An Economic Calamity

A Look at the Effects of High Unemployment on Spain

and

The European Union

Carly Tucker

SISU-383-001

Professor Martin

May 2, 2016

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Executive Summary: Spain’s Unemployment Predicament

Unemployment has resulted in an economic setback for a number of member

states and consequently the European Union as a whole. In particular, Spain is a country

that has been afflicted with vast unemployment, especially amongst its youth, a pertinent

problem of which we must be critically aware given its affect on the rest of the EU. The

situation involving recent college graduates, those eligible to work between the ages of

18 and 25, is of immense concern for Spain and its governing bodies. Overall, these are

bright and ambitious young people forced to take unfulfilling positions well below their

educational acumen level. Worse, some have found that there are no jobs at all when

they have diplomas in hand, the result of a beyond sluggish economy within the Iberian

Peninsula. As a result, the country now reluctantly poses one of the greatest

unemployment threats to the European Union. With a rate of over 20% for those without

work, and a youth statistic that is double that staggering figure, Spain has the second

highest unemployment rate, finding itself in the unenviable company of Greece.

The subsequent pages of this report find that Spain has established and attempted

to implement structural reform amongst a variety of sectors. However, the rate and

degree at which it is doing so has not proven to be adequate. The GDP is growing, but not

at a substantial rate, thus leading to a variety of damaging results. The high

unemployment amongst youth has led to a rise in radical new party politics, an increased

level of Euroscepticism, a negative atmosphere and attitude within the labor market and

has had dire effects on the country and its population. For instance, there have been

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findings that due to Spain’s high unemployment, there have, in turn, been low fertility

rates which will have a critical effect on the future economics of Spain.

My research has also led me to discover that while all of the European Union has

experienced some sort of economic setback from the financial crisis, Spain’s has been

much more drastic, due to institutional and economic differences between it and other

countries. There is a belief that Spain’s structural issues within its labor market, its

unreformed benefits system and a lack of government investment in crucial areas, such as

education and innovation, have led to its unemployment predicament.

The European Union’s Unemployment Situation: An In-Depth Look at Spain

Since the financial crisis of 2008 rocked and disrupted the world’s economies, the

European Union has struggled to recover economically. The challenge of unemployment

is a very important policy issue confronting the EU due to the severe recession and its

inflexible labor markets. Cyclical unemployment within the EU could possibly become

structural. Additionally, unemployment poses a huge risk to the EU collectively due to

the relationship between the economy and politics. The woes of the economy will

become political woes, as the unemployed are more apt to distrust politicians and

therefore are more apt to distrust the EU as a whole. This distrust will lead to increased

Eurosceptism and, potentially, the toppling of the European Union as an entity.

Background and Context

The 2008 financial disaster brought the deepest recession Europe has seen since

the 1930’s. The post Cold- War in the European Union era was marked by much

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economic advancement. Within a variety of treaties, the EU saw the completion of the

Single Market, the implementation of a single currency and plans to reform institutions

and to focus more resources on employment. According to a report from the European

Commission, the financial crisis was preceded by a period of “rapid credit growth, low-

risk premiums, abundant liquidity, and the development of real estate bubbles” (The

European Commission, 2009). All of this overstretched leveraging created a vulnerable

financial sector, thus allowing the United States’ economic crisis to spill over and affect

the European Union’s overall economy.1 As a consequence of this toppling, there were

adverse effects on the real EU economy, particularly on loan books, asset valuations and

credit supply. Some countries, however, were more vulnerable than others due to current

account positions, exposure to real estate bubbles or the presence of a large financial

center.2 In addition to the effects on economic activity, the labor market across the EU

has been negatively affected, leading to a rise in unemployment- a term that accounts for

those actively seeking jobs but cannot find them-a rise that has been felt more strongly in

some parts of the Eurozone than others.

While all of the European Union economies experienced hardship during the

financial crisis in ’08, Spain was arguably one of the most severely hit. Since the crisis,

while many of the EU countries have recovered, Spain has not. Spain has the second

highest unemployment rate behind Greece, with over 20% overall unemployment and

over 50% youth unemployment. The fact that Spain’s unemployment is so high is

puzzling for there is no one clear explanation. Many believe that Spain’s structural issues

1 István P. Székely and Paul van den Noord, “Economic Crisis in Europe: Cause, Consequences and Responses,” VOX European Union, October 6, 2009, accessed March 27, 2016, http://www.voxeu.org/article/economic-crisis-europe-cause-consequences-and-responses. 2The European Commission, “Economic Crisis in Europe: Causes, Consequences and Responses,” Economic and Financial Affairs, July 2009, accessed on March 27th, 2016.

