Research Euroland: Fact Book Spain

Spain was hit hard by the financial crisis and the bursting of the housing bubble and now has the EU’s highest unemployment rate. It is now above 25% and the decline in employment does not seem to have stopped. One major challenge is the extremely high youth unemployment (above 50%). The decline in GDP in the first years of the crisis was not strikingly high but job destruction was severe compared with the rest of euro area.

The housing market boomed prior to the crisis and credit expanded rapidly. In less than a decade household debt tripled. Spaniards now refer to this period as "cuando pensábamos que éramos ricos" – when we thought we were rich. However, the housing market bubble burst. House prices began to decline and demand fell and as excess supply surged, housing starts came to a virtual standstill.

House prices are still falling.
Another challenge has for many years been the low productivity growth and high unit labour cost as a result of an inflexible labour market. However, over the last few years, high unemployment and lower wages have led to higher productivity growth. Spain has been challenged by a substantial current account deficit but the deficit has been reduced substantially and the IMF expects Spain to have a current account surplus by 2014.

The Spanish Prime Minister Mariano Rajoy (People’s Party) announced in March 2012 that Spain could not meet its deficit target in 2012 as a consequence of the worsened economic outlook.

The budget deficit target for 2012 has been revised several times and currently stands at 6.3% of GDP –substantially higher than the 4.4% of GDP that was the target at the beginning of the year. It is consensus in the financial market that Spain will have a hard time meeting this year’s fiscal target as well as the official growth forecast for 2013, which is currently -0.5%.

During the summer, Spain was granted up to EUR100bn in financial assistance to the country’s banking sector funded via the EFSF. In the financial markets, focus is currently on when/whether Spain will ask for a precautionary EFSF/ESM programme, which is a condition for ECB intervention in the secondary market.

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