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The Crisis and Its Management Spain:. I. The Road to Crisis.

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Presentation on theme: "The Crisis and Its Management Spain:. I. The Road to Crisis."— Presentation transcript:

1 The Crisis and Its Management Spain:

2 I. The Road to Crisis

3 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:

4 Unemployment in Spain (1970 – 2005) Spanish Economy Prior to 1999

5 Spain Joining EMU in 1999 Low Interest Rate Long-term Mortgage Loans More investment, particularly in construction & real estate Any side effects?

6 The Golden Decade (1995-2007)

7 1995 2007 The Golden Decade (1995-2007)

8 II. The Crisis and Its Management

9 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

10 Industry Structure: Dependence on Construction Industry Five Possible Causes 1.Recently joined advanced economy 2.Immigrants need home 3.Sociological change (# of people/household decreases) 4.Demand for 2 nd houses in other EU nations 5. SPECULATION

11 Industry Structure: Further Complications Worsening current account deficit: Even before the burst Imports > Exports: Trade account deficit

12 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

13 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

14 Labor Structure 20002004 While employment, growth in labor productivity actually New jobs created: Low-skilled construction jobs

15 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:

16 Labor Structure Immigrants Golden 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)

17 Government Management Initial Response Goal: Mitigate the crisis Plan: Fiscal Stimulus 2008-2009 Scope: – Unprecendented in magnitude (Socialist PM Zap atero) – Represented 9% of GDP by 2009 – Highest share in EU

18 Fiscal Stimulus 2008-2009 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

19 Fiscal Stimulus 2008-2009 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 Spains central bank

20 Austerity Measures 2010 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

21 Austerity Measures 2011 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 measures and reassured investors concerned about the countrys debt Required balanced budget at national and regional level Capped public debt at 60% of GDP with exceptions for recessions & national emergencies Required the government to adhere to EU annual deficit levels of 3%

22 Austerity Measures 2012 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

23 Banking Reform Cajas 1.Regional savings & loans banks 2.Not publicly traded 3.Controlled by regional politicians 4.Relatively unregulated 5.Not required to disclose loan information 1.Central government unaware of depth of cajas investment in real estate market 2.2009 – Owned 56% countrys mortgages – Loans to developers accounted for 1/5 of cajas assets

24 Banking Reform Fund for Orderly Bank Restructuring 2009

25 Reform of Spanish Banking System Phase 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 to 10% 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 additional capital requirements for certain types of property exposures

26 Labor Reform Labor Market Reform 2010 2012 Spain experienced the sharpest rise in unemployment Unemployment was amplified by the structural problems in the labor market Duality of the workforce Restrictive collective bargaining system

27 Labor Reform 2010 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 Fund Establishment of a workers capital fund where employers pay into it at regular intervals instead of paying severance at dismissal

28 Labor Reform 2012 Simplified reasons and process for carrying out collective dismissals Compensation for unfair dismissal was reduced Official authorization to temporarily suspend workers contracts no longer required Net affect Allows firms to more easily and cheaply dismiss redundant employees

29 III. Whats Next?

30 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

31 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

32 Works Cited

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