EU Economic And Monetary Policy Case Of Spain

This research paper aims to go over how the European union has influenced economic and monetary guidelines of Spain and vice versa. This dual romantic relationship is of utmost importance as we go through the costs and benefits the EMU has brought to Spain and the opportunity of the long-standing inflation problem in Spain impacting on EU's monetary regulations. EU regular membership has undoubtedly largely influenced the economic regulations and conditions of Spain. For example, Spain's accession in 1986 forced the federal government and economical elites to look at the necessary procedures to embark on economic modernization. In addition, the Euro Monetary Union (EMU) Maastricht Treaty standards led to Spain needing to apply micro and macroeconomic insurance policies like fiscal consolidation, central bank freedom and wage moderation (Royo, 2006). Also, the current Greek debt turmoil has also tossed the limelight on Spain which is also undergoing a crisis of itself: "competitiveness crisis". With this turmoil at heart, it is highly unlikely but nonetheless possible that EU might either choose to expel Spain from the euro area or undergo a series of policy reforms to deal with this crisis. This research newspaper will start with an release of Spain's accession in to the EU, followed by the costs and benefits Spain experienced from complying with the EMU Maastricht Treaty. This will be followed by an investigation on the competitiveness problems in Spain and its own affect on the European union. Lastly, this newspaper will have a conversation on the possible monetary and structural reforms that both Spain and European union should undertake to smoothen EU integration for both gatherings.

Spain's accession in to the EU

Before accession in to the EU, Spain's market was of an protectionist dynamics. It remained typically beyond your international economical trading area. Yet, in the 1980s, Spain decided to integrate with Western Europe, and was enthusiastic in accommodating to the EC trade traditions and rules in order to secure accession. Spain became a member of the EMU because it was financially beneficial then as nearly all Spain's trading lovers are in the European union.

On January 1986, Spain signed up with the Western community as a complete member. Spain was a company supporter of the Western european and Monetary Union from the starting and rushed to be always a part of the Western european Monetary System (EMS) in 1989 (Sebastian Royo, 2003). The Western european Monetary Union was founded with the goal of creating and increases trade among European countries.

Based on the accession arrangement, the taxation insurance plan of Spain was altered dramatically. First of all, Spain were required to slowly but surely remove custom responsibilities as well as commercial tariffs on EC goods (US Library of Congress). Spain's taxes rebate on exports needed to be removed too. Furthermore, Spain were required to impose a value-added taxes (VAT) which experienced affected Spain negatively in the 1980s. For example, the release of VAT makes Spain a far more expensive vacation spot for inbound tourists/tourists and this will impact the Spanish tourism industry.

2. 1 Implications of European financial integration on Spain

More importantly, membership in the Economic Monetary Union has many implications on Spain's home economic policies. It is because Spain now manages to lose control of monetary and exchange rate polices to fix problems in its market and also have to rely on the EMU's economic insurance policy instead. The EMU is tasked with the aim to conduct insurance policies to ensure and achieve steadiness and growth in the Euro zone (Trichet, 2005).

European financial integration kick-started some reforms aimed at liberalizing and modernizing the Spanish current economic climate. Accession to ERM and then EMU regular membership resulted in the reform of the duty system. This reform of the Spanish tax system includes the introduction of VAT and a reduction of transfer duties. This is along with a fiscal loan consolidation process (minimizing federal government budget and personal debt deficits).

Membership in the European union which led to Western financial integration has both results and unwanted effects on the overall economy. The overall consensus is that the economic outcome for Spain's regular membership is still mainly positive. For example, gross domestic product per capital (GDP) increased significantly from 1985 and 2005 (Elcano Royal Institute & Euro Parliament - Office in Spain, 2006). The Spanish market has also savored expansion since accession. Furthermore Spain has received a huge amount of funds since accession and has made use of these cash to finance local cohesion jobs and develop infrastructures to modernise the economy. In addition, with increased exchange rate stability, imports of goods and services in Spain increased significantly and thus there was a greater degree of openness in the Spanish current economic climate. However there continue to be major differences in economic development between Spain and the best economies in the EU.

