Overcoming Challenges: the Modern Economic Recovery in Spain

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MADRID — Almost a decade after the housing bubble burst in Spain in 2008, the country’s GDP continues to grow in 2017 for the third year in succession, and unemployment rates are dropping. Although economic recovery in Spain seems to be under way, various challenges remain.

A Boom, then a Burst 

After Spain adopted the euro in 1999, the country’s economy experienced a boom. Cheap loans helped finance large numbers of construction projects. Housing prices rose by 44 percent between 2004 and 2008, until the bubble burst and Spain was hit hard by the recession. The economy contracted in the following years. Until 2013, unemployment levels rose and reached a level of almost 27 percent. As many borrowers struggled to pay back their loans, several banks experienced great losses.

After the election of the conservative People’s Party (PP) and Prime Minister Mariano Rajoy in 2011, a number of reforms were implemented to stabilize the economy. In 2012, financial support from the EU restructured the banking sector. The banking bailout and recapitalization package were “vital” for economic recovery in Spain, according to the Financial Times, since it allowed credit to flow to private actors again.

Spain also implemented austerity measures – cuts in spending and raising taxes – in order to reduce budget deficits. Spain also reformed the labor market in 2012, giving companies more flexibility to ease the creation of employment.

The Need for Reforms

In some ways, the reforms have come to fruition and steered economic recovery in Spain. Since 2015, the economy is growing again, with GDP growth rates of over three percent in the past two years. In 2017, further growth of at least 2.5 percent is expected. The export sector has grown and diversified, and unemployment has dropped again to 18.4 percent in December 2016.

Yet a look beyond these figures shows that it is yet too early to celebrate. The unemployment is still twice as high as the Eurozone average. Youth unemployment stays at exorbitant rates, 41 percent in February 2017. The labor reforms and the renewed flexibility for employers came at a high cost for workers. Real wages have dropped, a majority of the newly created jobs are based on short-term contracts, and conditions for dismissals eased for employers. This resulted in growing inequality and the emergence of a new class of working poor.

A report of the European Commission stated in February 2017, that the economic growth has only led to a minimal drop in poverty. The report outlines that the high levels of temporary employment have negative social and fiscal implications and affect productivity. The limitedness of social benefits and support for families compared to other EU member states were also criticized.

In 2017, Spain is still confronted with many challenges. Unemployment, as well as poverty rates, remain high. The labor market conditions result in a loss of human capital, as many of the educated youth leave the country. In the first months of the year, the inflation rate has also increased, potentially threatening further economic growth.

The crisis has also taken its toll on Spain’s political stability. The austerity measures and labor reforms were hugely unpopular and, combined with corruption scandals, led to an erosion of support for the PP. In 2016, the country underwent a political deadlock without a government for ten months, after two general elections remained inconclusive without a simple majority. In October, Rajoy’s party was able to return to power as a minority government.

To reach decisions, the PP is now forced to compromise in parliament. The second strongest party is the Spanish Socialist Workers’ Party (PSOE), followed by Podemos, both democratic socialist forces. This shows in the 2017 budget plan that is steering away from the previous rigidity of austerity.

The budget increases spending on social measures to reduce child poverty and support the unemployed, but also holds onto the objective to decrease public deficit spending further.

According to an OECD economic forecast published in June, economic recovery in Spain “is projected to remain robust in 2017 and 2018, although at a more moderate pace.” As conservative and left-leaning forces now have to compromise in parliament, there is hope that the economy will not only grow further, but that larger parts of the population will profit from the progress as the focus on equality increases.

Lena Riebl

Photo: Flickr

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About Author

Lena Riebl

Lena is from Leipzig, Germany, and is currently an exchange student at Ohio University in Athens, Ohio. Her academic interests include American Studies, history and international politics. Lena is a soup enthusiast: if she could only eat one food for the rest of her life, it would be potato soup!

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