Spanish Economy Crisis: Adjustments, Reforms & Banking System (2008-2016) - Prof. Sala, Apuntes de Economía

¡Descarga Spanish Economy Crisis: Adjustments, Reforms & Banking System (2008-2016) - Prof. Sala y más Apuntes en PDF de Economía solo en Docsity! TOPIC 07: ADJUSTMENT, STRUCTURAL REFORMS AND THE BANKING SISTEM 2008-2009 2010-2013 GDP -1,2 % -1.3% INVESTMENT -10.4 % -5.7 % PRIVATE CONSUME -2.2 % -2.2 % EXPORTS -5.9 % 5.5 % IMPORTS -12% -0.2% 2008 – 2013 CRISIS. REMARKS ▪ Investment fall persists ▪ Deceleration in the falling growth rates of investment because of o 08-09: Burst of the housing bubble o 10-13: Crisis: Financial crisis persists ▪ Consumption keeps falling ▪ Follows the same path during the 6 years the crisis lasted ▪ ΔC and ΔI >>> Δy . That means that we are still on a private domestic demand crisis GOVERNMENT: Change in the policy approach to austerity. We move from an expansive fiscal policy to a contractionary one. NET FOREIGN DEMAND (NFD): Experiences huge changes. 1. Falling exports to growing exports 2. From intensively ↓M to stability 3. 2008-2009 External adjustment is mainly based on falling imports (M), but now external adjustment (CA Adjustment / net borrow position) starts being adjusted via ↑Exports (X) 4. WHY? Reflects the internal devaluation (shift with structural reforms) ECONOMIC POLICIES 1.Monetary policy: Expansionary. Will be ineffective in terms of restoring credit. But will be effective in terms of the Sovereign Debt Crisis. We have the ECB injecting money; so it is quantitative expansion: selective bought of bonds and the credit line implemented to compensate the SDC. 2. Fiscal Policy: Austerity. It will be very contractive. (5.0% to -1.4%, more or less the fall in GDP) REMARKS Decrease in public expenditure a. Welfare State. Everything has been reduced a. Public health. In august some areas of hospitals are closed. b. Public pensions. Strong cut in pensions NO CREDIT + S-D-C c. Public education. Less budget disposable. Fall of quality b. Public Administrations a. High compression in public consumption i. Less N ii. Increase of temporary share b. Decrease in wages c. R+D; Public investment ↓ (2.7& 2016) d. Regional public expenditure a. Autonomous Communities. Lack of founding getting to the regions b. Local Communities Rise in public tax rates 2010. - Suppression of the Fiscal Bonus - ↑ Capital Tax Rate - Indirect taxes ↑ (VAT: from 16% to 18%, 7% to 8%) 2012. - Indirect taxes ↑ (VAT: from 18% to 21%, 8% to 10%). Many products that had super-reduce tax, moved from 4% to 10%. For instance “CULTURAL SERVICES” (7%  8% 21%) 2012 – 2016 Surcharges in direct taxation. Mainly IRPF Income tax rate. 𝑃𝑈𝐵𝐿𝐼𝐶 𝐷𝐸𝐹𝐼𝐶𝐼𝑇 = 𝑃𝑈𝐵𝐿𝐼𝐶 𝑅𝐸𝑉𝐸𝑁𝑈𝐸𝑆 − 𝑃𝑈𝐵𝐿𝐼𝐶 𝐸𝑋𝑃𝐸𝑁𝑆𝐸𝑆 𝐺𝐷𝑃 It’s more difficult to reduce public deficit because of the tend to fall of GDP. Also we had to rescue the banking system, so it increased hugely the public deficit. HAS IT BEEN SUCCESFUL? There was a huge difficulty to reduce public deficit in a period of recession because of the decreasing denominator that was GDP. Also, we had a debt of 60M € used to rescue banking system. That’s why austerity policies weren’t as effective as they would have had to be. TOPIC 08: PROJECTIONS AND CONJUNCTURAL ANALYSIS OF THE SPANISH ECONOMY (2013 – 2016) ΔY(14-16) 2.7% (ΔY 14-17 = 2.8%) ΔI (14-16) = 5.8% 5,8% >> ΔY because of ▪ Banking system reform: banks will become ready to give credit again ▪ Firms profitability is recovered because of: ▪ Increase of X ▪ New investments ECB: Quantitative easing since 2015 Construction: After the shock: New opportunities for speculators (center of towns) ΔC (14-16) = 2.5% Basically, due to job creation (associated to low wages). (99-07 consume was around 4%) That amount is due to the low quality of jobs. (less relevant) Credit is restored ΔG (14-16) = 0.9% Very low because of austerity End 2015 there were elections ΔX (14-16) = 4.4% They keep growing at the previous pace. Result of internal devaluations. ΔI (14-16) = 5.1% Back to growth (along with GDP) GDP is growing because of private consume (I, C) Positive NFD. Stable (below 2013) ECONOMIC POLICIES Monetary policy: Expansionary because we have a Quantitative Easing Program from 2015 extended to 2018 Fiscal policy: Restrictive because we have low growth in public consumption and we have the target to reduce public deficit below -3.0% Pending: New funding system for the AACC (pending since 2015) 2013 2016 2017 PUBLIC DEFICIT -7.0% -4.5% -3.1% 😊 PUBLIC DEBT 95.5% 99.4% 98.8% ☹ Because of GDP is not growing a lot and prices are not growing. Δy nominal = Δy * Δp Δy > 0 Δp > 0 Helpful to decrease public debt at a quicker pace Public deleveraging + (private deleveraging) UNEMPLOYMENT 26.1% 16.4%(IIIQ) 😊 We have a problem regarding to the quality of the job. Because job growth in this year has been based in temporary and part-time contracts. Wages are low. INFLATION 1.4% 2.1% 2.00%(target) :| (OK) CURRENT ACCOUNT DEFICIT 1.4% 1.9% 1.7% 😊 THREATS ▪ Interest rates now are 0. ↑Δi? Because if interest rates start going up, everything related to debt will become more expensive. This depends on US. Currently (2017) they have full employment, and that means that there is wage pressure. When unemployment is very low, that means that there’s a lack of supply of employers. That means that wages must ↑↑. That would mean that prices would increase (inflation) and then, interest rates would increase too. If we are very highly indebted economy would suffer a lot. ▪ End of the Quantitative Easing program (2018). That would mean that no more money would be injected. That resource credit in absence of any risk premium associated. Then the scenario changes completely. ▪ Oil prices have been very low for a long time (50$ for a barrel). Thanks to that transport is cheap. Thanks to that prices can be kept very low even though the increase of money due to QE program. OTHER ISSUES ▪ CHINA. China has relatively lower Δy. If China grows less: ▪ Commodity prices will go down because China produces so much and requires more inputs, and if China grows less, these inputs ▪ Emerging market economies are very indebted must be able to repay. If the products they export loss, they are endangered to not repay their debts. CHALLENGES ▪ We are back to growth. The challenge is making growth more inclusive. This is income inequality. The challenge is to reduce inequality, to make households benefit from growth, not only companies. ▪ Improve efficiency. ▪ To reduce unemployment and improve job quality. ▪ Public investment < 3.0% because we are in austerity. We have to increase public expenditure. ▪ Efficiency, to improve efficiency in tax collection, especially with respect to indirect taxation, basically VAT) and everything related to environmental taxes ▪ We have to improve our human capital LONG TERM CHALLENGES ▪ Deleveraging. We have to repay all our public and private debt ▪ Ageing population. We don’t know how will we be paying the public pensions in Spain.