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The Economy of Spain: World's Greatest Bubble? - YouTube
Channel: Economics AltSimplified
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This is Spain
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The Spanish economy is one of extremes.
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As one point a focus of the eurozone crisis.
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At another the largest contributor of growth.
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and more recently
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the worst performing advanced economy
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in 2020.
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Spain's economic problems are often misunderstood.
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In the years leading up to the Great Recession
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its government expenditure was relatively stable.
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However, a huge real estate bubble was lying in wait.
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The question... is why?
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Why did Spain go from a seemingly safe level of debt
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to one larger than its economy?
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How was the real estate bubble supported?
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and since then, has Spain's economy
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ever truly recovered?
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Or in what ways?
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To explore all of this
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its worth taking a brief look at the economic history.
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But first
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feel free to check out our new Discord server
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to interact with our growing community!
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The link to which is in the description below.
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Now back to the video.
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At the end of the Spanish civil war
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in 1939
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the nation lay in ruins.
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Seeing the emergence of an incredibly isolated Spain.
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A far cry from the country today,
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which routinely ranks second in the world
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for tourist arrivals.
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Because of isolation and poor policies
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under the early years of General Franco's Dictatorship.
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Recovery and development was slow.
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For example, the nation was excluded
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from the US's Marshall Plan for European recovery.
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Not reaching its pre civil war peak
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in GDP per capita
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until 1955,
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Five years after most other Western economies did
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despite World War 2.
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In general, the economic policies under Franco's rule
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weren't fixed, but varied during his time in power.
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However, there was a trend from self reliance to liberalisation.
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A key trigger of this change
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was a dire shortage of foreign exchange reserves
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by the late 1950s.
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A consequence of failed self reliance
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and isolationism.
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Being a large factor in Spain's pivot to adopting
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pro market policies.
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Through the so called
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plan of stabilisation and liberalisation
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Creative I know (dry humour XD)
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What followed was termed
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the Spanish economic miracle.
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Creating a sort of Iberian economic tiger
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Costa Del Sol style!
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Though make no mistake
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Spain was a dictatorship
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without the freedoms it enjoys today.
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Its economic miracle has similar traits
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to what we've discussed in previous videos.
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An estimated three million people
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or about 10% of the population
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moved to urban areas in the 1960s
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With many moving abroad.
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Often providing valuable remittances in return.
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This wave of liberalisation
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coincided with Spain joining
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international organisations like the GATT
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A predecessor of the WTO.
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Economic progress continued to gain pace after Franco
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With well known Spanish brands
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starting to gain international attention .
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The transition to democracy also paved the way
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for Spain to join the EU.
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Or European Economic Community
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as it was called then in 1986.
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However, it's important to note that despite the great growth
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Spain's official unemployment rate
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was stubbornly high in the 80s and 90s.
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A trend we will be discussing later in the video.
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Now despite only joining the EU in the mid 80s
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Spain decided to take the plunge
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and be amongst the first to adopt the euro in 1999.
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Intending to demonstrate
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to the entire world
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not only how far it had come
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but how integrated and open the economy had to be.
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Or so people thought!
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Adopting the euro was a trade-off.
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On the one hand,
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it traded in its monetary sovereignty,
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the ability to devalue its currency
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and set its own interest rate.
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On the other hand,
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trade with its neighbours became a lot easier
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as did paying for imports through a stronger currency.
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And most importantly perhaps,
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it gained access to cheaper credit.
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Whilst this was a time of great change
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there were a couple of striking things
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about this period.
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The flow of goods, services and the transfer of money
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otherwise known as the current account,
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took a downturn.
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Notably, the country already had a negative current account
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before adopting the euro.
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Though this worsened.
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Reaching its lowest level just before the Great Recession.
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Something which isn't unusual
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as recessions often cause imports to drop
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and international credit to dry up.
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The massive build up of credit
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was a fundamental part
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of Spain's economic bubble.
