The decrease in joblessness in Spain and the Catalan crisis

The article states about the unemployment rate of Spain which feel to a nine year low in the third quarter. The rate of joblessness declined to 16.4 percent in the last three months of the year 2017. With increase in hiring in the construction, industry and services, the rate of growth of unemployment have fallen down to a nine year low. Spain had experienced a constitutional crisis in the year 2017, which is termed as Catalan crisis. In case of Catalan crisis, there had been an ongoing political conflict which took place between the government of Spain and the government of Catalan. It took place over the issue of Catalan independence. The joblessness have increased to 26% few years ago. Spain had been experiencing nearly the highest level of unemployment in the developed world. The youth unemployment is also higher and had been at 42%. There had been many factors which had suppress the labor market in Spain. Spain have also experienced a negative growth of the gross domestic product until 2013 (Ruiz, Stupariu and Vilariño 2015). The major reasons behind the mounting rate of unemployment are shaky foundations of the economic model, rigid labor markets, banking crisis and corruption, crisis in the education system and increased in the flow of immigrants. Unemployment had been one of the major problems in Spain and it is higher than in other western European countries. Due to the economic crisis which took place in 2012 and 2013, the rate of unemployment had rose even higher. Spain had also known to have faced one of the highest rate of unemployment in the European Union. When compared to the other OECD countries, it still suffered from the highest unemployment rates. In the recent years Spain have also known to have shed around 203,000 jobs. The job creation has also experienced the worst in the month of august 2008. The paper will mainly focus on the financial crisis of which Spain had suffered from 2008 to 2014.  This financial crisis is even referred to be the “Great Recession” in Spain. In this situation, Spain had a debt crisis when the country was not able to bail out its financial sector. The paper will also state about the weaken growth model of Spain leading to crisis, the consequence of the banking intermediation in a tentative bubble and the effects of extrinsic disequilibrium.

Figure 1Long run and short run aggregate supply

In case of long run aggregate supply, there is a net change in the Potential GDP due to change in the aggregate labour hours and change in the labour productivity.

In case of short run aggregate supply, there is also change in the potential GDP and in the cost of production. The diagram also shows the change in wages, resource pric and government polices.

Figure 2 Aggregate demand

There is a change in expectation of household and firms along with change in government’s demand side policies. There is a change in word economy and change in spending variable in aggregate demand.

Factors contributing to Spain’s high unemployment rates

The banking industry of Spain have remained quite speculative in case of funding corporations. The economy of Spain have also entered in recession. Low efficiency in the public administration have also affected the productivity of the firm negatively. The overall growth of Spain in 2016 was around 3.2%. The five major challenges that the economy of Spain have faced are  low rate of consumer consumption, huge amount of debt, large scale of emigration, income disparity along with high unemployment rates.

The wage moderation have declined competitiveness in the product market with the growth of consumption which fell during 2016 as the tax cut have ended (Fernández and García 2017). Therefore it can be said that a decrease in the competitiveness of the business will be having a negative impact on the consumption of the consumer and it tends to decline of the consumer confidence in the third quarter of 2015.

As a result of poor employment rates, there had been a huge rate of emigration out of Spain which had reflected in the attitude of the job market which will be not improving in the near future. In the year of 2015, the emigration reached a high of 50,844. As there were more skilled workers compared to the available jobs which have contributed to emigration.

Another reason behind the financial crisis is the high rate of unemployment which had increased to 2.5 percent in the year 2014. Although the rate remained high even in 2016. In the year of 2014, the rate of unemployment was 51.8%. The macroeconomic adjustment process in the dual and the rigid labor market resulted in the destruction of the employment which have recently started to stabilize.