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within its labor market, its unreformed benefits system and a lack of government

investment in crucial areas have led to its unemployment predicament.3 With such high

unemployment among its youth, a sector that is defined as ages 18 to 25, and without any

talk or implementation by the government of structural measures, Spain will only

continue to experience insufficient growth.

From the latter half of the 1990’s up until 2007, Spain experienced a ‘Golden

Decade’ marked by rapid economic growth. By the end of its growth era, Spain’s GDP

per capita had reached 90% of the EU-15 average. This long “pre-crisis” period was

characterized by high employment and growth rates brought about largely by the

construction sector.4 This remarkable decade for Spain relied in large part to the housing

boom it experienced, but after the crash of the housing market, Spain’s economy suffered

a recession. Spain has experienced high unemployment in the past, but during its Golden

Decade unemployment dipped below 10%. During this period, a heavy influx of

immigrants contributed to Spain’s economic boom. Approximately 12.2% of Spain’s

population in 2010 were foreigners and between 2000 and 2008 the percentage of

employed immigrants increased from 1% to 14.8%.5 The 2.6% decrease within a two-

year span is important as it shows the fiscal incentives before and after the crisis.

Additionally, Spain’s trade deficit increased during this period, meaning that Spain was

importing more goods into its market, allowing for jobs to be created elsewhere instead

of domestically. This increase in the trade deficit was at a record high in 2007, thus

3Julia Sinitsky, “Unemployment in Spain After the Financial Crisis,” Boston University Undergraduate Economics Association, October 15, 2013, accessed February 10, 2016, http://buuea.com/unemployment-in-spain-after-the-financial-crisis/. 4Andrea Éltetö, “The Economic Crisis and its Management in Spain,” Eastern Journal of European Studies, 2 (2011): 41, accessed February 12, 2016. 5Éltetö, “The Economic Crisis and its Management in Spain,” 43-45.

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contributing to Spain’s economic and employment downfall. Spain’s lack of investment

in domestic jobs intensified the issues brought about by the crisis.

Spain’s high unemployment rate is an extensive issue. Even before the financial

crisis of ’08, unemployment amongst youth was still unstable. The country failed to

invest in education and innovation when it was experiencing its economic boom, which

has played a key role in the high unemployment rate now facing this country. Its high

percentage of unemployed is the most critical sign signaling Spain’s weak economy and

it also signals continued stagnation within other EU economies. If Spain cannot correct

its structural difficulties then the rest of the Eurozone will bear the consequences as well.

Since Spain is a part of the Eurozone, all countries that are part of the Eurozone feel the

repercussions of its economic woes and high unemployment rates.

Relevance to the European Union and Europe Collectively

Spain’s economy and high unemployment are of significant relevance to the EU

and Europe as a whole. As the fourth largest economy in the Eurozone, behind Germany,

France, and Italy, Spain has seen significant economic growth in the past couple of years

and is set to see a GDP growth of 2.8% this year according to the European

Commission’s Economic and Financial Affairs Report.6 Spain’s economy, however, is

still fragile and thus incredibly vulnerable. Despite positive forecasts for the Spanish

economy, the Commission predicts negative risks to the economy, which develop from

the uncertainty in the formation of the new government (The European Commission,

2016). The EU cannot depend on a Spanish economic turnaround to sustain and

6The European Commission, “Economies of the Member States,” Institutional Papers 20\2016, February 4, 2016, accessed on March 28, 2016.

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categorically benefit the Eurozone. In general, distressed economies within the European

Union lead to an overall increase in borrowing costs, as the EU has to bail out its

economies. These bailouts from countries like Germany come with strings attached, such

as strict austerity measures, that ailing countries resist. As Spain, and other peripheral

countries, have accumulated massive debts and deficits, it has threatened the Eurozone’s

effectiveness and productivity This threat highlights the European Union’s economic

interdependence and calls into question the sustainability of the monetary union.7 Under

the Maastricht Treaty, states that are a part of the Eurozone must have their economies in

order and be fiscally compliant. Negligence regarding Eurozone applications had led to

harsh effects for the EU and the IMF.

In 2012, Spain requested a bailout; EU leaders agreed to allocate $123 billion of

Eurozone funds to recapitalize Spain’s struggling banks. Despite EU assistance, Spain

followed Ireland and exited its bailout program, allowing Portugal to do the same.

Spain’s economy is set to grow, however, unemployment remains high, high debt persists

and there is still a rigid labor market, all weighing down Spanish banks.8 These bad assets

weighing down the banking system compromises the work the EU has done to assist

Spain and brings about negative effects and uncertainty to the EU as a whole.