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You see, credit became cheaper
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Adopting the euro led many investors to believe
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that the likes of Spain, Greece and Italy's credit
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was as good as Germany's.
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With increasing demand
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causing interest rate differences to narrow
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However, there is a common misconception that Spain's central government
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was the one doing the borrowing.
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This was certainly true for Greece
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but for Spain, this really wasn't the case at all.
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Spain's debt was low
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and even posted budget surpluses
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in the lead up to the crisis.
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Begging the question, who was borrowing?
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Well, this was largely done by firms
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especially ones in construction.
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But, who lent them money?
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A large portion came from Spain's
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regional savings banks through the international market.
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Regional economics plays a large role in Spain
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The country is split into 17 regions
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with a very high level of fiscal decentralisation.
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For example,
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a lot of tax collection, education and health expenditure,
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is dealt with by local and regional authorities.
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Likewise, Spain possessed
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some 45 regional savings banks before the crisis.
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A lot of whom had gone all in
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on lending money to speculative real estate.
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To be fair though,
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Spain kind of anticipated some type of debt problem
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when they joined the euro.
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According to the EU's own official report
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they were the first country in the world
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to require banks to set aside additional money
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for non performing loans in the good times.
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Which may sound strange
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in a post financial crisis world.
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But remember this was pre crisis
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Setting aside an estimated 35 billion euros
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something we found surprising.
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So check out the link in the description below
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for some light bedtime reading.
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However as we're about to find out
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the money saved up was far from sufficient
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In the early part of the 2000s
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the average house price sky rocketed.
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Which to be fair, was a common trend in many economies
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But the dependency in construction led growth
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really set Spain apart.
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For example,
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credit for the real estate sector
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far outstripped credit for the economy overall
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By the time the crisis hit,
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triggered across the Atlantic by rising mortgage defaults,
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Spain's real estate debt's equated to almost half of GDP.
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And make no mistake.
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Spain was heavily reliant on construction related employment.
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In 2007, more than 1/8 workers
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were employed in construction.
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Delivering more housing starts
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than Germany, France, the UK and Italy combined.
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This can be attributed to three core factors
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The first being the cheaper credit
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we mentioned earlier.
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The second being the tax breaks and investment incentives
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the government gave to the real estate sector.
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Whilst the third, was the general economic growth model.
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The model favoured construction activity
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because of the sector's labour intensive nature.
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Helping to drive down unemployment.
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Politically speaking, pro real estate policies
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also helped spur on higher prices.
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Great news for the 80% of Spanish voters
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who were home owners at the time.
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However, just like all bubbles
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at some point it had to burst!
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From their peak, average house prices
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declined by 45%.
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Pushing many, way into negative equity.
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Where the value of their asset was worth less than the debt.
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Now as the credit dried up and panic took over the world,
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people started to realise that building all these houses
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assuming ever higher prices
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just didn't make much sense.
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Speculative developers who borrowed heavily
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quickly turned into non performing loans.
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On a scale, which far exceeded the provisions we mentioned earlier.
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And remember, if you borrow a hundred thousand from the bank
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and can't repay then you have a problem
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but borrow a hundred million and can't repay
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and then the bank has a problem.
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And Spain's lenders certainly did.
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Spain's response can be split into two periods:
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the first part, involved the country trying to send its way out
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spending more as a percentage of GDP on stimulus
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than any country in Europe.
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Not a problem, given their low debt.
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However, as the Greek crisis evolved
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attention quickly turned to who was next.
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Sure Spain started with low debt
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but its economic model
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was fundamentally flawed.
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Real concerns were raised
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over whether Spain would be able to borrow enough
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for long enough
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to get its house in order.
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Ultimately this led to the bailout of Spain's banks
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and massive reform.
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With only two of the forty five savings banks
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we mentioned earlier
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escaping the crisis unchanged.
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By simplifying things a lot
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numerous banks were merged to create one giant bad bank.
