Spain and The Global Crisis - II

In my last blog I talked about the impact of global crisis on economy of Spain. This blog analyses the post-crisis steps taken by the government and the possible way forward for Spain.

4. GOVERNMENT ACTIONS AND REFORMS:

4.1 STIMULUS PACKAGE

With a hope of revival of the economy the government released a stimulus package of 11 billion euros, equivalent to 1% of Spain’s GDP, in October 2008. The idea was to create 300,000 jobs in the market and provide cushion to rising global crisis in Spain.

4.2 MORTGAGE RELIEF

Due to heavy contraction in property sector, the government started providing mortgage relief in terms of payback relaxation and discounts to push the sector and bring the economy on track. Around 40 billion euros were set aside for this.

4.3 TAX CUTS

To increase the money circulation the government reduced taxes to a great extent. Bank rate for example was reduced from 5% in 2007 to 3% in 2009 to fight the economy against deflation and increase liquidity in the market.

4.4 BANK DEBT

The Spanish government also created a €50 billion fund to buy assets from banks that need liquidity. Also around €100 billion were added for the new bank debt to support them and encourage the money circulation in the market.

4.5 AUTOMOTIVE SUPPORT

Automotive had been the major export lung for Spain that could act as a balancing factor against increased budget deficit due to reduction in tax revenues and increased spending. So, the government had increased focus on labour cost reduction and increase in competitiveness in this sector. Close to 1 billion euros were invested in environmental and Research and Development projects in automotive sector.

5. WAY FORWARD

5.1 SHIFT FROM STIMULUS TO AUSTERITY

The impact of recession was so strong that even after the release of billions of worth of stimulus package, the economy couldn’t revive and unemployment continues even today to its highest ever level. Looking at ‘not as expected’ outcomes of stimulus package, On May 23, 2010, the government announced austerity measures, consolidating the ambitious plans announced in January. The measures included lowering of civil servants pay and freezing of pensions.

5.2 HOPES FROM THE ‘RELATIVELY STRONG’ BANKING SYSTEM

Because of its conservative approach and strict adherence to loan regulations, the Spanish banking system had been able to cope up with the crisis in relatively better way than in other European countries. With a sound banking structure it is expected that the sector will move strongly in the future and become a support for rest of the economy.

5.3 SERVICE SECTOR

The service sector has also been able to maintain itself quite well during the peak recession time and had managed the current account to some extent. This sector would hopefully, help to compensate the loss from the collapse of Spain's construction industry.

5.4 DOMESTIC DEMAND

For an economy to completely revive out of recession, it would be very much necessary for Spain to get back to its pre-crisis consumption levels. The government has taken a no. of measures like low interest rates and government stimulus packages to boost the domestic demand and hopefully, once the fear of return of recession gets out of people’s mind, things would be on track.

5.5 AUTOMOTIVE SECTOR

With a special push from the government the Automotive Sector is in a good position to expand quickly thereby reviving the country’s export. Low credit costs and an available pool of labor would help this sector to reduce its overall cost and thus make better profits.

6. CONCLUSION

The revival of economy out of recession is majorly dependent on psyche of the people of the country. No matter how many stimulus packages or measures of austerity the government takes, all would fail unless the people change their mindset of being conservative and frugal in their expenditure which is heavily hampering the money circulation. The low confidence of people will further reduce the spending in the coming years which might push Spain back in recession.

So, as a matter of fact, Spain is going through the toughest phase of its economy these days but with the continuous measures the Prime Minister Jose Luis Rodriguez Zapatero is trying to take would probably help the country get out of this crisis soon. The situation has started improving from 2009 onwards developing the feeling and hopes among people that the worst is over.


Gaurav

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