Economic Policy and Global Environment on desklib

This article discusses the impact of political turbulence on the economy of Spain, including the reduction in unemployment rate, reasons for the problem, impacts on the economy and society, and policies undertaken by the government to solve the problem.

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ECONOMIC POLICY AND GLOBAL ENVIRONMENT

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Table of contents
1.0 Introduction..........................................................................................................................3
2.0 Discussion............................................................................................................................3
2.1 key macroeconomic challenges faced by the country..........................................................3
2.2 The reasons of the problem..................................................................................................5
2.3 Impacts of the problem on the economy and the society.....................................................6
2.4 Policies undertaken by the government to solve the problem..............................................7
3.0 Conclusion............................................................................................................................8
Reference....................................................................................................................................9

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1.0 Introduction
The article that is discussed in the study is related to the economy of Spain which has
experienced impressive reduction joblessness or the unemployment rate in the economy. The
figure of unemployment has reached all-time low since the year 2008 amidst the political
turbulence due to the separatist movement from the side of Catalonia. The movement is
creating a great problem for the economic performance of the country as this region’s
economic product contributes importantly to the overall national product of the country. The
investment decisions of the country has been postponed and other decisions are being
affected due to the political turbulence that needs to be solved in order to have a better impact
from the reducing unemployment rate in the economy. The objective of this paper is to shed
light on the details of this problem which is faced by the economy of France. The discussion
includes the impact of the problem on the economy at aggregate level. Apart from that the
study also includes the intervention that has been initiated by the government to get rid of the
problem.
2.0 Discussion
2.1 key macroeconomic challenges faced by the country
There are many factors that can impact an economy at the macroeconomic level. Among
them, one of the biggest problems is the political turbulence. Political turbulence not only
reflects the lack of control of the government but it also is a potential threat for the stability of
the economy. The instability arising from the political turbulence can hamper the activities,
ruin the infrastructure and trouble the administrative processes of the government. Apart from
that, political turmoil can also reduce the intensities of the economic gains as well.
For example, economy is going through a phase of continuous reduction in the
unemployment rate. This reducing unemployment rate can have a lot in store for the Spanish
economy. However, the existing political turmoil is marring the positive gains of the
economy. Littleboy, Taylor and Weerapana (2016) highlighted that Spanish economy has
been performing very average since it was struck by the global financial crisis of the year
2007. The credit crunch and lack of investable capital stalled the infrastructure development
and new business creation. The Spanish unemployment rate started immediately after the
global crisis and hit the peak around 2012.

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Figure 1: The Spanish unemployment rate over the years
(Source: Den Hoed, 2016)
Apart from that, the government of Spain also had to reduce the growth projection of the
future years due to the existing trouble of the Catalonia. The projection of the government
and the political situation plays a key role in the investment inflow. Among the number of
factor that influences the return of the investor are the support from the government and the
political stability in the destination country. Therefore the economy of Spain has failed to
retrieve the pre-crisis GDP growth. Many of the other European countries have rebounded
from the lack of aggregate demand due to the global crisis. The political unrest within the
economy also affected the external and the internal debt of the government. Terra (2015)
noted that, government had to inject capital from the external sources to keep the aggregate
demand high. This kept on increasing with the increasing political unrest of the Catalonia
area. This challenge further amplified with the rise in the interest rate that reached 10%
during the year 2016. Therefore the political unrest in one part of the country created a lot of
challenged for the government of Spain.
In the terminology of economics, post-financial crisis of 2007, the economy of Spain
experienced lower aggregate demand. That means, the Aggregate demand curve shifted to the
rise as a consequence of credit crunch following the crisis. While on one hand it reduced
aggregate price level of the economy it reduced the opportunities of the economy putting the
economy into a recessionary phase (McCrickard, Raymond, Raymond and Song, 2018). The
separatist movement in Catalonia hampered the improvement of the Spanish economy from
this vicious cycle.

