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The Economic Problems & Economic Policies of Spain

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The Economic Problems & Economic Policies of Spain

Section 3. Economic Variables

The economy of Spain has come through significant changes for the last three years. The

increase of major economic indicators was stopped by the spread of pandemic of COVID-19. Today

Spain is experiencing a steady growth of such indicators as GDP, GDP per capita, Unemployment

Rate and Budget percentage to GDP. At the same time the Inflation Rate, Debt percentage to GDP

are decreasing. Such changes exposed the national economy to certain challenges which are

difficult to overcome. The figures estimated by analysts of World Bank and National Statistics

Institute are given in the table below.

Table 1

“National statistics of Spain”

2017 2018 2019 2020
GDP, USD Billion 1314.31 1426.19 1460 ~1480
GDP per capita, USD 32402.7 33146.4 31103,5 ~32403,3
Inflation Rate, % 1.5 2.2 0.5 ~-1
Unemployment Rate, % 17.22 15.28 14.02 14,41
Debt, % of GDP 98.6 97.6 95.5 Not estimated
Budget, % -3 -2.5 -2.8 Not estimated

Note: Economic indicators of Spain 2017-2020. From Trading Economics.

1. The gross domestic product of Spain has a growing trend. Since 2017 Spain’s GDP

has increased by 185 billion US dollars. Analysts of the World Bank (“Spain - Economic

Indicators”) expect the further growth of GDP and in the long term it is to reach 1500 billion USD.

Such a steady development of Spanish economy is a significant change since 2015. Now the GDP

of Spain constitutes 1.21 percent of the economy of all countries.

2. For the last three years the GDP per capita of Spain has been fluctuating. Its indicator

is ranging from 31000 USD to 33000 USD. The analysts of the World Bank (“Spain - Economic

Indicators”) expect GDP per capita to increase in 2020 to 32403,3 USD. However, the spread of

COVID-19 can bring more deaths, and, as a result, the GDP per capita will grow extremely rapidly.
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According to the forecast of the World Bank, (“Spain - Economic Indicators”) the indicator of GDP

per capita will reach 35200 USD in 2022. Today the Spanish GDP per capita constitutes 262

percent of the average figure of the world.

3. The research conducted by the National Statistics Institute has demonstrated that the

Inflation Rate of Spain has a cyclical graph. Now the inflation indicator is at the bottom of the

graph with the figure of 0.5, but the pandemic of COVID-19 caused the expectations that there will

be no growth during the following year. In the long-term perspective the Inflation Rate is projected

to grow to 1.5 percent by the end of 2022.

4. In 2020 Spain faced the biggest increase of unemployment since 2013. The number

of unemployed workers was increased by 121 thousand. During the first quarter of 2020 the

Unemployment Rate was 14,41 percent because of the escalation of COVID-19. Although the self-

isolation measures will soon be cancelled, it is unlikely that the Unemployment Rate will fall.

According to the National Statistics Institute (“Spain - Economic Indicators”), this indicator will

continue growing by the end of the year. The analysts expect the decrease of Spain’s

Unemployment Rate in 2022 to the level of 15,50 percent.

5. The percentage of Spain’s debt decreased to 95,5 percent, which was less than

government expected. Such level of debt was the lowest indicator since 2013. It is projected that the

debt will reach 115 percent by the end of this year. During two following years the debt is expected

to decrease. The analysts forecast 112 percent of debt to GDP in 2021 and 107 percent of debt to

GDP in 2022.

6. Although the deficit of Governmental Budget of Spain has been decreasing for seven

years since 2012, now the forecast made by analysts projects the further growth of deficit by the end

of 2021. After that, a more rapid fall of deficit is expected.

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Section 4. Major economic problem

Nowadays Spain is facing one of the biggest challenges which occurred during last twenty

years. All the economic variables of the country are changing every day and bringing unexpected

twists to the overall picture of present image of Spain. The pandemic of COVID-2019 affected all

the spheres of economic development of the country, but it turned out that the most vulnerable in

this situation are the people who lost workplaces and failed to adjust to new working conditions.

The unemployment rate is a very important indicator which can be analyzed from both

economic and social perspective. In general, unemployment refers to people in the workforce, who

look for a job, but do not have the appropriate one. This indicator is extremely sensitive to any

change in the country, even if the sphere where the change occurred is not related to the

employment sphere. Although the government announced that the country has already reached the

peak level of incidence, the unemployment rate in Spain is still growing. Nevertheless, the forecast

of local analysts and the analysts of the international organization is rather promising. Today more

than 27,000 death are registered in the country, Spain is the third country of European Union and

the fifth in the world by the number of fatalities.

The consequences of the crisis are projected to be overcome by the end of 2022. The

measures taken by the government of Spain are aimed at the fastest and the most efficient recovery

from the unemployment. However, these measures are not enough to ensure the economic growth

of the country.