Not only is Spanish unemployment an issue for the European Union, but also

unemployment is collectively a problem for the EU, for it leads to an array of challenges.

The high percentage of youth unemployment in the EU has led to a sharp rise in

Euroscepticism and has led to young voters diverging from the mainstream liberal leaders

and instead supporting much more radical political parties based upon Nationalist 7Christopher Alessi and James McBride, “The Eurozone in Crisis,” The Council on Foreign Relations, February 11. 2015, accessed on March 28, 2016 from http://www.cfr.org/eu/eurozone-crisis/p220558Alessi and McBride, “The Eurozone in Crisis.”

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sentiments, sentiments that once tore Europe apart. In May of 2014, millennial voters

were a key source in the outcome of Parliamentary elections. For instance the French

Nationalist front, Marine Le Pen, won 25% of the votes of 18 to 24 year olds.

Additionally, a majority of Greece and Germany’s millennial voted in favor of far-right

Eurosceptic parties.9 The European youth have become cynical of the EU because of all

the issues it faces and the lack of transparency within the system. It is important to

recognize, however, that not all countries’ youth are supportive of far-right Nationalist

parties. Political dissatisfaction varies by region; in Spain and Greece youth have

benefitted from the growth and popularity of left wing parties such as Podemos and

Syriza.

Another challenge brought about the high unemployment is that of economic

integration. The EU’s youth has lost its keenness for economic integration, a principal for

which the Union is based upon. The approval ratings in countries with the highest youth

unemployment rates like Spain and Italy, which are 30% and 12% respectively, have

sharply declined over the past few years.10 Adding to the field of challenges is wide

emigration within and out of Europe. Despite the waning working age population and rise

of educational attainment, there are simply just not enough jobs to go around in Europe.

The high unemployment has brought about large waves of emigration, as skilled and

qualified people search elsewhere for opportunities not available to them in their home

countries. According to the United Nations Population Division, 18 out of the 40

European countries experienced negative net migration rates from 2010 to 2015.11 As

9Neil Howe, “A Rising Generation of Eurosceptics,” Forbes, (October 30, 2015). 10Bruce Stokes, “Faith in European Project Reviving,” Pew Research Center, (June 2, 2015). 11The United Nations, “Data Query: World Population Prospects,” Department of Economic and Social Affairs, (2015).

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Millennials struggle to find jobs, the added issue of immigration and the ongoing refugee

crisis does not help. Large numbers of Syrians and other Middle Eastern refugees are

seeking Europe for refuge, only adding to the youth’s frustration and struggle to find

jobs. Millennials are the next generation of the EU and it is their views that will shape the

future of the EU and will influence the outcome of the European Project.

The Challenge and Meaning for Spain

The topic of the economy is meaningful and challenging for the European Union

and Spain because a strong economic backbone is crucial for the EU and the Eurozone,

something of which Spain is a part. When it comes to its member states’ economies, the

EU has set the precedent that it will bail out these economies, thus the EU needs Spain to

bounce back so that it does not need to continue to monetarily assist its economy. As the

fourth largest economy in the Eurozone, the EU needs Spain to have a strong, functioning

economy with high employment. The financial crisis and subsequent consequences that

have followed have been detrimental for Spain. While its economy and GDP are

projected to grow, there are still structural issues that continue to persist in Spain. As

Spain enters into this fiscal year’s second quarter, high debt, emigration, lower consumer

consumption and income disparity are all persisting challenges.12 There are many

problems within the Spanish education system as well as a lack of investment in

innovation, both of which have abetted the high unemployment in Spain, particularly that

of its youth sector. Spain is now challenged with generating jobs for its citizens,

especially its youth; many of who are college educated and skilled. 12Melissa Parietti, “5 Economic Challenges Spain Faces in 2016,” Investopedia, March 15, 2016, accessed on March 28, 2016, http://www.investopedia.com/articles/investing/012416/5-economic-challenges-spain-faces-2016.asp

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Overall Purpose

The purpose of analyzing and evaluating Spain’s economy and high

unemployment is to look at the conversation surrounding the policies in place and the

policies that could help better alleviate Spain of its troubles. High youth unemployment is

the biggest concern for Spain because it contributes to political and social unrest. There is

a loss to future productivity and overall earnings and a very real chance that cyclical

unemployment will become structural. Educated youth who are actively looking for jobs

and cannot find them will not only hinder the Spanish economy but also Spanish society

in that it could potentially lead to negative effects on health, happiness and job

satisfaction.13 If serious structural reforms are not implemented, Spain could see its

current youth becoming a “lost generation.” The purpose of this report is to contribute to

the conversation and showcase why this issue is of concern for not only Spain, but also

the European Union and Europe as a whole.