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2.2 The reasons of the problem
The main reason for the problem is the political unrest in the Catalonia region of the country.
This region has been protesting against the government to get separated from the main
country of Spain (De Paula and Saraiva, 2016). However, as discussed in the article,
Catalonia contributes a huge chunk towards the national GDP of Spain. Therefore it will not
be a great idea for the central government to lose control over the Catalonia region of the
country. One of the attractive features of the Catalonia region of the country is that it has a
better per capita income compared to the other parts of the country (Stilwell, 2015). This part
of the country paid for the betterment of the other parts of the country following the damages
due to the financial crisis. This aggravated the political unrest within the economy of Spain
that led to lack of investment from the side of the foreign investors.
Another reason for the problem that led to the lack of aggregate demand in the economy of
Spain is the low amount of disposable income to spend on the consumer goods and services.
The income of the consumers of Spain had reduced after the financial crisis of 2007 that
failed to generate the aggregate demand in the economy of Spain. Different parts of the
economy such as the service sector, manufacturing and many more did not get enough gains
from the economic growth of the country leading to stagnancy in the economy of the country.
The excess supply in the market corresponding to a low demand for goods and services in the
economy hampered the profitability of a segment of sellers of the market. Kwan, Chen,
Chindarkar and Thampapillai (2017) noted that, the turbulence and the financial crisis of the
year 2007, together contributed to a situation where the profitability of the companies
reduced that reflected on low labour requirement. Therefore, the economy of Spain went to
the vicious circle of stagnancy.

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Figure 2: The money market
(Source: Martín, 2016)
Catalonia region of the country historically has a high average wealth that did not hamper the
local economy of Catalonia and hence it managed to survive the challenges from the financial
crisis of the year 2007. However, Catalonia was now creating problem for the whole of Spain
due it separatist movement that incited political turbulence in the country. The government of
Spain had to collaboration with the local government of Catalonia and eventually the central
government took over the financial management of the region from the local government
(Patel, Al-Bahrani and Sheridan, 2015). That further triggered the anger among the people of
that region and hence the economic disturbance.
2.3 Impacts of the problem on the economy and the society
There are a large number of direct and indirect problems that rippled through the economy of
Spain due to the political unrest. First and the foremost is the lack of aggregate demand as
was discussed in the earlier part of the study. Apart from that, the income disparity or
inequality has also been a major impact of the political turmoil that the country faced. The
income of a part of the consumer remained the same while the income of another part
increased that led to a gap between the incomes of the consumers of the market. Coupled
with the income tax reform that was initiated around this time further discouraged the low-
income population to supply their labour in the market (Martín, 2016). Consequently, the
income gap between the different citizens widened during the time of turmoil after the

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financial crisis of the year 2007. The productivity per capita of the labour dropped drastically
eventually reducing the overall product of the organisations and the economy as a whole.
Beaudin, Berdiev, Kaminaga, Mirmirani and Tebaldi (2017) noted that, the government did
not introduce a proper tax regime during this time that could boost the productivity and the
further demand in the economy. Progressive tax rate discouraged middle-income earners to
save their money and low-income earners to supply their labour in the economy. The low
savings rate at that time hindered the capital formation in the economy of Spain. According to
the microeconomics theory, the capital formation and the saving are important component for
the investment.
Figure 3: AD-AS Curve
(Source: Terry, Macy, Clark and Sanders, 2015)
Another major impact on the economy has been the lack of circulation of money in the
economy of Spain. The money market of the economy faced severe attack for which the
government of Spain undertook many action that included the injection of money in the
market. The debt of the economy increased more than before leading to a high absolute value
of the external tax of the country. One of the main reasons for the high capital requirement
was the damage of infrastructure and property due to the violence from the side of the
Catalonian population. The debt of the country increased to 159 billion Euros putting an

