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Saturday, January 1, 2011

Spain’s Austerity Measures

There was a time when Spain was the fifth largest economy in the European region, growing on the back of its enormous real estate sector. At that time, about 16% of Spain's GDP came from its construction activities. The profit margins were very promising and attracted a lot of activity, which over time became over activity, particularly in the housing sector. This built up an excess inventory of nearly 30%! Approximating to the timing of the U.S. subprime crisis, as the Spanish real estate bubble went bust the common masses began taking the hit. The burgeoning sovereign debt shook the financial foundation of the State, threatening its solvency. As the Government went into the damage control mode, some of the toughest measures, that further impacted the already suffering masses, followed.


In FY 2010, Spain witnessed an unemployment rate of over 20%, the highest in Europe. To add to the working class woes, the country that was once known for its labor-friendly markets began contemplating sea-change in the relevant statutes that may mean limiting the role of the unions and collective bargaining; greater power to the organizations; easier retrenchment policies; and smaller severance packages. Amidst the pressure from various institutions and international bodies, Spain tabled a bill for raising the retirement age from 65 to 67 years, in order to postpone the disbursement of retirement benefits. Meanwhile, the Organization for Economic Cooperation and Development (OECD) stated that this may not be a sufficient measure and a further raise is called for. It has advised the Government to reduce the retirement benefits through smaller pension payouts. The current practice is to consider the last 15 years of service as a basis for calculating the base salary. As per OECD, this period should be extended further back to arrive at a lower average figure. Among the other proposed changes, are stronger controls on the spending of individual regions, VAT for more items, new environmental tax on water usage, and so on. Though Spain seems to be approaching its deficit targets in the medium term, it is largely at the cost of the real purchasing power of the people in the shorter-term.
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