Spain’s Attempts to Tackle Unemployment

The economic crisis hit Spain hard and unlike many OECD countries, the impact

has lasted much longer in Spain. The construction sector collapsed, the government

deficit grew exponentially larger and unemployment saw unprecedented levels, levels

Spain is still trying to reduce. Despite the drastic impact the crisis has had on Spain, it has

allowed for a window of opportunity for Spain to reform and restructure it economy and

its labor markets. While the Spanish economy is strengthening, and unemployment rates

are slowly improving, it is not happening fast enough. A variety of measures have been 13Stefano Scarpetta, Anne Sonnet and Thomas Manfredi. “Rising Youth Unemployment During The Crisis: How to Prevent Negative Long-term Consequences on a Generation?” OECD Publishing (2010). Accessed February 24, 2016. doi: 10.1787/1815199x.

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taken in order to curtail unemployment, especially amongst the youth sector. In 2012, a

labor market reform was implemented but in order to fully and adequately address the

unemployment challenges, further tools and policies are needed. In 2013 Prime Minister

Mariano Rajoy revealed a plan of 100 individual measures the country would take,

among them was spurring spending in order to curb the extensive youth unemployment.

This plan allocated 3.5 billions euros over four years to stop the rising rates of

unemployed millennials. Now, in 2016, these effects are being slightly felt but further

reform is being instituted amongst the labor market, the education sector and work is

being done to create an efficient regulatory framework to reinforce business creation and

encourage the innovative capacity of the economy.14

Obstacles and Limitations to Curtailing Unemployment

Spain’s high youth unemployment has given rise to radical politics. With such

instability in the economy and labor market, the youth have become distrusting of the

traditional two party political system in Spain, thus leading to the creation of radical

leftist parties, such as the left-wing populist, Podemos party in 2014. Podemos is centered

on finding justice and solutions for Spain’s issues of inequality, unemployment and

economic disorder. After its establishment in 2014, the party garnered 100,000 members,

a number that has now risen to 389,000. This large number in such a short amount of

time could be attributed to Podemos’ goal of renegotiating the austerity measures put in

place as well as its goal of limiting the Treaty of Lisbon.15 In times of malaise and

corruption, citizens, especially the youth, look for ways to revolutionize the status quo in 14Angel Gurría, “Spain After the Crisis: A New Growth Model,” OECD, (2010). 15Omar G. Encarnación, “ Can the Far-Left Sweep Spain?,” Foreign Affairs, February 6, 2015, accessed February 6, 2016.

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politics. As Podemos continues to grow in popularity and youth unemployment stays

stagnant, there is a very real chance of further intense political backlash.

In order to strengthen its economy, its politics, and its overall support and morale, the

European Union and in particular, Spain, needs to get its unemployed, especially its

youth, back to work. Spain needs to create more jobs domestically, instead of overseas,

and to innovate so to make its labor force more mobile. The country needs to encourage

its workers to get back to work and to be more competitive. In addition to Spain, many

European countries support its unemployed for more than a year, an issue that needs to be

addressed. The EU needs to initiate labor market measures, which will result in

stimulated demand and sharpened skills.

As a result of the qualified and educated youth being unable to find jobs in Spain,

Spain has seen a notable amount of youth emigration into other countries where these

opportunities may be more readily and aptly afforded to them. According to Spain’s

statistics institute, before the financial crisis in ’08, there were 1.4 million Spaniards

living abroad, in 2016 that number is now 2.3 million. This Spanish ‘brain drain’ has

spread through Europe and the Americas with many Spaniards living in Germany,

Venezuela, Argentina and the United Kingdom, which has the sixth largest contingent of

Spanish expats.16

A Fractured Spain

For a period of time the autonomous region of Catalonia, in Spain’s Northern

geographic region, has wanted to become its own sovereign territory. As a highly 16“Spanish Brain Drain Spreads Through Europe and America,” Algarve Daily News, (March 18, 2016). Accessed April 27, 2016 from http://algarvedailynews.com/news/8303-spanish-brain-drain-spreads-through-europe-and-america.

