This is Spain
The Spanish economy is one of extremes.
As one point a focus of the eurozone crisis.
At another the largest contributor of growth.
and more recently
the worst performing advanced economy
in 2020.
Spain's economic problems are often misunderstood.
In the years leading up to the Great Recession
its government expenditure was relatively stable.
However, a huge real estate bubble was lying in wait.
The question... is why?
Why did Spain go from a seemingly safe level of debt
to one larger than its economy?
How was the real estate bubble supported?
and since then, has Spain's economy
ever truly recovered?
Or in what ways?
To explore all of this
its worth taking a brief look at the economic history.
But first
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Now back to the video.
At the end of the Spanish civil war
in 1939
the nation lay in ruins.
Seeing the emergence of an incredibly isolated Spain.
A far cry from the country today,
which routinely ranks second in the world
for tourist arrivals.
Because of isolation and poor policies
under the early years of General Franco's Dictatorship.
Recovery and development was slow.
For example, the nation was excluded
from the US's Marshall Plan for European recovery.
Not reaching its pre civil war peak
in GDP per capita
until 1955,
Five years after most other Western economies did
despite World War 2.
In general, the economic policies under Franco's rule
weren't fixed, but varied during his time in power.
However, there was a trend from self reliance to liberalisation.
A key trigger of this change
was a dire shortage of foreign exchange reserves
by the late 1950s.
A consequence of failed self reliance
and isolationism.
Being a large factor in Spain's pivot to adopting
pro market policies.
Through the so called
plan of stabilisation and liberalisation
Creative I know (dry humour XD)
What followed was termed
the Spanish economic miracle.
Creating a sort of Iberian economic tiger
Costa Del Sol style!
Though make no mistake
Spain was a dictatorship
without the freedoms it enjoys today.
Its economic miracle has similar traits
to what we've discussed in previous videos.
An estimated three million people
or about 10% of the population
moved to urban areas in the 1960s
With many moving abroad.
Often providing valuable remittances in return.
This wave of liberalisation
coincided with Spain joining
international organisations like the GATT
A predecessor of the WTO.
Economic progress continued to gain pace after Franco
With well known Spanish brands
starting to gain international attention .
The transition to democracy also paved the way
for Spain to join the EU.
Or European Economic Community
as it was called then in 1986.
However, it's important to note that despite the great growth
Spain's official unemployment rate
was stubbornly high in the 80s and 90s.
A trend we will be discussing later in the video.
Now despite only joining the EU in the mid 80s
Spain decided to take the plunge
and be amongst the first to adopt the euro in 1999.
Intending to demonstrate
to the entire world
not only how far it had come
but how integrated and open the economy had to be.
Or so people thought!
Adopting the euro was a trade-off.
On the one hand,
it traded in its monetary sovereignty,
the ability to devalue its currency
and set its own interest rate.
On the other hand,
trade with its neighbours became a lot easier
as did paying for imports through a stronger currency.
And most importantly perhaps,
it gained access to cheaper credit.
Whilst this was a time of great change
there were a couple of striking things
about this period.
The flow of goods, services and the transfer of money
otherwise known as the current account,
took a downturn.
Notably, the country already had a negative current account
before adopting the euro.
Though this worsened.
Reaching its lowest level just before the Great Recession.
Something which isn't unusual
as recessions often cause imports to drop
and international credit to dry up.
The massive build up of credit
was a fundamental part
of Spain's economic bubble.
You see, credit became cheaper
Adopting the euro led many investors to believe
that the likes of Spain, Greece and Italy's credit
was as good as Germany's.
With increasing demand
causing interest rate differences to narrow
However, there is a common misconception that Spain's central government
was the one doing the borrowing.
This was certainly true for Greece
but for Spain, this really wasn't the case at all.
Spain's debt was low
and even posted budget surpluses
in the lead up to the crisis.
Begging the question, who was borrowing?
Well, this was largely done by firms
especially ones in construction.
But, who lent them money?
A large portion came from Spain's
regional savings banks through the international market.
Regional economics plays a large role in Spain
The country is split into 17 regions
with a very high level of fiscal decentralisation.
For example,
a lot of tax collection, education and health expenditure,
is dealt with by local and regional authorities.
Likewise, Spain possessed
some 45 regional savings banks before the crisis.
A lot of whom had gone all in
on lending money to speculative real estate.
To be fair though,
Spain kind of anticipated some type of debt problem
when they joined the euro.
According to the EU's own official report
they were the first country in the world
to require banks to set aside additional money
for non performing loans in the good times.
Which may sound strange
in a post financial crisis world.
But remember this was pre crisis
Setting aside an estimated 35 billion euros
something we found surprising.
So check out the link in the description below
for some light bedtime reading.
However as we're about to find out
the money saved up was far from sufficient
In the early part of the 2000s
the average house price sky rocketed.
Which to be fair, was a common trend in many economies
But the dependency in construction led growth
really set Spain apart.
For example,
credit for the real estate sector
far outstripped credit for the economy overall
By the time the crisis hit,
triggered across the Atlantic by rising mortgage defaults,
Spain's real estate debt's equated to almost half of GDP.
And make no mistake.
Spain was heavily reliant on construction related employment.
In 2007, more than 1/8 workers
were employed in construction.
Delivering more housing starts
than Germany, France, the UK and Italy combined.
