Tuesday, September 13, 2011

Spain’s Economic Woes Lead to Historic Reforms

Economist: The Golden Amendment
Economist: Spain’s Economy: A balancing Act
El País: Congress Passes Constitutional Reform on Deficit in Historic Vote
Time: Spain Caps Its Debt
CIA World Factbook: Spain’s Economy

Last Wednesday, Spanish lawmakers overwhelmingly passed a constitutional amendment (referred to as the “golden rule”) aimed at placing a cap on the country’s future deficits. The legislation came in response to statements by German Chancellor Angela Merkel and French President Nicolas Sarkozy who jointly demanded that all Eurozone countries who wish to receive bailouts pass such “golden rules,” though Spain is only the second country to do so (Germany is the other). Although Spain has not yet needed a bailout, the global financial crisis hit the country’s economy hard. Currently the country has an unemployment rate of 20.89% and a budget deficit of 9.2% of its gross domestic product (GDP)-- more than three-times the Euro-zone limit.

The Spanish Senate approved the amendment just eight days after the lower house first started debating the rule. Such urgency was meant to send a strong message to the world that Spain would not need a bailout. The “golden rule” does not set a specific target cap on the country’s future deficits, but merely requires the legislature to pass a law setting what the actual deficit cap will be. An accompanying law, set to take effect by June 30, 2012, will set the actual deficit cap at 0.4% of annual GDP starting in the year 2020. Under the constitutional change, every level of the government – national, regional, and municipal – must limit its budget deficit to the set cap, except following natural disasters, recessions, or other extraordinary emergencies. Even in those situations, the lower house of parliament must approve any additional deficit. The constitutional reform also requires Spain to reduce its total accumulated debt, the results of many years of deficits, to within the European Union limit of 60% of GDP. The “golden rule” amendment will become part of Spain’s constitution unless 10 percent of either house of parliament votes to hold a referendum on it in the next 15 days.

It is difficult to predict how the amendment will affect the country in the short-run since it will not take effect until 2020. Spain’s finance minister, Elena Salgado, stated that, in the mean time, the government will continue working towards its goal of reducing the deficit to 6% of GDP by the end of this year, and to 4.4% of GDP by the end of 2012. With experts predicting the Spanish economy will grow by only 1.3% this year, it will be difficult for Spain to meet these targets, but Spain has no other choice if it wishes to avoid economic ruin.

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