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The current economic crisis in Spain is an ongoing carry-over from the global meltdown of 2007, which engulfed the entire world market. However, Spain’s recovery has been erratic and at times stagnant, making her the worst hit economy in Europe. The fact that Spain is currently begging for foreign aid from the Eurozone to jumpstart her economic recovery shows that it remains the worst basket case in the European Union. This essay examines the current state of Spain’s economic crisis and her chances of recovering from this financial quagmire.
The Spanish economic crisis was triggered by several domestic factors, including long-term loans stretching for as long as forty years, the collapse of the real estate industry that led to the bankruptcy of major investment companies, and an all time high rate of unemployment that hit 24.4% in early March 2012 (House & Roman, 2012). Coupled with the rise of oil prices in the world market and subsequently, high inflation rates, Spain’s trade deficit had reached a staggering 10% of the national GDP by mid 2008 (House & Roman, 2012). Lack of domestically produced industry resources like fossil fuels has also forced Spain to import raw materials from other countries, which in turn contributes to high inflation and a huge trade deficit. Consequently, Spain has lost her market competitiveness against trading partners, and this single factor continues to hinder recovery efforts up to date.
Another major problem facing the Spanish economy is the misleading accounting standards that hide losses and give false impressions of earnings volatility. In particular, the use of the “dynamic provisioning” accounting technique violates the benchmarks set by the International Accounting Standards Board (IASB). In Spain’s case, the dynamic provisioning approach helped to obscure capital cushions and allowed an appearance of financial health whilst the situation worsened (Lorca-Susino, 2010, p. 161). As a result, most financiers suddenly found themselves stuck with worthless collaterals of over-prized real estate properties, effectively triggering a long line of bankruptcy claims.
The existence of a two-tierred labor force has not helped Spain a little bit in her recovery efforts. Instead, the system poses a big problem to employers in terms of wage negotiations. Privileged labor, constituting two-thirds of the labor force, is cushioned from the effects of economic crises by “armor-clad permanent contracts.” As a result, employers suffer the negative effects of economic recessions, and often try to regain by dismissing temporary workers (The Economist, 2009). Although Spain’s labor system is not responsible for the crisis, her privileged labor is a big hindrance to the nation’s ability to remain productive and competitive in the global market, as well as generate significant amounts of foreign reserves to help reduce her national debt.
Nevertheless, while optimism remains that Spain will eventually stabilize, there are many challenges to be overcome. They include addressing the high rate of unemployment, reducing the national debt, streamlining the real estate sector, and implementing sound fiscal policies to curb malpractices in the banking sector. In particular, a thorough restructuring of the banking industry and fiscal consolidation are necessary to gain the confidence of international lenders and investors. Cutting private debts that resulted from bad loans can also help revitalize domestic investment. This may involve merging affected institutions to consolidate capital and save on operating costs. Collectively, these measures will help Spain re-establish herself as one of the most stable economies in the European Union. Until such fiscal policies are fully implemented, Spain has a long way to go before emerging from the woods.