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Spain’s Financial Crisis Cause and Effect Essay

Spain is currently experiencing the worst economic crisis since 1950s. The economic crisis has been attributed to global financial crisis that the economy faced. However, its internal imbalances accumulated in the pre-crisis period aggravated the situation. The global economic crisis that began in the late 2007 and worsened in 2008 accelerated the end of expansive cycle. As such, it triggered a severe adjustment of the imbalances accumulated during the previous decade, whose correction continues to these days, four years later, pending its completion (Jackson, 2010).

Changes in domestic demand

The rapid deterioration of the international macroeconomic context highlighted the structural weaknesses of the Spanish economy, especially after 2008 (Miller & Vines, 2006). Ideally, the Gross Domestic product declined rapidly. This was facilitated by the contraction of the private consumption by approximately 1.4% in 2008.

For instance, the demand for houses, new automobiles and retails decreased immensely in the early stages of 2011. According to Angelides (2011), there was a sharp decline in the new business activities and the service sector. In addition, fixed investment plummeted by approximately 5.2%. Overall, dismal confidence in household activities, increase in Spain’s debt levels, and aggressive increase of fiscal asceticism plan enhanced the decline in domestic demand.

Dependence in property development and construction activities

Ideally, the Spanish growth model inclined on the changes in the domestic demand, and specifically it depended on the property development and construction activities that affected the economy, which has proved to be a failure.

The disproportionate growth in the real estate sector, coupled with the expansion of credit needed to finance it, is at the basis of the economic imbalances. In the real estate sector, a spiral off growth in demand, prices and supply fueled a substantial bubble, which burst when the impact of the international crisis was felt in Spain (Kolb, 2010).

High unemployment rate

Unemployment rate has always been a key factor in determining the stability of an economy. The available data, denoting the unemployment rate of Spain’s economy, is quite alarming. In 2007, the unemployment rate was at 8.3%, but currently the rate is over 20%. The young individuals, who had lower qualifications, demonstrated a high rate of unemployment, unlike the older citizens. In addition to the high unemployment rate, domestic demand in Spain fell by 7.6% unlike in the euro zone, which merely fell by 1.6%.

Households reduced their savings rate to historically low levels and increased their fixed capital investment to maximum levels. In 2007, this behavior decisively contributed to the increase of the households’ debt up to 130% of their gross disposable income (GDI) (Angelides, 2011). Currently, the ratio of debt lies close to 125%, higher than the euro zone average (98%), similar to the United States (118%) and lower than the United Kingdom (151%).

Non-financial firms’ debts

Consequently, other cause of Spain’s financial crisis is the non-financial firms’ debts, which includes the gross operating surplus. According to Lieberman (2011), Spain’s non-financial firms’ debt is about 750% surpassing those of the euro zone (550%), the UK (650%), and that of U.S. (350%). Since the peak reached in 2008, the ratio of firm debt has only been reduced by 1% due to the scant growth of firms’ results.

As far as wages are concerned, in the early years of the crisis, remuneration per employee continued to increase as a result of the inertia of collective bargaining and the sharp increase in non-wage costs, such as compensations for dismissal.

Currently, the government has undertaken strategies that aim at improving the economic condition of Spain. One of the strategies includes the Updated Stability Programme initiated in early 2010 (Lieberman, 2011). The program establishes a procedure for a gradual reduction of deficit to 3% of GDP by 2013. The initiative proved positive, as in 2010, fiscal consolidation was achieved thanks to a one percentage point increase in the ratio of tax revenues on GDP, and a fall of 80% in the ratio of public expenditure on GDP.


Angelides, P. (2011). Financial Crisis Inquiry Report, New York: Diane Publishing Co.

Jackson, J. (2010). Financial Crisis: Impact on and Response by the European Union, London: John Wiley & Sons

Kolb, R. (2010). Lessons from the Financial Crisis: Causes, Consequences, and our Economic Future, London: John Wiley & Sons

Lieberman, S. (2011). Growth and Crisis in the Spanish Economy, London: Routledge

Miller, M. & Vines, D. (2006). The Asian Financial Crisis: Causes, Contagion and Consequences, New York: Cambridge University Press

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