Introduction

The impact of the crisis on the Spanish economy, although qualitatively similar to that in other countries, shows some important quantitative differences. First, the cumulative decline in GDP (−4.5 per cent) has not been as large. Secondly, the banking sector started the crisis with more solid portfolios, as Spanish banks were kept away from the ‘toxic assets’ that initiated the first phase of the crisis, and has not imposed too much stress on public finances. Thirdly, despite the mild decrease in GDP, cumulative employment losses (−9.4 per cent) and the increase of unemployment (almost 12 percentage points) have been extremely high, due to some peculiarities of the Spanish labour market. Finally, after a decade of fiscal consolidation in which there was a long period of running fiscal surpluses and the debt-to-GDP ratio was brought below 40 per cent, there has been a severe deterioration in the fiscal position, with a deficit of 11.1 per cent in 2009. Despite the low debt-to-GDP ratio and the government commitment to restore fiscal soundness by 2013, Spain was temporarily among the ‘collateral victims’ of the Greek debt crisis. While the problems of the banking system seem currently under control, Spain faces the policy dilemma of restoring competitiveness and growth within a monetary union -- that is, without control of the exchange rate and interest rates -- at the same time as running down the volume of private debt accumulated before the crisis and that of public debt which increased sharply in response to the effects of the crisis.

Understanding this sequence of events and the policy options to restore growth requires revisiting the driving factors of the long expansion during the pre-crisis period and the impact of alternative policies. The pre-crisis expansionary phase was mostly driven by two factors: (1) a significant expansion of credit, which was induced by the fall in interest rates that followed Spain's entry into the European Monetary Union (EMU) and, more broadly, by a pervasive relaxation in the conditions of access to credit, and (2) the large immigration inflows into Spain over the period that substantially modified the demographic structure of the Spanish population.