Financial integration anticipated to EMU was not totally smooth-sailing for Spain. The financial integration, which led to professional restricting, has undesireable effects on the market in the first 1980: it resulted in high unemployment. Furthermore, the 1992 EMS turmoil was traumatic for Spain. The 1992 turmoil originated from an increase in administration spending in Germany. This coupled with contractionary monetary policy led to increase in interest levels which affected all of those other people of the EMU. The result was a sharpened drop in the development rate of real GDP and Spain having to devalue thrice. Many jobs in Spain were lost in the turmoil. Fortunately these results were cushioned somewhat by an economic increase in Spain, the continuing fall in essential oil prices and large inflow of foreign direct investment into Spain as much foreign companies seek to seize a cut of Spain's increasing consumer market (US Collection of Congress).

Therefore for Spain to seize the benefits associated with EU membership and revel in economic development as well as low inflation, it has to push forward its structural reforms as well undertake reasonable fiscal regulations. Spain till now has succeeded in conducting reasonable fiscal insurance policies. However its natural issue of high inflation is constantly on the threaten its competitiveness and hence its trade balance. This has not been solved quickly partially because of complacency due to its early economic success in the EU (Royo, 2006).

European financial integration of the EU which entails productive free motion of capital, dedication to exchange rate stableness as well as harmonization of capital taxes have many positive implications on the Spanish macroeconomic insurance policies. One benefit is the fact free movement of capital ends up with a reduction in financial costs for companies and so allowing companies to raise more resources. However Western financial integration has its disadvantages too for Spain. For instance, such commitments come into conflict with the aim of the Spanish administration to reduce inflation as such commitments tend to cause lower interest levels thus nurturing inflation rates. Nevertheless, EU membership has contributed to some extent in reducing inflation in Spain. The launch of the Euro and the Euro Central Loan provider (ECB), have sizeable success in restricting price increases. The ECB's main aim of its monetary insurance plan is to keep inflation of those in the euro area under control and achieves this by increasing interest rates. The ECB therefore sets long-term rates of interest for all the EMU countries. Since getting into the EMU and taking part in the single money, Euro, the Spanish overall economy has altered in a starkly different manner when compared with its counterparts in the EU. Spain's economic development in conditions of GDP and inflation rate has been significantly greater than the other member expresses in the European union (Andres, Hurtado, Ortega, & Thomas, 2009). These differentials particularly the inflation differential is most probably brought on by the convergence and the integration of international markets. In fact, the surrendering of a nation's to pursue autonomous monetary policy consequently of complying with EMU and ECB is one reason Spain has problems reducing her traditionally high inflation rate. Therefore this is perhaps the reason why Spain is powerless to make use of initiatives like preparing interest rates to regulate inflation.

As mentioned previously, one of many implications of EMU regular membership for Spain was the convergence of interest levels which resulted in extremely low interest rates in Spain. (Royo, 2006). The extreme decline of interest rates in Spain was necessary in order to secure accessibility into the EMU. Actually, this convergence of interest levels therefore of EMU regular membership comes with an indirect influence on Spain's current profile trade deficit. Low interest rates resulted in an explosion of credit and mortgages. This raises residences prices. Low interest rates cause savings to diminish and so the cutting down rate is insufficient to financing investment projects, resulting in the private sector having a large trade deficit. Low interest rates also bring about excess demand and resulting in high goods and wage inflation.

Therefore, although membership in the European union served as, the burkha trigger for the Spain to embark on liberalizing the current economic climate and has typically better trade, it also contributes to problems regarding Spain's trade balance. It is because almost all of Spain's trade associates (countries which Spain exports her products to) are in the EU. (Royo, 2006)This in conjunction with increasing GDP, which increased quicker than exports, resulted in a growing current bill deficit.

