Comparison Italy vs Spain in Crisis

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Comparison Spain vs. Italy

Similarities

* Left-centred coalition government
* Member of the EU
* Low birth rate
* High immigration
* Declining competitiveness
* Latin, Mediterranean (used to take siestas), highly emotional citizens * High costs, low productivity firms (likely to be overtaken by Chinese competition) * Low spending on R&D
* Poor educational system

Differences

* Italy has a high black economy, Spain does not (tax deficits for Italy) * Spain: monarchy and democratic
* Italy: republic
* Corruption percentage index (Italy: 6.5 and Spain 4.8)
* Unemployment rate (Italy: 10.7% Spain: 25.1%)

How did Italy and Spain become struggling economies?

Spain

* Real estate crash

Nearly every Spanish representative did heavily investments in the real estate market. So there was an illegal connection between reforms undertaken and unnecessary low interest rates concerning the housing sector in their own interest.

Cajas, which are semi-public banks, are the most involved banks, which lenthuge amounts of money to the real estate sector. Those real estate companies went bankrupt. This was followed by a huge price increase of housing done by the cajas, since they needed to get their money back.

* Increase in unemployment
* Huge trade deficit (increasing oil prices, lack of resources) * High inflation rate (caused by real estate price increase and family indebtedness increase)

Italy

* High governmental debt (118% of GDP)
* Very difficult to start businesses -> high bureaucracy and sluggish justice system * Very weak economy
* Weak investment, elderly population, poor regulations (->less increase in productivity) * Very low annual growth rate (lower than the rate of interest it pays) -> causes a huge governmental debt * Due to a bad outlook and insecurities of Italy the interest rate increased tremendously for Italy * If nobody will lend to Italy, then Italy cannot repay its debts. And if Italy cannot repay its debts, then nobody will lend to it. (Vicious circle)

What procedures did the government do to decrease the effects of the crisis?

Italy
* Monti tries to boost growth in Italy
* €10 billion of savings should be reinvested to boost growth * New policy: reduced tax to encourage firms to hire women and young workers * Full-scale liberalisation of shopping hours (to stimulate consumer spending) * €3.8 billion for infrastructure projects (to attract FDI)

Spain:

* Restructuring Spain’s banking sector

A lot of small and weak banks have had to merge by larger banks. This caused a job loss by 11% in this sector. Bankia, Spain's fourth-largest bank is now part nationalised this caused a huge governmental money spending to save the bank.

* Recession

To get help from the market (borrowing funds) would be too cost intensive (high interest rates). So Spain had to ask for financial help at euro members. So far Spain does not want a full bailout or rescue, to avoid another increase in interest rates and close supervision of the Spanish finance system.

So far the government decided for: a 12% average cut in ministerial spending, freeze in public sector pay for the third consecutive year, new independent authority to monitor government finances, increase in pensions, new 20% tax on lottery wins, new car scrappage scheme.

* Ms Saenz de Santamaria said that efforts to close the government's deficit would focus more on spending-cuts than tax rises. * The only areas of spending to increase in 2013 would be pensions, student scholarships and interest payments.(to calm the Spanish citizen) * Government tries to reduce the deficit to 6.3% of the GDP this year. * BUT, government said that tax revenues will be higher than budgeted for this year, so they are expected to increase by a further 3.8% in 2013.

Analysis -...
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