Spain Germany France UK
legislation has the effect of permanently increasing the unemployment rate. Other factors that were discussed that also have affected the country’s high unemployment rate are the severe consequences that the burst of the housing bubble in Spain had for the economy combined with the drop in tourism due to the international financial crisis.
The labor wedge demonstrates the wedge that taxes and the degree of regulation in the labor market generate between the marginal rate of substitution of consumption and leisure and the marginal product of labor. My calculations showed that the labor wedge was the lowest for Spain, and hence I can conclude that this is not the right measure to look at in order to explain the country’s economic difficulties.
However, by looking at a measure that the European Central Bank can directly
control, such as the price level, I was able to find some indication of the effect of ECB policy on its member countries. The comparison of the counterfactual (what would have happened if the trend from the 20 previous years continued) and what actually happened to the price level in the different countries showed that all of these four Eurozone countries have been below the counterfactual. However, one can clearly see that Spain’s price level has diverged more from the counterfactual than any of the other nations have.
These results give credence to the idea that the issues that Spain has encountered are a result of the mixture of both country-specific issues, such as the strong employment protection legislation and the high portion of temporary contracts, and the Eurozone monetary policy that was imposed on them after they entered the currency union.
Conclusions
The implementation of a common currency in 2002 is the best example of economic integration between European countries. The early years of the currency union were marked by economic progress of each of the member nations. However, this apparent success in the first years of the currency union where it looked like the member countries’ economies were converging was not true. The countries were actually diverging. The financial crisis in 2008 affected certain countries in the Eurozone more than others. In the years following this downturn in the economy, one can see how some of the Eurozone countries have been struggling a lot economically.
In this thesis, I have looked at Spain because I wanted to find the reasons for the deeper recession that this country has experienced compared to other big countries in the Eurozone. Also, by comparing Spain to other countries, I wanted to figure out whether the economic issues experienced in the Eurozone are due to the common monetary policy or more due to country-specific problems. What is evident from my research is that there are combinations of factors that have created complications for Spain.
One significant issue in Spain is their unemployment rate. Spain is one of the countries with the highest and fastest growing unemployment rates in the Eurozone.
This is an alarming trend. Currently Spain has an unemployment rate of over 26% and for Spaniards less than 25 years old it is above 50%. Looking at data of
unemployment rates between the different Eurozone countries, it is clear that Spain has diverged from the other countries since 2008. From the data that I have looked at,
it is apparent that Spain has experienced difficulties since the recovery phase after the economic crisis in 2008. Since then, one can clearly see that both the unemployment rate and the growth rate in real GDP for Spain has diverged from those of Germany, France, and United Kingdom. Also, compared to these countries, the trend in Spain’s debt to GDP ratio has been increasing a lot more over the past few years.
The issue that I have researched is whether these problems that Spain have encountered are due to their membership in the currency union and therefore suboptimal monetary policy or if it is more due to issues and policies that is
happening domestically. To explore this further I looked at the Spanish labor market.
Some of the measures that I looked at gave credibility to the idea that this is a Eurozone problem rather than each individual country. This idea was found in the calculations displayed of the labor wedge. The labor wedge calculation showed that it was not so much the structural problems in Spain that were the main issue because it was higher for Germany and France, and lower for Spain and United Kingdom. I also looked at the ratio of the strictness of regulations on permanent employment relative to the same measurement for temporary employment and this supported the same idea. In order for this measurement to have provided us with some indication of that this might be more of a structural problem in Spain, the values should have been higher for Germany than for Spain and France. However, the values were similar and this provides more credibility to the idea that it is the common monetary policy that is the issue for the member nations of the currency union.
However, some of the other measurements that I looked at showed results that are supporting the idea of country-specific problems in individual countries in the Eurozone. Spain has strict employment protection legislation. In the framework that I discussed, it was shown that higher employment protection leads to a permanently
higher unemployment rate. Also, I looked at the share of temporary employment and the unemployment rate. Here I found a strong relationship between these two
measurements. This is especially a problem in Spain because large shares of the Spanish workers are hired on temporary contracts. I also looked at the deviations from trend of the inflation rates of the Eurozone countries over the period 2002-2012. The result found was that Spain had deviated from trend a lot more than the other
countries. This indicates that Spain has had a tighter monetary policy than other member countries in the currency union and supports the idea of domestic problems in Spain.
Therefore, as Spain and the Eurozone implements methods to resolve some of the problems that they are currently facing, it is important to consider this issue as being a mix of two complications. First, it was a bold move to impose a single currency on a very heterogeneous group of countries. It is evident that a good monetary policy for a country such as for example Germany might not be the best option for a country like Spain. Hence, the common monetary policy for all the members of the currency union is one of the problems. Second, there are indicators of country-specific issues that also have developed into problems for some of the
countries in the Eurozone. For Spain this is their employment protection policy, which has resulted in their extremely high unemployment rate.
The main issues that should be addressed in Spain are their employment protection legislation and how they can make this policy more flexible. Another issue to be looked into in Spain is how they are implementing their monetary policy, since there is found evidence that they have had a tighter monetary policy. Also, one should try to pay more attention to the development of the Eurozone’s monetary policy so that all member countries will benefit as much as possible from new changes. If more
changes like these can be made, Spain can possibly recover from their recession and the Eurozone will become a stronger currency union.
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