Figure 3Aggregate expenditure model

The 2008-2014 Spanish financial issue was also known to be the Great Spanish Depression which started at the world financial crisis of 2007-2008. The financial crisis made the country a late contributor in the debt crisis that took place in European sovereign when it had to pay €100 billion rescue package which was given by European Stability Mechanism. The recession which Spain was experiencing was a multifaceted crisis with the public sector, financial system, corporate sector and households all together involved in the evolving process. The financial crisis took place as the economic activity had been only biased towards construction and real state which took place as a result of regulation of labor market which took place mainly because of temporary and seasonal jobs. Secondly due to the housing market which provided huge scope for expanding the demand and supply  and the product and labor markets which are being poorly regulated leading to dual economy.

The main cause behind the financial crisis of Spain was the housing bubble and the unsustainably high degree of growth of the gross domestic product. The huge amount of tax revenue has taken place as a result of property booming investment where the revenue is kept in surplus. The banks at that time were also able to hinder losses and the earnings volatility, deceive the investors, analysts and also financed the Spanish real estate bubble. The impact of the crisis were highly  drastic in nature  for the Spanish economy. It have resulted in the economic downturn which have resulted in the rise of unemployment or bankruptcies. In the year of 2012, the global economic activity started to decelerate resulting to complex macroeconomic and financial environment in the euro area. This also resulted to slowdown in the pace of growth of all the emerging economies leading to low growth of the world trade.

Macroeconomic challenges faced by Spain in the long term

Employment crisis: the rate of unemployment have  hit 17.4% in the month of March 2009andthe total jobless have doubles in the next year where nearly two million people lost their jobs. By the month of July 2009, it has known to have shed around 1.2 million jobs within a year and by March the rate of unemployment in Spain reached 24.4% which is double the Eurozone aggregate. The unions then started a general strike as a result of job cuts and low wages. Large scale of immigration took place and continued throughout the 2008, however by 2011, the total number of people leaving the country had taken over the number of arrivals which made Spain, the emigrant country 2013 (Ruiz, Stupariu and Vilariño 2015). The sluggishness of the growth of the gross domestic product continued to stay until the mid-2013. The worsening situation of Greece in 2012 along with the recession taking place heightened tensions in the economy. In the early 2012, the funding conditions of the markets for the Spanish banks became much tighter. Another factor which resulted to huge rate of growth of non-employment in Spain is associated to the structural traits due to the labor market. This resulted to a high rigidity of wages and hours worked by the workers.  The segregation of the labor resulted to a dual market labor where the labors with increased wages coexist with the low wage earners with little protection. This is why the rate of unemployment was much higher than the average. The sharp appreciation of the real exchange rate also resulted to high rate of unemployment.

Figure 4 Rate of unemployment

One of the main reason behind the financial crisis in Spain was the housing bubble the price of the real estate rose to about 200% from 1996 to 2007.  More than 500, 000 new properties were built in Spain in the year 2004 and 2005.  In the country of 16.5 billion people, there were more than 20 million houses where 3-4 million houses were empty.   When there was a presence of speculative bubble in Spain, it became one of the nastiest affected nations. Between the years 2007-2008, Spain had experienced the sharpest plunge in construction. The bust of the housing bubble along with the financial crisis had resulted to sharp current account adjustments. At the time of pre-crisis in the economy, Spain had created some features which lead to the formation of the housing bubble. The hosing bubble took place as the banking sector was much capable of attaining external funding in order to change it in to mortgage credit and also a construction sector which was supported by the European structural funds, which resulted in rising of the  new houses and infrastructure. The transformation  in banking and  regulations of land  also provided a rise to the speculative housing boom.

