Spanish Crisis

Topics: Unemployment, Bank, Inflation Pages: 31 (10768 words) Published: August 27, 2013
PANOECONOMICUS, 2011, 3, pp. 309-328
Received: 9 September 2011.

UDC 338.124.4(460) DOI: 10.2298/PAN1103309C Original scientific paper

Francisco Carballo-Cruz
NIPE and School of Economics and Business, University of Minho, Portugal 

Causes and Consequences of the Spanish Economic Crisis: Why the Recovery is Taken so Long? Summary: Spain is currently facing its worst crisis in the last fifty years. The crisis began as an extension of the international financial crisis, but the internal imbalances accumulated in the pre-crisis period aggravated the situation. At present their incomplete adjustment is making difficult the economic recovery. This paper describes the evolution of the economic crisis in Spain. The real estate sector and the banking sector are analysed in detail, as they played a key role in the detonation and the deepening of the crisis. The results of the main reforms carried out so far are also carefully examined. It also discusses the main factors that have delayed the economic recovery up to now (unemployment and indebtedness), and present some alternatives to define an exit strategy. Key words: Crisis, Real estate, Banking, Debt problems, Unemployment, Public debt. JEL: E24, F34, G21, H63, R31.

fcarballo@eeg.uminho.pt

Paper by invitation

Financial support from Fundação para a Ciência e a Tecnologia – FCT (Project PTDC/SEN-TRA/108522/2008) is gratefully acknowledged.

After a long period of economic expansion, which began in the mid-nineties, in 2006 the Spanish economy began to show the firsts signs of exhaustion. The international economic crisis, which began in 2007 and deepened in 2008, hastened the end of the expansive cycle and triggered a severe adjustment of the imbalances accumulated during the previous decade, whose correction continues to these days, four years later, pending its completion. The rapid deterioration of the international macroeconomic context highlighted the structural weaknesses of the Spanish economy, especially after 2008. Betting on a growth model heavily dependent on domestic demand, and more specifically on construction and property development activities, has proved to be an absolute failure. The disproportionate growth in the real estate sector, coupled with the expansion of credit needed to finance it, is at the basis of the economic imbalances. In the real estate sector a spiral of growth in demand, prices and supply fuelled a major bubble, which burst when the impact of the international crisis was felt in Spain. The massive credit granting to construction and property development activities caused an excessive exposure of the banking industry to those sectors. This exposure was the means of transmission of the housing crisis to the banking sector, whose business is still very constrained by the inadequate risk policy and the deficits of supervision of the pre-crisis period.

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Francisco Carballo-Cruz

The paper aims to: i) describe the evolution of the economic crisis in Spain; ii) highlight its differential aspects, and; iii) discuss the main factors that have delayed the economic recovery so far. The rest of the paper is organized as follows. Section one describes the impact of the crisis on the Spanish economy. Section two presents the evolution and current situation of the sectors that contributed to the deepening of the crisis: the real estate sector and the banking sector. Section three addresses the two main barriers to recovery: debt and unemployment. The reforms in the banking industry and the labour market are described and discussed in section four. Section five discusses some relevant issues and presents several policy recommendations. Section six concludes.

1. The Crisis’s Impact
The Spanish economy’s downward phase of the expansion cycle began in 2007. Four years later an economic recovery is yet to be seen. During 2007 and the first quarter of 2008, there was a growth slowdown, and from the second quarter of 2008 until...

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