The sovereign debt crisis of Spain: The implications of private debt and unemployment in the context of membership of the EU and EMU

Anders Ladegaard-Pedersen & Daniel Galliano Dalgaard

Student thesis: Master thesis


Motivated by the current debt crisis in the European Union (EU)’s PIIGS countries (Portugal, Ireland, Italy, Greece and Spain), we have chosen to focus on Spain because it reveals significant differences from the other PIIGS countries, mainly because it suffers from high private debt rather than public debt. It will be highlighted how favorable macroeconomic factors coupled with lower interest rates (due to the integration of the Euro) and excessive lending by the banking industry, which was believed to be one of the most solid in the world, generated a property bubble which was doomed to burst. It kick-started the economic crisis in Spain, and magnified the private debt, as the banks were not as solid due to the “Dynamic Provisioning” accounting method, which made banks look healthy when they in fact were sick. The crisis has resulted in an explosion in unemployment and stagnation of GDP growth, which in turn increases the public debt and public deficit that were otherwise healthy, prior to the crisis. The crisis in many of the southern European countries, and in our case Spain, is the product of macroeconomic flaws triggered by the EMU, and thus the rules of the game for the Euro and future measures are crucial for the future economic stability of Spain. Through analysis of previous similar crises, we will show how Spain can draw lessons from solutions that have benefited the respective countries. We will mainly use Ireland and Iceland and, very briefly, Finland and the East Asian crisis as case studies coupled with the crisis management theory of the OECD which divides economic crises, and the crisis management thereof, into three different phases. With the similar crises in mind, we will be able to draft possible solutions for Spain in the context of the OECD theory. Namely in the phase of resolution and deleveraging Spain can use other previous crises as a benchmark. Firstly, Spain should consider both the pros and cons of a possible bail-out. In doing so, it should be weighed up against a bail-in, where the Swedish Model is mentioned by many experts as being most successful. Secondly, Spain can internally improve its situation through austerity coupled with new labor reforms and improved entrepreneurial and innovative measures. It is clear that Spain suffers under the macroeconomic flaws implied by the EMU, increasing cyclical instability and unemployment, and lacks the ability to correct the demand shocks by manipulating the currency and interest rates, since its currency was replaced by the Euro.

EducationsMSc in Finance and Strategic Management, (Graduate Programme) Final Thesis
Publication date2012
Number of pages133