came to a standstill leading to massive unemployment, shocking the economic system.

After the application of austerity measures, the unit labor cost was significantly reduced relative to productivity realizes within the economy. As the economy received the stimulus package, lower paying jobs were created to replace those that had been destroyed in the recession. This resulted in the general decrease in real wages.

This is depicted in the disposable income for each household within the economy. Prior to the economic crisis, disposable income was growing rapidly (between 2006 and 2007). As unemployment increased in 2009, household disposable income reduced.  Finances from the bailout led to the temporary increase in disposable incomes for households. However, after the application of austerity measures in 2011 has led to the significant decline in household disposable income, recording negative growth up until 2012.

Furthermore, Spain’s labour force is characterized by seasonal unemployment as labour laws make it difficult to fire employees. This makes it difficult for companies to hire employees, especially on a permanent basis.

Growth Rate

Real GDP tells us the value of all the commodities (good and services) produced by a nation within one year, depicted in base-year prices. Real GDP accounts for the actual value of goods while factoring in inflation. The Economy’s Growth Rate is measured through the growth rate of GDP. Between 2011 and 2015, Spain has experienced a considerable drop in economic growth, but a recent period of resurgence after the application of austerity measures (Rzon?ca & Balcerowicz, 2015). After 2009, the onset of the effects of the collapse of the housing bubble led to slowed economic growth.

Economic growth was considerably curtailed by the general unavailability of credit for businesses. The economy was largely dependent on credit and austerity measures employed by the new ruling regime in 2011 further affected employment. Between 2011 and 2013, Portugal experienced a considerable decline in domestic demand. As credit was not accessible, an economy that was largely dependent on foreign investment and debt financing led to a decline in domestic demand.

An increase in capital inflow tend to increase an economy’s net foreign liabilities. Increasing net foreign liabilities considerably reduces a country’s bargaining power. Owing to reduce bargaining power, the economy is opened up its market to goods and services from their foreign debtors. This creates a general reduced or negative net exports. This is because imports from foreign markets become cheaper than products and services existing within the economy. When the capital account depicts a negative or reducing value, i.e. the financial capital inflows surpass financial capital outflow, the balance of payments is skewed in the form of negative net exports.

As unemployment continued to soar through 2012 to the last quarter of 2013, the economy began to digress. However, new sources of revenue for the government allowed for the economy to kick-start growth. In 2012, with the help of the stimulus package, GDP started an upward trend. In this case, the government employed the stimulus package so as to stimulate aggregate demand through the increase in government expenditure. This is further enhanced by improving the net exports position of the economy.However, this growth continues to be curtailed by austerity measures that limit certain aspects of fiscal and policy.

Government Regulations

In 2011, the conservative Popular Party came into power. The new regime employed drastic austerity measures in a bid to rescue Spain’s economy from dipping into considerable debt. The new administration employed a budget deficit reduction policy in a bid to control government expenditure. However, the housing bubble of 2008 and the consequent recession in 2009 had considerably affected the banking sector. The banking sector received a €41 billion bailout package from the European Union (EU).

In conclusion, Spain’s economy performed poorly between 2-11 and 2013, while still recovering from the effects of the 2008 global recession. However, the economy bounced back in the final quarter of 2013 to start recording positive growth reduced unemployment.

Works Cited

Harrison, J., & Corkill, D. (2013). Spain: a modern European economy. Aldershot: Ashgate Publishing, Ltd.

Meltzer, A. H. (2009). A history of the Federal Reserve: 1970-1986. Chicago: University of Chicago Press.

Quaglia, L., & Royo, S. (2014). Banks and the political economy of the sovereign debt crisis in Italy and Spain. Review of International Political Economy, 1-23.

Rzon?ca, A., & Balcerowicz, L. (2015). Puzzles of Economic Growth. Washington: World Bank Group.

Vives, J. V. (2015). Economic history of spain. Princeton University Press.