TOPIC 1: GROWTH AND STRUCTURAL CHANGE

1.1 SPANISH ECONOMIC GROWTH: BASIC TRENDS

INTRODUCTION:
Spain in the last 60 years has been characterised by:

● A rapid growth of GDP per capita income (four-fold (4x)).

More growth than the US and EU: The poorest countries have bigger growth rate (Converge
in GDP per capita with the EU)

● Imbalances (responsible of the actual crisis)

● Transformation of Lifestyle and Work Patterns
● Organisational and Governance Changes
● Interconnected Nature of Progress: between economic progress and institutional
modernization.
● NO more Isolationist Tendencies

MAIN FEATURES OF SPANISH ECONOMIC GROWTH SINCE THE SIXTIES

1. Spain exceeds the rate of progress of the more mature European nations.
● Period pre-definite per capita GDP as the indicator
● Shows a greater capacity of growth→ Starting out from a lower level of
development.

2. Similar time profile between Spain and European community countries

The common profile combines 3 different trends:

● The golden age (50’s - 1974)
● The recovery from the oil crisis (1975 - 1980)
● Sustained increase during 1981 - 2008 → Until Germany unification 1993

3. Deeper of Economic Crises (70s, 1995, 2008, 2013)

● Oil crisis, in spain occurred on the 2nd half of the 70’s
○ + Intense → The increase of salaries due to the democracy transaction.
● Setback in Convergence
● 2010-2013 crisis deeper due to rigidities in labour markets

1
 4. Greater fluctuations in Spain's GDP
● Significant fluctuations in comparison with EU-15
Thanks to:
● Process of political and economic harmonisation
● Late external openness
● Flexibility into the labour market.

1.2 DRIVING FACTORS OF SPANISH ECONOMIC GROWTH

An increase in per capita income can result from:
● An increase of workers (employment rate).
➔ Providing work to everyone who seeks it
𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑒𝑠
◆ Δ 𝐴𝑐𝑡𝑖𝑣𝑒
→ Changes in employment regulation and labour markets
institutional framework

➔ People willing to work →Depends on the birth rate and of the migratory flow
◆ Δ Población activa/población total→(demography + immigration)

● An increase in productivity per worker.

➔ Δ physical capital perworker (machinery)
➔ Δ human capital per worker (education, training)
➔ Technological progress and total factor productivity TFP (innovation
and R&D)

FACTORS THAT DRIVEN SPANISH ECONOMIC GROWTH SINCE THE 1961

Spain GDP grew mainly due
● Δ in labour productivity
Employment rate contributed zero to growth

● Δ Capital labour ratio (K/L) due to increase in domestic and freeing investment
● Δ Human capital stock due to increase in schooling
● Δ Efficiency/ TFP improvements →Mainly foreign technologies.

In contrasts to the US/UK, the Spanish and EU labor markets→ more rigid and hence
employment growth was limited (particularly on 1961 to 1985)

2
 The growth pattern in the second subperiod (1986-2020):
● The labor productivity growth shows down
➔ Slower growth of physical, human capital and TFP
● Employment per capita growth becomes positive
● Physical and human capital stocks grow less due to increases in the weight of labour
● GDP per capita grew due to increase of the employment ratio
➔ EU countries created more employment (especially Ireland and Spain).
➔ Δ Labour markets flexibility and immigration

CONTRIBUTION OF PHYSICAL AND HUMAN CAPITAL TO LABOUR PRODUCTIVITY

GROWTH
In Spain the labour productivity growth is anti-cyclical ( has grown more during economic
crises)
● Creating lots of low-quality employment (temporary, low-productivity sectors)

Decrease in productivity per worker:

● R+D investment rates are lowers than EU and US percentages of GDP (2015: Spain
1.2%, EU 1.9%, and US 2.8%)
● Private sector R+D is especially low and depends on subsidies.
● Public sector R+D has difficulties turning into innovation.
● Spain has a huge presence of SMEs that do not invest.
● Low investment and penetration of ICT technologies.

Over time labor

productivity grows less
and less unless we
improve TFP
dramatically

1.3 ECONOMIC OPENNESS AND ECONOMIC AND MONETARY INTEGRATION

THE ECONOMIC OPENNESS OF THE SPANISH ECONOMY IN THE LAST 60 YEARS

The degree of external openness (X + M / GDP) of the Spanish economy has increased
considerably.

Stabilization plan of 1959 allowed Important dates for political integration

1. Open to foreign trade from 1966
2. Eliminate exchange rate control (foreign
exchange market)
3. Allow foreign investment (with limits)
from 1962
January 1986→we entered the EU (customs union)
June 1989→accession European Monetary System (EMS)
January 1993→we entered the European single market
January 1999→membership of the Economic and
Monetary Union

3
What benefits does monetary integration generate?
Advantages of monetary union:
● Efficiency gains (transaction costs disappear)
● Elimination of exchange rate risk
In addition, the price comparison is at 0 cost and immediate.

What are the costs generated by monetary integration?