There are various causes of unemployment. Despite the economic nature of the problem of

unemployment, the impact it has on the country can be both economic and social, as it, first of all,

relates to people. All of them can affect the economy to some extent. The unemployment rate

calculated by the analysts does not demonstrate which cause added more to the total number of

unemployed workers, but it gives the opportunity to see the whole picture at the exact moment in

time.
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Firstly, the level of unemployment can be affected by the demand for goods and services. In

terms of Spain this situation occurred with the start of the lockdown. The demand for tourism and

leisure facilities decreased as the self-isolation regime was introduced. This way a significant part

of workers was deprived of their workplace as service industry generally requires face-to-face

communication which was made impossible due to the quarantine. The companies involved in hotel

and restaurant business suffer most of all, as the number of tourists fell to a minimum and is

unlikely to restore in the following two years, which will definitely have its impact on the

development of the service industry of Spain.

Secondly, not only service industry is affected by the quarantine. Lots of European

manufacturing companies trying not to go bankrupt put a lot of effort to digitalize most of the

processes within the company or to involve machines into the production. Certainly, the minimum

number of workers needs to remain, because some machines need to be operated and maintained.

According to the consulting firm CEPR Policy, nowadays “only 25,4 percent of jobs in Spain can

safely be done from home – a percentage that could rise to 43 percent when restrictions are scaled

back to a minimum” (Vega, 2020). People who cannot work from home have to rely on the benefits

provided by the government.

High unemployment rate can severely affect the economy of the country and generate new

issues which need to be solved in the short term. The rising level of unemployment leads to the lack

of income of households and individuals. Such circumstances lead to curtailing of business activity

and production. As a result, the speed of growth of GDP of the country decreases. The lack of

employment also leads to increase in government expenditures on social benefits. Such unplanned

expenditures can expand the deficit of the country’s budget and disrupt the delicate balance of the

economy. Generally, the benefits and other forms of assistance provided by government can cover

only 50 percent or less of the regular income of a worker (Vega, 2020). High unemployment rate

makes the government uncapable of collecting as much income tax as before, so it is forced to cut

on other spending in order to fill the holes in the budget. Introducing new taxes and other sources of
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increasing of the national budget can have its negative effect on the nation’s trust and reliance on

the government.

People who cannot find employment for a long time usually experience the erosion of their

skills. Skilled workers constitute the human potential of the country, which is one of the most

important socio-economic indicators. The higher the human development index, the more enhanced

the image of the country for professional workers is. The lack of skills reduces the possibility of

future employment for workers after the end of lockdown. This situation is likely to affect the

income of young employees who struggle to find employment even at the non-crisis times. The

unemployment rate is also one of the variables, which are taken into account when deciding

whether the country is developed or not. Undoubtedly, developed countries attract more foreign

direct investments than other countries, so it is important for Spain to remain in the list of

developed countries in order to ensure the existence worthy of human dignity to its citizens.

Another important aspect which is influenced by the variations in the unemployment rate is

the labor force flows. A lot of young graduates fail to find the appropriate job in Spain, so they

leave the country in order to search for employment in developed countries which can provide them

with just and favorable remuneration for their work. Labor migration is increasing every year and

the country loses potential specialists on a grander scale. Although the government makes attempts

to encourage young workers to stay in Spain, and now, during the lockdown, it is impossible to

cross the borders of the state, lots of potential employees stay in the country till the end of the

quarantine, but leave the country as soon as possible. This phycological factor is extremely

important in terms of social indicators and policy of the country.

Last but not least, unemployment can lead to the increase of crime and reduced

volunteerism. Unemployed people tend to have recourse to desperate action in order to earn their

living. This means that they may come to the conclusion, if the country is unable to provide the

citizens with appropriate and rewarding job, they can make money from criminal acts. The
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consequences of increased crime come to the issue of foreign investment. It is unlikely that the

country with the high crime rate will gain the trust of investors, because pouring of money is

inherently risky process. The investors would rather receive a little profit than lose everything they

dedicated to a particular business.

The first quarter of 2020 was characterized by the highest unemployment rate in the

Southern regions of Spain. The biggest percentage was registered in the city of Ceuta with the

unemployment level of 24 percent (“Spain - Economic Indicators”). These figures continue

growing, and it is still unknown, whether the unemployment problem will be solved or not.

Nevertheless, the pandemic of COVID-19 will eventually be overcome, so the growth of economy

and social indicators is inevitable after two or three years of recovery.

The government of Spain is highly concerned with the issue of unemployment. As the

pandemic of COVID-19 is considered to be the major economic crisis of the last five years, the

policy followed by the government and measures taken by it are directed at the reduction of

unemployment under the circumstances of self-isolation during the lockdown of the country.

During the crisis caused by the pandemic of COVID-19, a lot of companies have recourse to

the mechanism of temporary redundancy. The businesses fail to serve their functions properly under

the lockdown. There is a specific mechanism in Spain called the ERTE (“ERTE: What you need to

know about losing your job during Spain's coronavirus crisis”, 2020), which stands for Eexpediente

de regulación temporal de empleo” or “temporary employment regulation dossier”. This mechanism

is concerned with issuing temporary redundancy status to the workforce. Such status can be granted

in case of force majeure. Obviously, the pandemic of COVID-19 is viewed as such case. ERTE can

efficiently pause the contract of the employee and decrease the number of his working hours in

accordance with what is necessary for the company during the crisis.