This can be attributed to three core factors
The first being the cheaper credit
we mentioned earlier.
The second being the tax breaks and investment incentives
the government gave to the real estate sector.
Whilst the third, was the general economic growth model.
The model favoured construction activity
because of the sector's labour intensive nature.
Helping to drive down unemployment.
Politically speaking, pro real estate policies
also helped spur on higher prices.
Great news for the 80% of Spanish voters
who were home owners at the time.
However, just like all bubbles
at some point it had to burst!
From their peak, average house prices
declined by 45%.
Pushing many, way into negative equity.
Where the value of their asset was worth less than the debt.
Now as the credit dried up and panic took over the world,
people started to realise that building all these houses
assuming ever higher prices
just didn't make much sense.
Speculative developers who borrowed heavily
quickly turned into non performing loans.
On a scale, which far exceeded the provisions we mentioned earlier.
And remember, if you borrow a hundred thousand from the bank
and can't repay then you have a problem
but borrow a hundred million and can't repay
and then the bank has a problem.
And Spain's lenders certainly did.
Spain's response can be split into two periods:
the first part, involved the country trying to send its way out
spending more as a percentage of GDP on stimulus
than any country in Europe.
Not a problem, given their low debt.
However, as the Greek crisis evolved
attention quickly turned to who was next.
Sure Spain started with low debt
but its economic model
was fundamentally flawed.
Real concerns were raised
over whether Spain would be able to borrow enough
for long enough
to get its house in order.
Ultimately this led to the bailout of Spain's banks
and massive reform.
With only two of the forty five savings banks
we mentioned earlier
escaping the crisis unchanged.
By simplifying things a lot
numerous banks were merged to create one giant bad bank.
Using financial wizardry to separate the bad apples
from what ever was left.
It's important to highlight
just how much the crisis impacted Spain's economy.
A point we discussed in much more detail
in our video on Greece.
A big problem, is that by being tied to the euro
Spain couldn't just depreciate its exchange rate.
It had to under take painful structural reforms
to raise competitiveness.
A tough love approach
which saw unemployment rise to an eye-watering one in four
and millions leave in a brain drain of epic proportions.
So, it's fair to ask
Well, yes and no.
If you were to look at the pure stats in isolation
Spain's GDP overtook its pre crisis peak in 2017
Not only that, but in recent years
pre-2020 at least
it has become an engine room of the eurozone economy.
At times accounting for more than its fair share
of overall growth.
A lot of this growth has been on increases
in its exports.
Which has grown as a share of GDP.
One reason for this,
is that after a decade of painful reforms
average labour costs either declined or were typically lower
than other larger European economies.
Though to be fair,
productivity still lags some way behind.
On a more positive but related note,
its current account entered a surplus in 2016
for the first time since 1986.
And consistently has been there since.
Pointing towards a more sustainable growth trajectory.
Yet at the same time
it's only fair to point out that the nation
has lingering issues.
Which make a full recovery less likely.
One is its stubbornly high unemployment.
Which is related to how expensive it can be to hirer workers.
Redundancy costs are extremely high.
This has led to a large number
of short term temporary contracts
Possessing much less job security.
Because of this Spain's historically high unemployment
has been suggested to be slightly misleading.
Some of the officially unemployed
work or at least did before 2020 in the black market
to avoid the red tape.
Now, Spain's persistent unemployment issue
is also a product in part
of having the highest rate of in the whole of Europe
from education and training.
Helping to shine a light on
its notoriously high youth unemployment.
With all of these points coming to haunt the nation
during the Great Lockdown.
Which according to the IMF
Saw Spain record the highest contraction
of any advanced economy.
Much of this can be of course linked to
the hit to tourism.
Though this loses a little bit of weight
when you consider France;
the most visited nation on earth.
Experienced less of an impact.
Crucially as mentioned earlier
Spain has the highest proportion of temporary workers.
Comprising over a quarter of the work force.
Whereas in France,
they account for roughly sixteen percent.
With the lay off of these short term workers
helping to understand at least some of the difference
between the two nations.
What this also highlights is that
the Spanish economy is still grappling
with the legacy of its economic bubble
and most likely will for years to come
We've seen that Spain made incredible
progress from a dictatorship
to one of the largest economies in Europe.
Its entry to the euro was controversial
in more ways than one.
Which undoubtedly influenced its housing bubble.
Unlike other Mediterranean countries though
Spain's government debt was surprisingly low
before the crisis.
However, its economic growth model
one based on rising current account deficits
and a disproportionate reliance on construction, was not.
Private debts quickly became a public issue.
But since undertaking reforms,
its economy has improved.
In some cases dramatically, yet in others not so much.
We can't help but think that
Spain's poor performance during the Great Lockdown,
was at least in part
a result of its unresolved problems.
The real question
is whether they're likely to be solved
anytime soon.
And now it's over to you
Do you think Spain suffered the world's greatest housing bubble?
Or do you think that title belongs somewhere else?
To a country like Ireland
which has done considerably better in recent years.
What do you think lies in Spain's future?
A population crisis? Given its incredibly low
fertility rate?
Something we mentioned in soo many other videos.
Let us know what you think in the comments below.
Also, do check out our Discord server
the link to which is in the description.
Lastly, thanks for watching! :)
And as always,
see you in the next video!!!!