Spain Case

Spain Case.

The case discusses how  Spain interacts during 2000-2009 and how it results in the recession in 2008. Unemployment in Spain remained very high during early years of  EC. There are several factors that contributed to this.  The economic model was very shaky. Between 2000-2009 Spain accounted  for 30% homes built in the European union. when the property bubble collapsed  the jobs were destroyed very rapidly. since construction was majorly labor intensive  the decreased the jobs as soon as it collapsed.  The labor market laws were too firm. Spain had a very dual labor marker where it was very hard to let  go of the permanent workers because they were very costly while the temporary workers would have to move from  place to place as their contracts expired. also they had very generous unemployment benefits which also explain their high unemployment.  The education system was in crisis.1 in 4 early school  leavers.  Spain received more immigrants that any other parts of Europe. the unemployment rate in immigrants was way higher than Spaniards.

The bank of Spain introduced so called dynamic provisioning which forced banks to build up reserves for future losses. This system didn't  help  with the growth. the provision was set up for each  new loan it helped the banks to build a cushion against future losses but at the same time it had some draw backs. For example profits before tax only grew by 0.5% instead the actual growth of 12%.  It also encouraged banks to take on more risks with each product.

The production has been very low in Spain from 1995-2007. The total factor productivity (TFP) was negative for every year until 2006. Spain underperformed  EU and USA in almost all sectors of labor and TFP growth. The main reasons for low productivity were  labor market conditions because we see in exhibits that during some years they had the worst record of making the temporary workers to permanent. The companies were failed over and over in upgrading the skills in the workers. The technology was very backwards.  Exhibit 6C shows that the IT had much less impact in Spain that other countries during that time.  Exhibit 6B shows that correlation between GDP, Labor productivity and TFP growth for Spain was very very low compared to other counties that the time because there was no pressure to increase productivity when the economy was booming. .