● Monetary policy is delegated to a supranational authority (the ECB)
● The currency disappears→Renounce the use of the exchange rate policy (you cannot
devaluate your currency).
What can be done to minimize costs?
● • Centralize fiscal policy (common fiscal policy)
● • If the above is not possible, it is recommended:
○ Have very flexible factor markets
○ Allow member countries autonomy when designing their fiscal policies
What principles were followed when designing the EMU?
● Nominal convergence was prioritized (macro stability)
● Fiscal policy was not centralized → Why?
○ Lack of political will
● The fiscal autonomy of member countries was limited (public deficit ≤ 3% of
GDP)→Why?
○ Avoid moral risk
● The ECB was prohibited from financing member states → Why?
○ Guarantee the absence of political pressures

Has this design of EMU created any significant problems?

1. EMU is not an optimal monetary union

2. Convergence of risk premiums of the eurozone during the first years of Euro
operation (until the crisis)

3. High public deficits in most of the EU countries due to:

● Financial and economic crisis and the measures taken for it
● Rescue of the banking entities caused
● Forced to issue huge amounts of public debt to finance the + costly
internal devaluations

BEHAVIOR OF THE EUROPEAN PERIPHERY IN MACROECONOMIC IMBALANCES AFTER

ENTERING THE MONETARY UNION

Until 2007, they could

meet their growing
financing needs.

4
TOPIC 2: CURRENT SITUATION OF THE SPANISH ECONOMY

2.1. RECOVERY 2014-2019:

BACKGROUND

● From the end of 2013 until 2019, Spain recorded positive GDP variation rates and
grew more than the eurozone as a whole.

But before, starting in the USA, the world economy experienced a financial crisis of unseen
magnitude in years 2007-2008.

CAUSES OF THE ECONOMIC CRISIS (2008-13)

SITUATION:

● In the second graph we see a drop in GDP of up to 6%.

● In 2009, the world economy stopped growing
○ This relationship and trade between Spain and other countries (-exports).

Housing Bubble and Subprime Mortgages generated the bankruptcy of some US entities.

5
 1. Closure of financial markets
● The Spanish economy (and banks) cannot continue refinancing the debt that
they had incurred the previous expansionary stage ( to meet increased
demand).
● The volume of credit is growing and we cannot finance it without help.

The blue graph is the debt assumed by the European central bank.

2. Total paralysis of the construction sector (Due to the lack of financing and falling
demand)
● Losses for Spanish banking entities
○ high volume of risk contracted with the sector (60% of the total credit
granted by the Spanish banking system).

The graph on the right shows the rate of change in construction GDP.

While emerging countries and the USA were able to leave the crisis behind in 2010 thanks to
the dynamism they maintained….

The measures taken in Europe to fight it, and the rescuing of banks generated:
● Large public deficits in most of the EU countries, especially in those on the periphery
of the EMU (Greece, Ireland...)
They were forced to issue increasing amounts of (national) public debt to finance such
deficits.

6
Some countries had difficulties to finance their debt:

A sovereign debt crisis can be solved in three ways:

1. Budget adjustment: increase taxes, reduce expenses
2. Financing: coupled with smaller budget adjustment
3. Debt restructuring, i.e. renegotiating terms and rate, which results in loses for
investors (difficult to “sell”)

3. Interest conflicts in the Eurozone

➔ Crisis countries (“debtors”): Minimize budget adjustment (it hinders recovery
measures)

➔ The rest of countries (“creditors”): Maximise financing, and avoid

restructuring (as their banks are investors and they would lose)

The European Central Bank (ECB) 2010-2011 wanted to avoid restructuring national debt due
to potential contagion.

4. The design of the EMU (lack of a fiscal union + financial prohibition of States) made:
● The markets will question your ability to pay.
○ “Leave” from many countries
○ They demand higher interest rates on their debt.

THE VICIOUS CIRCLE BETWEEN SOVEREIGN AND BANKING RISK

The doubts about the payment of

the sovereign debt (due to large
volumes held) put into question
the solvency of the banks
generating a vicious circle that
almost broke the EMU.

7
EXPLANATORY FACTORS (WHAT MADE THE RECOVERY POSSIBLE IN THE 2014-2019 ?)

1. The ultra-expansive monetary policy of by the ECB

● Lowest interest rates
● Raising liquidity by buying debts

2. Euro depreciation (+exports)

● From 2001 to 2007 the euro appreciated (€1=$1.6) = Less exports

● Later, it depreciates and this encourages us to export more.

● The fall in the price of oil together with the depreciation of the euro also contributes
to the recovery of economic activity.

3. Recovery of foreign competitiveness.

● Due to Reduction of unit labour costs
○ Salary moderation
○ Job destruction

4. External shocks (“cabbage wind”)

8
MAIN CHARACTERISTICS
Growth is manly due to internal demand.
● Driver of the recovery of the economy from 20014-19.
Investment is the variable most sensitive to changes in the cycle In this case, it is the one
that grows the most.

Unlike what happened in previous expansionary stages, net external demand did not subtract
practically anything from growth in this period.