It is important to note that the high inflation problems and the growing current profile deficit occurred in a setting of fiscal stableness (Ubide, 2007). Once more, regular membership in the European union has resulted in Spain having too little monetary and cyclical tools to achieve fiscal surplus and control rising inflation. Getting the national money in a set exchange rate because of the EMS thus brought on Spain being unable to resolve these economic problems. Quite simply, if Spain is not a person in the EU and don't participate in the single money, Euro, she can have devalue her currency with respect to other currencies and improve its competiveness of its exports, and therefore improve her trade balance.

3. 1 The Competiveness Problems in Spain

The Greek debts crisis has put the limelight on the peripheral member expresses of the European union especially Spain. However Spain is starting another crisis which of a different nature as compared to Greece. Spain's problems is not anticipated to too little budgetary discipline, but caused by the increase in domestic credit (anticipated to convergence in interest rates in the EU). The regular membership in the EMU can be related to the increase in local credit resulting in the construction growth in Spain. EMU reduced the expense of borrowing for households as real interest levels for households fall substantially. This is due to the reduction in the risk premium as a result of EMU membership. Therefore, lower cost of borrowing for households led to an increased in range of houses built and so a growth in the structure industry. The structure growth in the private sector was combined with poor monetary performance in the other sectors; this resulted in instability as well as trade imbalance.

From the later 1990s to 2007, Spain has exhibited poor international cost competitiveness (when compared with the rest of the EU members) as a result a significant upsurge in cost of production especially in the tradable goods sector (Marzinotto, 2010). This significant increase in cost of creation is brought on by Spain's owning a home boom. "Other factors that contributed to poor international cost competitiveness include wage indexation to past high inflation and extension of wages that happen to be decided at industry level" (Marzinotto, 2010).

In the 19809s, Spanish firms were facing powerful competition from Latin America and the Far East on products like clothing, textile that happen to be Spain's main exports. These countries from china and taiwan and Latin America have leverage on Spain because they are in a position to produce these goods very good cheaper than Spain because of their low salary (Royo, 2006). Because of this, Spain is often forgotten by foreign buyers who chose to establish their operations in these countries instead. This situation worsened when the enlargement of the European Union to the central and eastern Europe materialized. It is because Spain must package with new competition from new users on industries which can be labor-intensive which form the bulk of Spanish trade. This further impact the trade balance of Spain because these new users also are in a position to exploit their low salary thus have the ability to produce cheaper exports when compared with EU.

It is a tough obstacle for Spain to solve the resulting current accounts deficit because such trade imbalance prevails independent of any utilization of sound fiscal policies. This is not only an important concern for Spain but also has an important influence on the European union. It is because the poor international competitiveness of Spain will impact the balance of the Euro too.

3. 2 Spain's crisis and its own implications on the EMU

Based on the existing competiveness turmoil of Spain, one of the improbable options for Spain is to exit from the euro area. However this option begs another central question: is a euro exit possible and how will the credibility of the euro being afflicted? Firstly, the reliability of the euro is improbable to be threatened if countries like Spain and Greece leave from the euro zone. However in a meeting of an Spanish leave from the euro zone, it will lead to other troubled nations pondering over similar departures and such spill over results will create an uncertain environment which is not conducive for even more Western financial integration. Nevertheless, such concerns may be redundant because the chances of Spain exiting the euro area or any other member status doing likewise is incredibly unlikely as a result of difficulty in doing this.

One important barrier to exit is the financial integration between the people of the European union has reached a significant level thus cross-border resources are very high. "Therefore an exit will result in massive upheaval" (Willams, 2009). Naturally there will be benefits for Spain to leave the euro as it implies regaining autonomy in chasing independent monetary coverage as well as exchange rate versatility. However, the costs of drawback are high too. For instance, there will be a slice in usage of finance as well as a sharp increase in funding costs due to a removal of funding by the EMU because of this of drawback. This thus suggest a likely situation where Spain will remain in the euro zone and attempt to deflate its real estate boom without the utilization of independent financial policy or money devaluation.