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immense pressure on the government of the country. Terry, Macy, Clark and Sanders (2015)
noted that Spanish economy had a great growth potential especially after the reduction f the
unemployment in the economy. However, the high internal and external debt of the economy
reduced the potential. The government of Spain could not reinvest the capital for the job
creation and hence the shrink of the aggregate demand. The Spanish government even issued
debt at negative interest rate due to the reduction in the overall interest rates. The main aim of
the government was to increase the money supply among the consumers of the market so that
consumers spending can be triggered. One of the shocking facts is that at the third quarter of
2015, the private debt was 182% of the GDP of the country (Bofinger, 2016). This figure
suggests the level of vulnerability of the economy at that time.
Figure 3: Aggregate expenditure
(Source: Sabiston, Leung and Terrazzano, 2017)
2.4 Policies undertaken by the government to solve the problem
The government of Spain intervened in the economy to increase the consumer spending. The
consumer spending is one the major component of aggregate demand and amplification of
this could be used to further boost the demand in the market (Kampamba, Nkwae and Tembo,
2015). That means the government of Spain tried to shift the aggregate demand to the right
side to that both the price and the output of the market could be increased. The political

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unrest did not allow the government to source the investment from the foreign capital market.
Therefore the government of Spain issued debts at the individual level to increase the
consumer spending (Sabiston, Leung and Terrazzano, 2017). In addition to that, the
government of Spain also pegged the value of the interest rate a very low level in order to
discourage high savings rate. The more the savings lower the consumers spending and hence
the problem would have prevailed. The main objective of the government was to increase the
demand for money for the transaction in the economy. The government used the quantity
theory of money which states that, output of the market can be increased through the increase
in transaction in the market and the money supply (Brink, 2016).
Apart from that, the government also bought t- bills and government bonds from the market.
This open market operation allowed the government to inject a significant amount of money
in the market. Tariff rates were also increased in order to discourage the consumers of the
market to buy products from the external markets. In order to have a significant impact on the
aggregate demand of the national economy, all the money required to be reinvested in the
domestic market (Dullien, Goodwin, Harris, Nelson, Roach and Torras, 2018). Therefore, this
strategy was a positive one towards the betterment of the economy. However, the taxation
policies of the government attracted a lot of criticism as it reduced the tax revenue of the
government. The tax structure discouraged the low-income consumers to reduce their supply
in the market leading to a reduced productivity and tax revenue of the government.
Lastly, the government also increased the spending from the raised capital from the foreign
debt. Government spending is an important remedy to boost the aggregate demand of the
market. The government of Spain spent a huge amount of money for the development of
infrastructure in the Catalonian part of the country (Williams and Franic, 2016). The other
parts of the country also received capital for the infrastructure development. Special
economic zone was created under the investment opportunities for the consumers of the
market. Supply side of the market was also managed by the government (Venkatesan, 2015).
The government spent money for the cold storage and the surplus storage of the market in
order to deal with the excess supply of the market. Consequently, the aggregate supply of the
market remained the same so that the overall output level of the market can be stabilised. The
government provided other kinds of financial support to the sellers of the market to make
sure a healthy aggregate supply of the market that would eventually allow the economy to
have a higher output corresponding to a good aggregate demand (Ngulube, 2018).

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3.0 Conclusion
Therefore, the paper finds out that, unemployment rate reduction that has been seen from the
article has been a great opportunity for the economy to get out of the influence of the crisis of
2007. However, the Spain has been experiencing turmoil over the separatist movement in the
Catalonian part of the country. This political unrest not only made the economy an
unattractive destination for the investor, but it also harmed by the economy through different
indirect channels. The main problem of the economy of Spain that halted the activities was
the lack of aggregate demand and consumer spending. Government has undertaken a lot of
measures to correct the consumer demand and expenditure through capital injection. External
debt was taken by the government for the infrastructure development post the crisis. Private
debt was also provided to the consumers in order to boost the expenditure and hence the
demand for the product. Nevertheless, the political turmoil and the crisis together damaged
the economy to such extent that reduction in the unemployment rate did not have the intensity
to produce again for the economy as a whole.

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