Austerity vs. Growth - Economic Crisis in Spain
ETEA - Grado en Administaricón y dirección de empresas
Curso 2012-2013
Spanish and international economy
Austerity versus growth
Individual homework #1
The European economic crisis started in year 2010, the first visible serious problem was the debt crisis in the Greece and then other problems have showed. But the main fault had beginning in inconsistent European integration process. The EU has chosen halfway solution of economic integration - they have accepted just common monetary policy without the fiscal union. So from the very beginning of common European currency project instantly grew problems between integrated states, because unified monetary policy wasn’t convenient to everybody. Low interest rate (fixed by ECB) caused that some of the marginal economics have been growing too fast and on the opposite side developed economics have been growing really slowly. In the Spain low interest rate after year 2002 caused a boom in construction and Spanish economy became extremely dependent on this type of sector. The annual GDP growth was until year 2008 in interval 2-4%.
But the inflation rate was significantly higher than interest rates, so finally real interest rates were in negative values. Thanks to that in the Spain mortgages were cheap in that time and its demand of private sector was enormous. But Spanish banks didn’t have enough liquidity and had to use the external capital. Other inequality at market was showed when with growing price of real estate also grew its demand. However Spanish government discharged the fiscal criteria accepted by EU, they couldn’t control this irresponsible behaviour of private sector, because interest rates were held by ECB. So after collapse of the US mortgage market when ECB elevated interest rates, Spanish construction sector got into the trouble, real estate lost its prices and some people wasn’t able to pay back their mortgages. Construction and related sectors have a high share of national income in Spain,
Curso 2012-2013
Spanish and international economy
Austerity versus growth
Individual homework #1
The European economic crisis started in year 2010, the first visible serious problem was the debt crisis in the Greece and then other problems have showed. But the main fault had beginning in inconsistent European integration process. The EU has chosen halfway solution of economic integration - they have accepted just common monetary policy without the fiscal union. So from the very beginning of common European currency project instantly grew problems between integrated states, because unified monetary policy wasn’t convenient to everybody. Low interest rate (fixed by ECB) caused that some of the marginal economics have been growing too fast and on the opposite side developed economics have been growing really slowly. In the Spain low interest rate after year 2002 caused a boom in construction and Spanish economy became extremely dependent on this type of sector. The annual GDP growth was until year 2008 in interval 2-4%.
But the inflation rate was significantly higher than interest rates, so finally real interest rates were in negative values. Thanks to that in the Spain mortgages were cheap in that time and its demand of private sector was enormous. But Spanish banks didn’t have enough liquidity and had to use the external capital. Other inequality at market was showed when with growing price of real estate also grew its demand. However Spanish government discharged the fiscal criteria accepted by EU, they couldn’t control this irresponsible behaviour of private sector, because interest rates were held by ECB. So after collapse of the US mortgage market when ECB elevated interest rates, Spanish construction sector got into the trouble, real estate lost its prices and some people wasn’t able to pay back their mortgages. Construction and related sectors have a high share of national income in Spain,