| 2010: Spain's economy rides the storm |
| Date: 2010/12/28 Click: 1919 |
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2010 was a difficult year for the Spanish economy, although it is possible to say that after the " perfect storm" that it experienced at the end of 2008, it appears that the fall has been stopped and the basis for recovery established.
At the start of 2010 the government began to realize the time had come to end with stimulus packages and concentrate on fiscal adjustment. The rumors about the insolvency of Greece provoked continuous speculative attacks on the bonds sold against the public deficit by the countries on the periphery of the Euro.
Given the slow reactions of European authorities, the differential of the Spanish bond against the German bond began to rise which the main risk assessment agencies began to lower the rating of the Spanish public debt. This meant an increase in the price of public expenditure in interest on the debt which has continued all year, peaking after the bailouts of Greece and Ireland.
This shock in the public debt markets, along with the recommendations of the European Union, led the government to adapt successive packages of measures to reduce the deficit.
The first reduction in the salaries of public employees in the history of Spanish democracy (around 5 percent) was passed by the government along with a pensions freeze and numerous cutbacks in other areas. This has led to a 11,500 million Euro (15,137 million U.S. dollars) reduction in public spending.
Several taxes were also increased, especially sales tax (IVA) and taxes on tobacco, while there was a minimal rise in income tax for the highest earners. These measures have allowed Spain to succeed in its aim of reducing the public deficit during 2010 (it is currently below the predicted 9.3 percent) and allow the government to fulfill its future objectives.
The unions and the parties from the left have criticized this adjustment, labeling it as anti-social and pointing out it could lead to a return into recession. However, despite the government' s austerity policy, it seems the Spanish economy hit bottom in 2010 and will not continue to fall.
The first two quarters of the year ended with slight growth in GNP and the last published data, from the third quarter, shows a growth of 0.2 percent in comparison to 2009.
The rise in unemployment also appears to have halted in 2010. Following the loss of 1,600,000 jobs between May 2008 and December 2009, the number of jobs in 2010 has remained just about the 17, 500,000 mark.
Not only have the fall in production and the rise in unemployment been halted, but previous imbalances have begun to recover. Early estimations show the external deficit of the balance for current accounts and for capital began to be reduced in 2010, falling to below 4.5 percent of GNP.
This is due mainly to a rise in exports, especially to countries outside of the Euro zone. The construction industry continues to lose influence in the national economy, given that its production fell by 6.8 percent in the third quarter of the year when compared with 2009. Meanwhile the service sector grew by 1 percent and the energy and industrial sector by 2.3 percent. All of this has helped boost Spain's competitively in outside markets
As a result, the Spanish economy is reducing its dependence on the construction industry as well as domestic consumption and saw a slight growth following the second quarter, thanks to bigger external demand, private investment and industry, while tourism is also showing signs of recovery.
There are still some important imbalances: the black economy has increased as a result of the crisis and it is estimated that it makes up around 20 percent of GNP. Although these "informal" jobs allow many unemployed people to make a living, they also mean a major reduction in state earnings.
House prices have also failed to hit bottom and are expected to continue falling in 2011. Finally there is still a high level of duality in the labor market, with Spain "boasting" one of the highest levels of temporary employees in Europe.
In conclusion, 2010 has been a difficult year. The need to redirect resources from construction and its dependent industries to other sectors has coincided with the harsh fiscal adjustments of the government, which was provoked by the public deficit and has caused the elimination of social protection and led to tax increases.
Despite these problems there are details that indicate that unless there are new and unexpected negative shocks, such as insolvency of banks, new financial turbulence or a new setback to the European economy, it is possible to say that the Spanish economy has been able to heal its wounds and is putting together the basis to begin a slow, but balanced process of growth. |
