The European sovereign debt crisis continues to impact major EU economies, with some of the economies grossly in foreign debt. Beginning in 2008, governments have increased their debt levels, without the ability to repay or re-finance their debts without assistance from other nations. The causes of this ongoing financial crisis can be attributed to various events such as the real-estate bubble in some countries, a slowing economy and recession, unemployment in several sectors, and excessive spending by ill-disciplined governments.
Most of the Euro-zone countries have exceeded their borrowing limit of three percent of their country’s GDP. In countries such asSpainandItaly, the build-up of debts occurred prior to 2008.Spaincurrently owes nearly 1.9 trillion dollars in foreign debt to theUnited States of America,France,Portugal,Italy,Japan,Germany, and theUnited Kingdom.Spain’s problems are different from the other European countries. The housing and construction bubble burst in 2008 were the main causes of the downward spiral ofSpain’s economy.
Things that went wrong
Up until 2008, the Spanish government’s borrowing was under control and the deficit was less than three percent of the GDP. Between 2004 and 2008, the housing and property prices rose nearly 44 percent. This bubble was fuelled by cheap loans to builders and home buyers. However, with the financial crisis in 2008 and the subsequent property collapse, the Spanish government’s deficit went up to 8.5 percent of the GDP.
The Euro-zone’s fourth largest economy is now teetering on the verge of total collapse. One in four Spaniards is unemployed. In the European Union, Spainis the country with the highest unemployment rate of 24.4 percent. The bubble burst [r1] affected the banking sector drastically. The country’s banks are deep in debts and need 59 billion euros to get themselves back up. One of the country’s largest banks, Bankia, has asked for a 19 billion euro bailout package.
House prices have dropped by 25 percent since 2008 because of which the banks face a risk of loan non-repayment of nearly 155.84 billion euros. Since smaller, weaker banks have merged, many jobs have been lost. Nearly, 51.5 percent of the youth are unemployed and creeping towards poverty. To ease their problems, the Spanish government has been offered a 100 billion euro bailout package. But this may just prove to be a temporary fix. For a long-term solution, the Spanish government will have to cut its deficit and reduce borrowing bySpain’s regional governments, which are beyondMadrid’s control.
Why are 17 regional governments to blame?
A huge chunk ofSpain’s financial problems can be attributed to the excessive spending by the regional governments on infrastructure projects and costly health care. It was during the real estate boom that these governments increased their borrowing for investment in hotels, properties, etc. When the 2008 crisis occurred, consumer spending reduced and tax revenues fell drastically. And yet, the governments’ have not reduced their spending. Finding it impossible to borrow any more, the regional governments have requestedMadridfor 18 billion euros as relief. Reduction in spending has caused wage cutbacks, and the Spanish labour market is badly hit. Companies are busy repaying debts and do not want to spend more.
The Road Ahead
But the nasty question to be answered here is: Should there be cuts in spending? It’s quite a dilemma. Cutbacks on spending will only deepen the recession and increase unemployment. Less wages imply less debt-repaying capacity. More strikes and protests are bound to happen as a result. However, if spending is not controlled then the entire economy will collapse. International markets will lose the last remaining bit of confidence and no one will lend the Spanish government any money. This is truly a worrying time for world leaders and in particular, forSpain’s Prime Minister, Mariano Rajoy.
Kritika Pramod Kulshrestha