Spain was the second-largest country in the Western Europe in 2008. The census that was carried out in 2008 registered 46 million persons residing in the country. The main religion that was widespread was Catholicism. According to the statistics found in 2008, Spain is among the developed nations and had been rated eighth in the world in terms of economy. The per capita income was estimated to be at U.S.33, 500 and this was on the basis of purchasing power parity. 5 percent of the GDP was from the agricultural sector, 29 percent from industry sector, and the remaining 67% was from the service sector. The sectors of construction and tourism sectors also contributed to the economy enormously where the tourism sector contributed 5% of GDP.
Spain exports were 72% whereas the imports were at 61%. The primary exports were motor vehicles, consumer goods, machinery and foodstuffs. Spain imports much of the energy that it uses approximately 77% which represents 14% of the total imports. Spain is also very democratic and it is governed by the parliamentary system that is under some constitutional monarchy. This constitution addressed cultural diversity through the “State of Autonomies “and this made Spain a decentralized country. The autonomous communities owned their own elected governments, budgets, revenue sources, parliaments and public administrations and therefore the education and health systems were managed better regionally. The police corps also had replaced the state police functions and this was fully fledged. All these factors ensure that the House will be able to stand.
The population of Spain increased very sluggishly especially between 1980 and 2000. After 2000, the number of immigrants into this country increased greatly and by 2007, the population was higher by 5 million. 36% of the immigrants were from Latin America, 19% from Africa and 18% from Eastern Europe. The reason for the massive immigration was because most of the countries in Latin America were suffering very serious economic recessions. They hoped for a better life in Spain. Spain was located at a convenient destiny and this made it very convenient for the Africans who also migrated into Spain. The Europeans who were mostly retirees moved into Spain with the need to look for new and better opportunities in Spain. The immigrants were aged between 16 and 64 and they would become part of the Spanish labor force to over 22.2 million in the year 2007 from 18 million in the year 2000.
The labor markets also changed very significantly. This is because the immigrants were ready to work for lower wages and this kept the real wages virtually unaltered despite the growth in the economic activity. The rate of unemployment was also greatly reduced. This increase in the labor force also increased the potential of the country to produce more services and goods in the economy. The GDP of Spain grew in a persistent trend. Businesses required more capital due to the increased workforce and this eventually led to faster investment and therefore by 2007, the real fixed investment had grown to $378.37 million from $262.26 million in 2000.
There was unprecedented boom in the housing markets which were fueled by increased demand. The increased number of immigrants led to the boom. There were many divorces that happened in 2000 and this led to people leaving in different houses after the divorce .the housing was part of the national wealth and therefore the expected and actual increase in the prices of housing gave rise to some dramatic increases in the national wealth. This fostered further growth in the economy because the owners of the houses perceived their wealth growth. The sale of cars increased significantly in Spain, and the spending on the consumer staples, durables, and luxuries.
When the European countries experienced economic recession, Spain was having good and prosperous time especially due to the rise of the wealth and grown economy during the year 2000. Spain offered investment opportunities, the construction banks and companies enjoyed opportunity that they could access savings at very low interest rates and could invest the money in the country. Spanish interest rates fell dramatically because of country risk. The heavy borrowing by Spain soon reflected in their accounts. This was because Spain did not reduce its consumption in order to finance its investment in foreign borrowing or in housing. The deficit kept growing and soon the net external debt increased to unmanageable levels of $1trillion.
Many households invested in more houses because they thought that the prices would increase to higher levels and this would make them save for retirement. The construction companies found it more profitable to add the number of houses and the supply eventually became staggering and by 2006, there were more than 600,000 new homes that were constructed although the prices still skyrocketed. The housing prices increased at a yearly rate of 12.1% to 130% between the periods. The financial stability of financial companies and foreign banks was damaged badly and this spread the liquidity crisis globally.
The trade deficit in Spain did not reduce despite the sagging demand. In 2008 due to the international recession, the number of foreign tourists greatly reduced by 8percent the Spain’s foreign-earning capacity could be undermined if this decline in the tourism sector had come during any hard times. The banking system in Spain used lending facilities in financing the current-account through ECB which is European Central Bank. The governor of the Bank of Spain restructured the financial sector through mergers or other useful instruments that were unavoidable. The IMF however agreed to this proposal and gave them advice on how to improve the balance sheets that they used.
The economic expansion that occurred between 2000 and 2007 and the fiscal responsibility of Zapatero first government had brought tremendous changes on the budget of 2007 with surplus of 2% of the GDP. The use of expansionary fiscal policies by the Spain government was also of great help to the storm. There was a 400 Euros rebate on each income tax payer. It provided tax incentives in order to get the real estate investment companies to be enlisted on the stock exchange and this would help to attract more liquidity into the banking sector. The government opened a credit line worth 3 billion Euros that would help the property developers in restructuring their outstanding debts. However a slump in tax revenues hindered the expansion and extension of fiscal policies.
The government of Spain had given the first priority to providing liquidity to all financial institutions in order to minimize the positive or negative effects of the financial crisis in the U.S. The Spain government raised the deposit insurance to 100,000 Euros from 20,000 Euros per bank. The government also created 30 billion Euros fund that would help to purchase affordable MBS from the Spanish banks and by this way the liquidity that they wanted to achieve would be reached to help solve the short term obligations.
By taking part in the G-20 summit that was held in Washington on November 15 would help the government in restoring the financial confidence. At first they were not allowed to participate but it took the intervention of the French president Nicholas Sarkozy. The President Zapatero of Spain was to clear all clouds to the Spaniards before the situation got out of hand.