The Economic Crisis in Spain: Contagion Effects and Distinctive Factors

Abstract

Since the year 2008, the Spanish economy has been immersed in the deepest crisis of its history. From being one of the most dynamic European economies in the decade of the 2000s, Spain has moved to be a nearly stagnant economy whose short-term prospects are far from being optimistic, clearly worse than those of most European countries. The aim of the chapter is to provide an explanation of the bad performance of Spain’s economy since 2008. In this chapter we argue that the current economic problems of Spain can be found in the unsustainable strategy of economic growth that was followed since the early 1990s. This expansion was based on an excessive resource to the external funding, leading to an unsustainable growth of the external debt, whose problems unleashed, first with the financial turmoils that took place in the years 2007 and 2008, and, second, with the crisis of the sovereign debt in the euro area that started with the crises of Greece, Ireland and Portugal. Also, there is the existence of unsolved structural problems in the labour market, namely the excessive use of the fixed-term employment contracts, which since the early 1990s have contributed to amplifying any shock affecting the Spanish economy, making it more unstable and pro-cyclical; and, finally, the wrong fiscal policy implemented both before and during the crisis, which led to a pro-cyclical fiscal stance before the crisis, to the generation of an unsustainable fiscal deficit at the very beginning of the crisis, and to a pro-cyclical fiscal stance during the crisis because of the need to adjust the fiscal deficit.