Origins of the Crisis

26 Nov 2011

While I've been writing a lot recently about the economic crisis in Spain, I've yet to write about the origins of this crisis.

I'd like to preface by saying that I'm no expert on economics so I'm explaining the situation as I understand it.

Prior to 2008, Spain was actually experiencing a boom in its economy. During the boom, the Spanish government had a nearly balanced budget every year--unlike a number of other European Union countries. The government also had very little in the form of debt.

However, just as in the US, as interest rates decreased, Spaniards began to borrow money at an incredible rate. Like in the United States, there were many Spaniards who bought property during the boom and don't have any way to pay it off--at least not until they're 70 years old. Brand new apartment buildings sit empty because no one will buy them.

The second contributing factor to the current economic situation is the inflation in Spanish wages. Over time, Spanish wages have grown to an unsustainable level. For this reason, with the economic crisis, companies have had to fire employees because they can't afford to pay them at the current rate.

Furthermore, with the housing bust, there isn't a lot of new construction. Consequently, there are many people unemployed because of it--since construction jobs once made up 13% of Spanish jobs.

However, to make matters worse, the Spanish government is borrowing money at an alarming rate in order to pay unemployment benefits. Don't get me wrong. The government needs to help out unemployed people, but it seems like a vicious cycle. The more unemployed people there are, the more the Spanish government has to borrow to pay unemployment benefits (because it's a welfare state). The more that the government has to borrow, the less confidence lenders have in their ability to pay it back. This leads to an increase in interest rates--which the government can't really afford to pay.

All these factors add up to the current situation in Spain:  high unemployment (because of the housing bust and inflated wages) and rising debt.


**All of this information comes from what I've been reading in the paper, I've heard from Spaniards, and from an excellent article from the BBC.