Tuesday, December 27, 2011

Why Spain doesn't fit the narrative of a spendthrift Mediterranean country.

Why Spain doesn't fit the narrative of a spendthrift Mediterranean country. 

But the Spanish government then proceeded to run a balanced budget on average - that is to say, its borrowing was zero - every year until the eve of the 2008 financial crisis.

And as Spain's economy grew rapidly, its debt ratio fell to a mere 36% of GDP by 2007. Germany's, by contrast, continued to rise.

So, given this record, why are markets telling us that they fear Spain may not repay its debts, while they think Germany's debts are the safest bet within the eurozone?

The reason is that Spain is facing an impossible economic dilemma.

When Spain joined the euro, interest rates fell to the much lower levels typical in Germany.

While the Spanish government resisted the lure of cheap loans, most ordinary Spaniards did not.

The country experienced a long boom, underpinned by a housing bubble, as Spanish households took on bigger and bigger mortgages.

House prices rose 44% from 2004 to 2008, at the tail end of a housing boom, according to ministry of housing data. Since the bubble burst, they have fallen 17%.

During the boom years, Spaniards earned more and spent more.

That helped to flatter the government's finances. More economic activity means more tax revenues.

But it also helped push Spanish wages up to uncompetitive levels.

Unit labour costs in Spain - a measure of the cost of employing an average Spaniard - rose 36% from the euro's creation in 1999 until the end of 2008.

Read the rest of the story here

http://www.bbc.co.uk/news/business-15734280

No comments:

Post a Comment

Ebay Auctions of Spanish Stuff

About Me

Today is a new day, the sun is in the Sky. I wake up this morning and greet the new day.