Boom to Bust - Reconstructing the Spanish Economy Part 2: : Policy Responses to the Economic Crisis

Abstract

Recession in Spain led to intervention by the government to stimulate the economy, a response that was replicated around the world. But as public finances deteriorated, financial markets and some policy makers demanded credible austerity measures (exit strategies) to reduce growing public sector debts. There was particular external pressure on Spain since any sovereign debt default would have serious repercussions at least throughout the European Union. Thus, from autumn 2009 stimulus measures began to be withdrawn and replaced by austerity ones. In addition, recession highlighted fundamental weaknesses in the Spanish economic model. Part one of this article (Salmon 2010) charted the passage of the Spanish economy into recession through examining key three features that were specific to Spain, the financial system, conditions in the property market, and the exceptional level of unemployment. The second part examines the macroeconomic policy measures taken in Spain and the outlook for a new economic model. It concludes that Spain had little alternative but to severely tighten fiscal policy and that a new economic model will be evolutionary rather than revolutionary