This turmoil has huge implications on the European union. The European union cannot and can not hang these struggling economies out to dried up. Therefore to fix the competiveness crisis in Spain, there is a need for the European union to make some changes or create some frameworks. One possible manner in which the EU can manage this turmoil is to present something to monitor income and price trends (Marzinotto, 2010). This isn't exactly a novel avenue that your EU hasn't implemented before. One of the requirements of the Exchange Rate Mechanisms ERM (before the advantages of the euro) was that no member country could change its nominal exchange rate minus the consent of others because of its results on competitiveness. This isn't the truth now. "Member claims can now change its real exchange rates via VAT raises and slashes in interpersonal security efforts" (Marzinotto, 2010).

Therefore in this avenue, the European union should regularly screen the real exchange rates in the euro zone and should expose initiatives whenever economical developments create a risk to the balance and the operation of the EMU. Furthermore this Western competiveness monitoring platform (Marzinotto, 2010) should have a euro-wide point of view and concentration as Spain's current profile deficit means a surplus for a different country. Therefore in the event of necessary adjustments, the EMU must consider both the hobbies of the "deficit" and "surplus" member claims.

In addition to a monitoring framework, there also needs to be an alert treatment (Marzinotto, 2010)that will own an examination whenever fluctuations in a country's current bill deficit exceed the predefined limits. Within the alert procedure, the united states that has flouted the predetermined limitations will be assessed based on its efforts to improve this problem. If the analysis is negative, the commission will then propose initiatives to solve the problem predicated on a euro-wide target.

Nevertheless, despite these advice to help Spain and other similar countries to solve such competiveness problems, the onus is ideal for these countries to produce a concerted effort to resolve it via nationwide initiatives. The Spanish administration should execute a national competiveness monitoring construction (Marzinotto, 2010). This construction includes employing a range of plans for remedial action. However this will not be any easy activity due to commitments to the EU. Guidelines that Spain is hindered from using scheduled to euro account include stimulating inward investment by offering duty bonuses and cheap loans to buyers as well as devaluation. Therefore there appears to be only supply-side procedures which Spain may use to treatment the turmoil. Supply-side plans are favourable because an improvement in supply-side performance tends to lead to continual economic growth with out a surge in inflation rate, ceteris paribus. However, a good supply-side performance by itself is not sufficient and must be along with a sufficiently advanced of aggregate demand therefore the fruitful capacity of the overall economy can be utilized. The Spanish administration can encourage an entrepreneurial culture by giving regional policy assistance for entrepreneurs and also aiding these firms in relation to usage of knowledge and advice.

In addition, although Spain has managed to maintain a acoustics fiscal coverage, it hasn't fully employed the fiscal insurance plan to deflate the housing boom. Spain can enhance the duty treatments of interest payments on house loans to cool the local housing market. With higher cost of capital, the disposable income of a household will be affected thus leading to a decrease in excess casing demand. In fact Ireland has exhibited that raising the cost of capital of homes can be achieved by detatching interest relief on mortgage interest repayments, (Gerald, 2004) is possible within the EMU. This would go to show that the increased loss of independent monetary policy (as a result of EMU regular membership) to improve the crisis cannot be an excuse for failure. It is because a well targeted fiscal insurance plan can be utilized effectively to lessen excess demand in the housing marketplace. However such measures carried out by the Spanish authorities might not exactly be popular with the Spanish open public.

3. 3 Attempts by the Spanish government

Spanish government launched the National Reform Program (OECD, 2007) in 2005 to recognize challenges to the current economic climate (due to indirect implications of EMU regular membership) and propose initiatives to resolve these problems. Regardless of the intentions of this program, it has not been very successful in getting together with the challenges. Furthermore, the tensing by the Western Central Bank hasn't were able to cool the domestic demand in Spain by a little degree. Furthermore, although the housing marketplace in Spain has exhibited some indications in slowing down, residential investment continue steadily to form a substantial part of Spain's GDP and house prices remain continuously increasing (OECD, 2007). Industry production has not increased significantly thus inflation differential still persist between Spain and all of those other euro zone participants.

