Read the case study “The Spanish Government’s Response to the Debt Crisis” below and conduct further research on this topic. What are your conclusions regarding the following:
What was the cause of the debt crisis in Spain?
What actions has the Spanish government taken to reduce its national debt?
What problems have resulted from the size of the national debt in Spain?
To what extent is the Spanish debt crisis an international problem rather than merely a national one? (Dransfield, 2014, p. 208)
Please explain your answers.
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Case Study: The Spanish government’s response to the debt crisis
In July 2012 the Spanish economy required a bailout from the European Central Bank and from stronger European economies – particularly Germany. The Spanish economy was suffering from the wider crisis in the Eurozone and more specifically because most Spanish banks had taken a hit as a result of the credit they had extended to borrowers in the Spanish property market, which had crashed with many firms going bankrupt.
As unemployment increased in Spain to dramatic proportions (24 per cent by July 2012) the Spanish government had had to pay out more and more money on social security while its tax revenues continued to fall. The net effect was that the national debt increased as government revenues fell well short of government expenditure.
The issues for central government were mirrored in the finances of regional governments in Spain. By July 2012 the Spanish government was having to pay a record interest rate of 6.459 per cent to sell five-year bonds, while rates on ten-year bonds had risen to 7 per cent. (By comparison France was only paying 1 per cent on five-year bonds.)
The Spanish government’s response to the debt crisis was to introduce an austerity package of government cutbacks in public spending. This was not a popular measure with many people in Spain, with mass protests in cities across the country.