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economically prosperous region, Spain has been reluctant to comply with Catalonia’s

demands. With the economic crisis and surging unemployment, Catalonia’s resistance to

be apart of Spain has only increased. The region makes up 19% of Spain’s GDP, is taxed

heavily yet rarely sees anything given back from Madrid in return. Catalonia feels it is

milked by the Spanish government to help more ailing parts of Spain, such as Andalucía;

however, its own services are underfunded. After pro-independence parties won the

elections in 2015, it is uncertain whether or not Spain will be able to keep Catalonia as a

part of the country, a move that is in Spain’s best interest. With uncertainty and disarray

amongst Spanish politics, an independent Catalonia only seems more likely.

Looking Ahead for Spain: Conclusions and Recommendations

Since the economic crisis of 2008, Spain has seen significant recovery. The

economic crisis highlighted many fundamental problems in Spain’s housing bubble, the

financial sector and its unsustainably high GDP growth. The crisis left Spain with

devastating economic downturns, an incredibly high unemployment rate and a number of

bankruptcies for major companies. As one of the hardest hit EU countries, Spain still has

a long way to go. Its economy and GDP are growing once again and while labor market

reforms have been effective and are improving, its unemployment is not growing fast

enough. Youth unemployment is one of the greatest challenges still facing Spain. The

country’s economy is still facing macroeconomic imbalances. While there have been

improvement in the rebalancing of Spain’s current account there are still risks linked to

the high levels of private and public sector indebtedness. In addition, the exceedingly

negative net international investment position needs careful attention in a framework of

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very high unemployment. Spain needs to implement further action in order to reduce the

risk of unfavorable effects on the Spanish economy and of adverse spillovers to the

economic and monetary union.17

In addition to the reforms and policy proposals brought about by Spain, The

European Commission has made four recommendations to ensure that Spain is on target

come 2020. To help Spain improve its economic performance it must adhere to

improving the following areas: public finances and health; financial sector; labor market;

small and medium enterprises and services.18 Spain is the EU’s fourth largest economy

and safeguarding its progress is vital to the Eurozone. Spain needs to take more measures

to tackle its unemployment rate, particularly that of its youth sector. In the interest of

policies, Spain the government needs to target specific groups among the youth in order

prioritize and customize solutions and direct available resources to the specific needs of

groups based on their areas of vulnerability. A second policy recommendation for Spain

would be planning for the short term and long term in order to maximize potential. In the

short term, it is crucial to adopt impact measures that focus on mitigating the immediate

consequences for the most vulnerable sectors of the population. These vulnerable sectors

would be those with low levels of education and job training. Prioritizing this group is

vital to the improvement of overall unemployment.

Tackling youth unemployment is not something Spain can do on its own. The

European Union, as a whole, needs to provide assistance to Spain and address it across

the entire EU. As of 2015, there were still 7.5 million young Europeans who were

without jobs, without school and without training. One measure the Commission is taking

17“Europe 2020 in Spain,” The European Commission, (2015). 18The European Commission, (2015).

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is to promote job mobility, to encourage youth to travel throughout the EU to countries

where there may be more jobs or training opportunities available. Of course, this is only a

short -term solution as their home countries should be able to offer these same

opportunities in the long run. In 2013, all EU member states signed “The Youth

Guarantee,” a promise to invest in youth. The Guarantee entails youth to be enabled to

find jobs suited to their level of education, skill and experience or the opportunity to

acquire the necessary education, skills or training in order to get a job or apprenticeship.

This Guarantee provides grounds for structural reform measures in both the long and

short term. It seeks to establish structures, measures and processes to be able to offer the

unemployed youth a way forward, a way to become integrated within the economy and

labor market and to enhance access to a job for not only Spain’s youth but also to

enhance the access to the labor market for all of the EU’s youth.19 As The Youth

Guarantee is a new adoption by the EU countries, it is still playing out and its effects are

yet to be significantly felt.

Getting the youth working and tackling overall unemployment is not an easy task

and there is no one simple solution. As this paper has addressed, unemployment is an

issue for Spain and other parts of the EU. The Spanish economy and the unemployment

rate have considerable consequences for the entire Union and puts a significant financial

burden on the Eurozone, thus it is an issue that needs collective assistance in addressing.

The high rates of youth unemployment have had dire implications for the EU and for

Spain. There has been a rise in radical politics across the EU, an increased level of

Eurosceptisim and Spain has seen a greater push by Catalonia for independence. Despite

19“Addressing Youth Unemployment in the EU,” The European Commission, (2015).

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the Spanish economy improving and unemployment slowly decreasing, the rate at which

it is doing so is not rapid enough. Through reform and strict structural measures, there is

hope that Spain can hasten its improvement of the dire situation in which it finds itself,

and give hope to its youngest, brightest and most promising members of its labor force.

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