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A Long Period of High Growth
Historical experience and empirical evidence show that deep financial crises tend to produce sovereign debt crises, given that bank bailouts, automatic stabilizers, and extra fiscal impulses produce an increase in the budget deficits and debt of the general government.
At the end of 2007, the year in which the financial crisis started, on August 9, the fiscal position of Spain was apparently excellent. According to Eurostat, it was better than in the other three largest euro area member states. Spain had a consolidated total government budget surplus of 1.9 percent of GDP, the third highest after Finland (5.2 percent) and Luxembourg (3.7 percent). Three other euro area member states were also in surplus, Germany (0.3 percent), Netherlands (0.2 percent), and Ireland (0.1 percent).
The rest were in deficit: Slovenia, which joined that year (–0.1 percent), Belgium (–0.3 percent), Austria (–0.9 percent), Italy (–1.5 percent), France (–2.7 percent), Portugal (–3.1 percent) and Greece (–6.4 percent). Cyprus (3.4 percent), which joined in 2008, also had a surplus as well as Estonia (2.5 percent), which joined in 2011, but Slovakia (–1.8 percent), which joined in 2009, and Malta (–2.4 percent), which joined in 2008, were in deficit. The average euro area deficit that year was 0.7 percent.
The total government debt to GDP position of Spain was also quite good and also much better than the other three largest member states of the euro area. Spain had a debt to GDP ratio of 36.1 percent compared with France of 63.9 percent, Germany of 64.9 percent, and Italy of 103 percent, all the three of which were above the 60 percent Stability and Growth Pact (SGP) ceiling. The best positions were that of Ireland (2.5 percent), Luxembourg (6.7 percent), Slovenia (23.1 percent), Finland (35.1 percent), and Netherlands (45.3 percent). By contrast, Austria (60.7 percent), Portugal (68.3 percent), and Belgium (84.2 percent) were well above the 60 percent ceiling. The member states that joined later were all below 60 percent (except Malta, which had 62 percent): Estonia (3.7 percent), Slovakia (29.6 percent), and Cyprus (58.3 percent). The average debt to GDP ratio of the euro area that year was 59 percent.
Spain had reached such an excellent fiscal position after growing at an average of 3.7 percent per year, for a period of 14 years (since 1994) while the euro area as a whole only grew at an average of 2.3 percent. This large boom was mainly due to two, once for all, factors. The first was the 2 Spanish entry into the Economic and Monetary Union (EMU), which produced a dramatic fall in the Spanish interest rates, once investors discounted the end of the exchange rate risk of the peseta (which had devalued several times before joining EMU). Average short and long term rates fell from 13.3 percent and 11.7 percent in 1992, to 3.0 percent and 2.2 percent in 1999 and to 2.2 percent and 3.4 percent in 2005. That produced a large expansion of credit, investment and growth.
The second factor arrived when, between 2000 and 2007, 3.6 million immigrants entered Spain, growing from 923,000 in 2000 to 4.5 million in 2007, mostly at working age. Immigration continued since, reaching the peak in 2010 with 5.7 million, 12.2 percent of the total population and 15 percent of the total labor force, which generated large contributions to social security. This huge inflow supported the boom by contributing to 80 percent of the population growth and giving a large push to the working age population contributing, on average, to a 36 percent of the GDP growth during that period. Immigrants were attracted by the housing and construction boom as well as from an expanding tourist sector.
The second factor arrived when, between 2000 and 2007, 3.6 million immigrants entered Spain, growing from 923,000 in 2000 to 4.5 million in 2007, mostly at working age. Immigration continued since, reaching the peak in 2010 with 5.7 million, 12.2 percent of the total population and 15 percent of the total labor force, which generated large contributions to social security. This huge inflow supported the boom by contributing to 80 percent of the population growth and giving a large push to the working age population contributing, on average, to a 36 percent of the GDP growth during that period. Immigrants were attracted by the housing and construction boom as well as from an expanding tourist sector.
Nevertheless it should be reminded that Spain has been growing at a high rate of growth and catching up very quickly, for much longer. In the last 50 years, since its first deep structural reform in 1959 (the Stabilization Plan), Spain has been the second member state of the euro area at 12 (after Ireland) with the fastest average growth as well as the sixth fastest growing country in the world, after Korea, Japan, Singapore, Hong-Kong and Ireland in the same period.
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