As in comparison to other associates of the euro area, Spain has embarked on a fiscal consolidation policy with a far more concerted effort. This is because of any need to counterbalance the effects of the current loose monetary coverage conditions. Although ECB brought up the rates of interest in 2007, it got limited success in air conditioning the domestic demand in Spain. This is partially scheduled to tax reductions on homes which boost the households' throw-away income. Therefore Spain should continue or even enhance its restrictive fiscal stance to reduce pressure on the home demand.

The Spanish authorities has also attemptedto develop the rentals housing market. Nonetheless it has found with limited success. "Therefore, it will be better to little by little stage away any types of assistance which property owners can receive in order to balance the incentives between booking and purchasing and moderate demand pressures. " (OECD, 2007). Another solution is to "enhance the legal security of relations between owners and tenants in order to improve the use of the enclosure stock" (OECD, 2007).

With the progressive decrease in EU exchanges to Spain as a result of enlargement, there can be an increasing have to have and manage the government budget effectively. The Spanish federal has regarded this need and also have used reforms to increase the management of the federal government expenditure and resources. "The Spanish federal limited the development of government expenditure to below the projected climb in nominal GDP and also used taxes revenue to lessen indebtedness" (OECD, 2007). The federal government has also increased the accountability and responsibility of parts regarding their costs. That is achieved via increasing the control the regions have above the taxes imposed on their specific regions. This may have the result of minimizing the reliance by these regions on the central authorities for transfers. Therefore this delegation of responsibility will also enhance the regions' revenue bringing up power. However there are problems associated with such decentralization, there may be lack of information thus impacting efficiency. Therefore there need to be an independent organization to screen and measure the polices of the many government organizations of the respected locations (OECD, 2007). In addition such assessments have to be translucent to the Spanish general public.

The Spainish federal has also reformed the 2003 Fiscal Steadiness Legislations (OECD, 2007)to be able to keep fiscal balance and prudence in a decentralised system. According to the 2003 Fiscal Stability Law, each degree of the government has to ensure that its accounts are permanenty in balance. Furthermore, the law evaluated the cyclical position of the Spanish current economic climate by monitoring its expected development rate against it potential. Although this legislations seems has a great influence on preserving fiscal stability, the federal government must perform this regulation with caution to prevent a situation of any pro-cyclical budgetary result in which a loose fiscal position is adopted when times are good and a restrictive fiscal position when times are bad.


Since accession in to the EU in 1986, Spain has loved a positive economical growth. In addition, EU transfers possessed also allowed Spain to modernise and develop its current economic climate as well as infrastructure. Although financial integration process was difficult for Spain with the launch of VAT and other methods, Spain accommodated its national guidelines to secure entrance into the EMU. Despite Spain maintaining an environment of fiscal balance, the high inflation differerntial between Spain and the rest of the euro zone members threatens to damage Spain's international competitiveness. This competition problems can be partly attributed to the reduced interest rates set by the EMU thus resulting in domestic credit increase and hence unwanted demand in the housing marketplace. This is a central concern for both EU and Spain as they have wide implications for both gatherings. Therefore it is likely that EU's economic policies and framework will be revised to add initiatives like a monitoring framework to control the Spain's problems or other similar turmoil by other member expresses in the future. Furthermore, although Spain is linked by its obligations to the EMU (such as not having the ability to devalue its exchange rate or going after an independent economic plan to deflate its booming housing market), there are some supply-side regulations and national reforms that Spain can go after to lessen inflation. Finally, remedial action by both the EU and Spain will invariably have implications on each other as well on the rest of Europe.

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