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Tuesday, 25 May 2010 00:00

Spain is not Greece

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Many factors are used to describe the economy of a country: unemployment, public & private debt, deficit, productivity, etc.

In May 2010, the Spanish stock market just experienced its worst week since October 2008. Greece-related doubts about its capacity to pay the huge public debt and the downgrading of Spain’s credit rating by Standard & Poor’s (from AA+ to AA), combined with the rumours that Spain could be experiencing the same problems as Greece, have created an atmosphere of uncertainty in the stock markets.

Five months ago, Greece started dominating headlines of all Europe’s major newspapers, always with bad news.

Experts assure everyone that the situation in Spain is different than the one in Greece, but measures still should be taken immediately. The concern is the speed at which the public debt is growing. Unemployment already affects 20.05% of the active population (4.6 million people).

The countries know as PIGS (Portugal, Ireland, Greece and Spain) are introducing unpopular spending cuts. In Greece, very strong measures are being taken, as VAT has increased from 19% to 23% during the last few months, public workers’ salaries have been cut by an average of 16% and pensioners receiving the highest pensions will lose their two extra monthly payments. In addition, tax increases have been applied. In Ireland, public workers’ salaries have been cut by 5%. Portugal raised its VAT by one point, highways will no longer be free of charge, and the income tax has been increased. France, the United Kingdom and Germany have also announced adjustment policies to be applied to their budgets.

The common currency, the Euro, has fallen to a new minimum low within the last four years, as it is the first time since 2006 the Euro is worth less than 1.23 dollars.

All these events have resulted in Europe creating a fund to help countries which find themselves in a problematic situation. First, they started talking about 45,000 million Euros, then the amount switched to 110,000 and now, the European Union and the International Monetary Fund (IMF) approved this May a rescue fund of 750,000 million Euros.

Spain is in a very difficult situation and, for such reason, the President has announced new measures against the crisis. These are the specific measures announced by the President:

  • 5% cut in public sector pay.
  • Freezing of pensions.
  • Elimination of the one off payment of 2,500 € for newborn babies. This help will disappear on the 1st January 2011.
  • Public investment will be cut by 6,045 million Euros between 2010 and 2011.
  • Savings of €1,200m by regional and local governments. In addition, a €600m cut in foreign aid during 2010 and 2011.
  • Savings on the cost of pharmaceuticals in the public health system.
  • Dependants. Government eliminates dependent care aids.
  • Elimination of early retirement.

Such measures are not intended to recover the economy, but rather to avoid bankruptcy. However, other opinions are that these measures will hurt the economy even more and that they will have to be borne by the middle class.

One of the existing proposals consists of increasing taxes for the highest incomes and re-implementing the disappeared Wealth Tax and the Inheritance and Gift Tax. The crisis has made the underground economy start to spread.

CONCLUSION: The Spanish public debt is of 53,2% of GDP, but lower than Ireland (64%), the United Kingdom (68,1%), Portugal (76,8%), France (77,6%), Belgium (96,7%), Greece (115,1%) oand Italy (115,85). The public deficit in Spain is 11,2% of GDP, one of the highest in the EU, but the United Kingdom (11,5%), Greece (13,6%) and Ireland (14,3%) are even higher. In summary, Spain has a better record than the average EU country. It is clear that economic measures should be taken but it is not fair that Spain is in the spotlight of the economic rating agencies.

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