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Home News The big problems with Spain’s economy

The big problems with Spain’s economy

Published on 20/11/2011

These are the biggest economic challenges facing Mariano Rajoy, leader of Spain's conservative opposition Popular Party, who won the general elections Sunday according to an exit poll:


The collapse of a Spanish property bubble in 2008 destroyed millions of jobs.

According to official figures, the unemployment rate rose to a 15-year high of 21.52 percent at the end of September 2011 — the highest in the industrialised world.

Among 16-24 year olds, the rate was a staggering 45.8 percent.

The number of unemployed is 4.978 million people, according to the National Statistics Institute, although the numbers are widely believed to be inflated by undeclared workers claiming benefits.

Complicating the task ahead, many of the unemployed are trained for construction jobs that no longer exist.


Spain’s economy showed zero growth in the third quarter of 2011 when compared to the previous three months.

Over the entire year, output grew just 0.8 percent.

Many analysts now predict a recession for early 2012, barely two years after emerging from an 18-month downward spiral caused by the wreckage of the housing market.

Exports including the hugely important tourism industry have kept Spain’s head above water so far, official figures show.

The Socialist government has abandoned its forecast for 1.3 percent growth in 2011. It now sees growth at 0.8 percent.


Spain’s central and especially regional governments are spending far more than they earn in taxes and other income.

The result is a shortfall, which has to be financed by borrowing from the financial markets.

In 2009, Spain’s government ran up a public deficit equal to 11.1 percent of the country’s total economic output, or gross domestic product (GDP).

Since then it has been cutting.

It met a target of trimming the shortfall to 9.3 of GDP in 2010 and has promised to go further and lower the deficit to 6.0 percent of GDP in 2011 and 4.4 percent of GDP in 2012.

Anger over cuts made to date — including a five-percent cut in public sector salaries, a pension freeze and a raise in the retirement age from 65 to 67 — helped spark a nationwide protest movement.

Each year of deficit adds to the total accumulated public debt.

By the second quarter of 2011, the public debt had climbed to a 14-year high of 65.2 percent of GDP from 57.2 percent of GDP a year earlier. That is well below the European Union average of 85 percent, but above the EU-agreed ceiling of 60 percent.

In addition, there is an enormous private debt built up during the property boom: in 2010, according to the International Monetary Fund, Spanish households had accumulated a gross debt equal to 90 percent of GDP and businesses another 205 percent of GDP.


Spain’s banks, especially regional savings banks which account for about half of all lending, carry a huge weight of loans that turned sour after the 2008 property market crash.

Since 2010, the government and Bank of Spain forced the industry to consolidate and strengthen their balance sheets by raising the share of rock-solid core capital in their books.

The European Banking Authority says Spain’s five biggest banks will need to raise yet another 26.16 billion euros to meet tougher new capital requirements.

At the same time, Spanish banks’ bad loans rose to a 17-year record of 128.1 billion euros ($173 billion), equal to 7.16 percent of total assets, in September.