The downward phase of the Spanish economy of the development cycle began in 2007. After few years the economy although recovered. As an outcome of the financial crisis, the economy went in to recession in 2009 (Cabrera de León et al. 2018).  The recession period was also quite long in the period of recession.   The toughest time of the crisis took place because of the product breakdown and also as a result of destruction of job in the year 2009he gross domestic product fell down to 6.3% and the unemployment took place around 800,000 people. The economy of the country although started to recover in 2010. The development of the output was also known to be 0.6% which was diffident when judged against the production loss.  Due to the financial crisis taking place the unemployment rate raised to 8.3% in late 2007to 20.1% in the late 2010. Between the year 2007 and 2010, the rate of unemployment in Spain increased from 8.3% to 20.1%. Throughout the years from 2010 to 2014 there has been extensive growth in the long term unemployment level which comes to 42.5% of the total (Lozano-Vivas and Martinez-Alba 2017). The growth of the level of unemployment has lead to a differentiating aspect in case of crisis in Spain. It was also been found out that the unemployment increased mainly among the young workers. The financial issue of the economy has lead to a decline in the output and also an extensive rise in case of unemployment. Also the explosion of the real estate bubble has resulted to a very strong shock on the economic operations of Spain and on the employment.  The real estate activities along with the high exposure of the banking also lead to housing crisis in the banking industry.  The main source of issue of the Spanish economy is the huge amount of the private debt which took place as an outcome of increased amount of liabilities of business and households.  The rise in the rate of debt of the private sector was five times more than in the Eurozone. The public debt of Spain mounted to 60.1% of the gross domestic product in the years of financial crisis. The economic recession resulted to a significant drop in the incomes of the firms and households which refrained the growth of the private debt. In the year 2012 and 2013 the macroeconomic situation worsened rapidly which resulted to fall in the gross domestic product which fell down to 4.2%. The financial sector was also becoming increasingly unstable in nature with marked increase in the non-performing assets, with a sharp decline in lending. The rate of unemployment was much less in the year 2006 and 2007

Figure 5 Growth of GDP

The banking sector reforms

The banking system of Spain has been stated as one of the best and the best equipped from all the Western economies so that it can cope with the liquidity crisis of the world. The starting of the crisis suggests that it was quite essential to move faster along with a changing process. The reform of the Spanish banking system mainly comprises of the three objectives which resulted to reorganization, capitalization and recognition of loses (Cabrera de León et al. 2018).  The institutional framework of the Spanish labor market creates an intergenerational injustice. Some of the main features of the reforms comprises of increase in the hiring with the help of reducing compensation of the objective, the porch of the workers which can be employed through the agreements of promotion of employment, introduction of the new restrictions in the temporary hiring and on contraction duration for services and work. A financial crisis takes place when the money supply have outpaced by the demand of money. The government in case of financial crisis have reduced the rate of interest and increased the extent of liquidity which has given the banks more money to lend in the market (Reinhart, Reinhart and Tashiro 2016). The government can increase the supply of money with the help of quantitative easing. The low inflation, low-priced euro and fall in the energy prices with the renewed financial stability in Europe supports the spending of the consumer.

Conclusion 

The two main reasons behind the financial crisis of Spain was the housing bubble with the high extent of growth of the gross domestic product. There is a huge amount of the revenue from the tax which resulted from the investment of property and also from the construction sectors. The problems that are generally encountered by the Spanish economy are usually not because of the cyclical downturn. The effect of the financial crisis on the economy of Spain have resulted a sharp decrease in terms of output and therefore a huge rise in the rate of unemployment.  The burst of the real estate bubble provided a very extensive shock on the activity of the economy of Spain and unemployment. The increased exposure of banking to construction and the operations of the real estate was the process of transmission of the housing issues into the banking industry. On top of that the Catalonia crises have also disrupted the recovery of Spain. After the crisis of about four years long, the economy of Spain became stagnant with only little prospects of recovery. The recovery of the economic activity will be remaining moderate due to many reasons which includes negative assumptions on the development of the public consumption and of investment in housing which took place in both 2011 and 2012. The recovery of the economic growth is quite strongly affected by the increased level of debt which is specially the private debt along with high rate of unemployment.  Therefore, it can be said that the difficulties of the international market along with the adverse situation of the financial sectors can adversely impacts the banking system which will pose issues for the economy.

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