1. Private consumption
Δ employment
+
Lower int rate
+
High accessibility to credit
+
Improved household asset position (recovery of
housing prices)
___________________________________________________________________________________

= Δ private consumption.

Lower restrictions on public procurement →Δ public

consumption

2. Investment
Lower int rate
+
Improvement in financial conditions
+
Improvement in expectations
+
Δ profitability
_________________________________________________________________________________
= Δ Gross capital formation in capital goods and
construction.

3. Exports and imports

The improvements in competitiveness
+
Internalisation of companies
+
Instability of some tourist destinations
+
Depreciation of the € increased the X
_________________________________________________________________________________

Compensated the Δ that the M registered with the

recovery of demand.

9
MACROECONOMICS RESULTS

1. Employment (mainly temporary employment)

● GDP and employment are correlated variables.
● Reduction of unemployment (Still very high, especially among young people, the
elderly and low-skilled people).

2. Oil price decrease

● + salary moderation
○ made it possible for inflation to remain at very low rates.
The more economic activity, the more is collected and there are fewer unemployed, therefore
unemployment spending decreases.

3. External surplus despite the reactivation of

demand due to:
● The increase in exports
● Decrease in the price of oil

The surplus was achieved without resorting to currency

devaluation.

4. Reduction in public deficit in the period

2013-2018.
● Return to economic growth
● Adjustments made in 2012
○ Spending moderation
○ Tax increases
● Reducing the financial burden

10
2.2. THE COVID 19 IMPACT
The world wide had a glowdown of the GPD.
1. Supply shock → Due to lockdowns and firm closure

2. Demand shock → Social distancing, preventing some activities

➔ Drop in the domestic demand (lockdown)
➔ Drop in external demand

Impossibility to consume some goods → = Negative impact to private consumption and

investment

PANDEMIC AFFECT MORE TO THE SPANISH ECONOMY

The Spanish economy is based on tourism, hospitality, commerce....

INTERNAL DEMAND AND EXTERNAL DEMAND IN 2020

Δ in public consumption → due to the

increase in health spending.

Decrease in private consumption and

investment due to:
➔ Impossibility of consuming goods and
services
➔ Increase in precautionary savings

The contribution of net external demand did

not help economic growth due to the fall in exports.

11
MACROECONOMIC IMBALANCES IN 2020

1. The impact on the labor market was reduced thanks to:

● The ERTEs, reflecting “the hibernation of employment”

2. Negative inflation variation rates due to:

● The sluggishness of demand
● Oil price drop

3. Reduction of the current account surplus due to:

● The fall in tourist exports

4. Public deficit increases again due to:

● Automatic fiscal policy stabilizers
● High volume of resources (health
expenditure and ERTE's)

This caused the consequent Δ in the stock of public

debt.

12
2.3. CURRENT SITUATION: FROM THE PANDEMIC TO THE ARMED CONFLICT

MEASURES TAKEN TO DEAL WITH THE PANDEMIC

1. Expansive fiscal policy

To help the groups most affected by the crises:
Direct aid to companies, ERTE, tax holidays, public guarantees, support…

2. Central banks practiced a super-expansive monetary policy

This provide abundant and cheap financing to credit institutions and considerably increasing
their asset purchase programs…

EVOLUTION OF THE WORLD ECONOMY IN 2021

The measures taken by governments, central banks and the EU + Advances in the level of
vaccination = Growth of the world economy in 2021.

13
Recovery of the Spanish economy was slower → Importance of tourism

INTERNAL DEMAND AND EXTERNAL DEMAND IN 2021

1. Private consumption/investment increases

= recovery of domestic demand, due to:
● Low interest
● Materialization of spending
decisions postponed by the
pandemic

MACROECONOMIC IMBALANCES IN 2021

● Intense employment recovery, but unequal according to sectors, regions and sexes.
● Notable rise in inflation due to:
○ The base effect
○ The recovery of demand
○ The bottlenecks
○ The rise in energy costs

● The good performance of tourism made it possible to continue registering a surplus

in the current account balance.

● Reduce of the public deficit (which nevertheless remained high), due to:
○ Increase in revenue
○ Reduction in health spending

● Reduce of the volume of Spanish public debt, due to:

○ The reduction of the deficit

14
TOPIC 3: THE SPANISH LABOUR MARKET

3.1. BASIC FEATURES OF THE SPANISH LABOUR MARKET

SPANISH LABOUR MARKET: BASIC CONCEPTS

Unemployment types (depending on their causes):

1. Structural: Reflects the rigidities existing in the labour market generated by the
regulatory framework and the functioning of the institutions

2. Cyclical: Caused by the oscillations of aggregated demand.

3. Frictional: Reflects the imbalances that occur in the labour market as a result of
rotation and incorporation process into the labour market

MAIN FEATURES OF THE LABOUR MARKET IN SPAIN

1. Stable activity rate started to increase due to:
● Incorporation of women into the labour market
● Migratory flows

High rates of job creation and destruction with a markedly procyclical character (since
1985).

15
16