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Using financial wizardry to separate the bad apples
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from what ever was left.
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It's important to highlight
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just how much the crisis impacted Spain's economy.
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A point we discussed in much more detail
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in our video on Greece.
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A big problem, is that by being tied to the euro
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Spain couldn't just depreciate its exchange rate.
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It had to under take painful structural reforms
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to raise competitiveness.
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A tough love approach
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which saw unemployment rise to an eye-watering one in four
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and millions leave in a brain drain of epic proportions.
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So, it's fair to ask
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Well, yes and no.
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If you were to look at the pure stats in isolation
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Spain's GDP overtook its pre crisis peak in 2017
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Not only that, but in recent years
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pre-2020 at least
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it has become an engine room of the eurozone economy.
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At times accounting for more than its fair share
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of overall growth.
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A lot of this growth has been on increases
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in its exports.
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Which has grown as a share of GDP.
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One reason for this,
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is that after a decade of painful reforms
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average labour costs either declined or were typically lower
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than other larger European economies.
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Though to be fair,
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productivity still lags some way behind.
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On a more positive but related note,
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its current account entered a surplus in 2016
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for the first time since 1986.
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And consistently has been there since.
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Pointing towards a more sustainable growth trajectory.
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Yet at the same time
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it's only fair to point out that the nation
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has lingering issues.
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Which make a full recovery less likely.
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One is its stubbornly high unemployment.
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Which is related to how expensive it can be to hirer workers.
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Redundancy costs are extremely high.
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This has led to a large number
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of short term temporary contracts
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Possessing much less job security.
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Because of this Spain's historically high unemployment
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has been suggested to be slightly misleading.
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Some of the officially unemployed
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work or at least did before 2020 in the black market
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to avoid the red tape.
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Now, Spain's persistent unemployment issue
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is also a product in part
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of having the highest rate of in the whole of Europe
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from education and training.
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Helping to shine a light on
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its notoriously high youth unemployment.
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With all of these points coming to haunt the nation
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during the Great Lockdown.
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Which according to the IMF
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Saw Spain record the highest contraction
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of any advanced economy.
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Much of this can be of course linked to
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the hit to tourism.
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Though this loses a little bit of weight
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when you consider France;
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the most visited nation on earth.
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Experienced less of an impact.
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Crucially as mentioned earlier
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Spain has the highest proportion of temporary workers.
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Comprising over a quarter of the work force.
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Whereas in France,
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they account for roughly sixteen percent.
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With the lay off of these short term workers
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helping to understand at least some of the difference
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between the two nations.
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What this also highlights is that
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the Spanish economy is still grappling
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with the legacy of its economic bubble
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and most likely will for years to come
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We've seen that Spain made incredible
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progress from a dictatorship
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to one of the largest economies in Europe.
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Its entry to the euro was controversial
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in more ways than one.
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Which undoubtedly influenced its housing bubble.
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Unlike other Mediterranean countries though
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Spain's government debt was surprisingly low
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before the crisis.
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However, its economic growth model
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one based on rising current account deficits
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and a disproportionate reliance on construction, was not.
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Private debts quickly became a public issue.
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But since undertaking reforms,
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its economy has improved.
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In some cases dramatically, yet in others not so much.
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We can't help but think that
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Spain's poor performance during the Great Lockdown,
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was at least in part
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a result of its unresolved problems.
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The real question
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is whether they're likely to be solved
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anytime soon.
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And now it's over to you
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Do you think Spain suffered the world's greatest housing bubble?
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Or do you think that title belongs somewhere else?
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To a country like Ireland
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which has done considerably better in recent years.
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What do you think lies in Spain's future?
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A population crisis? Given its incredibly low
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fertility rate?
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Something we mentioned in soo many other videos.
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Let us know what you think in the comments below.
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Also, do check out our Discord server
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the link to which is in the description.
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Lastly, thanks for watching! :)
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And as always,
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see you in the next video!!!!
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