The way how this mechanism works is quite simple. Technically, the worker still remains

employed, and the company does not pay salary to him. Instead, it provides the employees with
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social security payment in order to satisfy their immediate needs. The unemployment benefits given

by the ERTE can satisfy up to 70 percent of the salaries paid before the crisis. One of the major

benefits granted by this mechanism is that the employee does not need to monitor the process of

activating the mechanism since the company is totally legally responsible for the conduct of the

scheme.

At the end of May 2020, a “minimum vital income” was approved by the government of

Spain (Llach et al., 2020). It was concluded that the money will be given to 850,000 families which

have suffered from the present crisis. The main objective to be achieve by this measure is to

encourage unemployed workers to go on looking for a job and to remain in the country. This action

is eligible for adults aged from 23 to 65 who live either alone or in family. The minimum amount

each claimant can receive is €462 and the maximum sum can reach €1,100 per month.

Undoubtedly, such expenditures can cost a lot for the national budget, to be more exact, according

to the government forecast, the program will cost €3,000,000,000,000 each year, so a “Tobin tax”

was proposed in order to partially fund the new measure of stimulating employment. The “Tobin

tax” will be applied to the digital companies and the transactions at the stock market.

In order to receive the unemployment security in Spain, the unemployed worker needs to

contribute to Social Security Service for at least 360 days. If this mandatory procedure is

completed, the applicant is entitled to receive unemployment benefits for 4 months. Moreover, any

unemployed worker willing to join the program has to prove that he is looking for a job. After that

the evidence must be delivered to the Servicio Público de Empleo Estatal or SEPE, which stands for

Spanish State Employment Service. SEPE is the autonomous institution which reports to the

Ministry of Unemployment and Social Security.

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Section 5: Conclusion & Recommendation

All in all, the unemployment is a difficult problem with affects each field of activity of the

country. The unemployment rate, which reflects the current level of unemployment in the country,

is extremely sensitive indicator which reacts to any change in the political, economic, or social

environment. The current unemployment rate of Spain is 14,41 percent. This figure continues

growing because of the present crisis caused by the pandemic of COVID-19. Today 3.31 million

Spaniards look for employment, and 27,000 of Spain’s population died from COVID-19. Under

such circumstances the country experiences the loss of professionals who strive to migrate to other

countries, lack of skills, which are subject to gradual erosion, the reduction of workplaces in

particular industries which require personal communication between an employee and a client, the

growth of crime in the country and the decrease of volunteerism among the people.

However, the hardest challenge the country has to face is the outflow of foreign investments

from the country. Spain always attracted investors into its various industries, and now all the

spheres of business activity are exposed to the threat of bankruptcy.

The government’s main concern is to prevent the further expansion of unemployment in

Spain. Each unemployed worker will be paid the “minimum vital income” according to the latest

decision made by the government. It is estimated that the overall payments will reach €3.1 billion.

Moreover, the special measures taken by the ERTE in Spain make the companies satisfy up to 70

percent of salaries paid to workers while they are temporarily redundant.

All things considered, it is difficult to predict, whether the economic situation of Spain will

improve soon or not. The government of the country takes effective steps directed at the

improvement of the current unemployment issue by adopting new laws and spending budget on the

needs of the citizens of Spain.

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References

ERTE: What you need to know about losing your job during Spain's coronavirus crisis. (2020

March 31). The Local. Retrieve June 9, 2020 from

https://www.thelocal.es/20200331/what-you-need-to-know-about-erte-being-made-

redundant-during-coronavirus-crisis

 Llach, L., Cereceda, R., & Tidey, A. (2020, May 29). Spain minimum income: Socialist

government backs benefit for 850,000 vulnerable families. Euronews.

https://www.euronews.com/2020/05/29/spain-minimum-income-socialist-government-

backs-benefit-for-850-000-vulnerable-families

Simpson, S. D. (2020, April 15). The Cost of Unemployment to the Economy. Investopedia.

https://www.investopedia.com/financial-edge/0811/the-cost-of-unemployment-to-the-

economy.aspx

Spain - Economic Indicators. Trading Economics. Retrieved June 9, 2020 from

https://tradingeconomics.com/spain/indicators

Unemployment procedures and benefits in Spain. Euraxess Spain. Retrieved June 10, 2020 from

https://www.euraxess.es/spain/information-assistance/unemployment-procedures-and-

benefits-spain

Vega, M. Á. G. (2020, May 18). More unemployment and lower wages: Coronavirus crisis

dimming the prospects of young people in Spain. El Pais.

https://english.elpais.com/economy_and_business/2020-05-18/more-unemployment-and-

lower-wages-coronavirus-crisis-dimming-the-prospects-of-young-people-in-spain.html

What is Unemployment? Corporate Finance Institute. Retrieved June 11, 2020 from

https://corporatefinanceinstitute.com/resources/knowledge/economics/unemployment/
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Optional Section

https://www.youtube.com/watch?v=Q3q_2gMNaRM

https://www.cnbc.com/video/2020/04/15/why-were-facing-the-worst-recession-since-the-great-

depression.html