Spain has been one of the European countries more affected by the financial and economic crisis. Prior to 2007, Spain could be presented as a good example of responsible management of fiscal policy, with surplus in the public budget and a very limited ratio of public indebtedness. The main economic problems were located in the enormous deficit in the current account and the external private debt accumulated. Part of this debt was employed in adding fuel to the real estate bubble. The crisis seriously affected those parts of the financial system (Cajas de Ahorro) more linked with the real estate sector, obliging public authorities to a massive public bailout programme. As a consequence, private debt was transformed into public debt, the public budget fell into significant deficits and GDP growth turned negative. The Spanish government adopted an extreme adjustment programme as a condition for receiving external financial support and recovering economic equilibrium. Nowadays, the Spanish GDP is still 10 per cent lower than that of 2007 and social costs of the adjustments have been tremendous, while the ratio of external public debt has climbed to its highest historical levels and the economic recovery is fragile. The chapter analyses this process and argues that the economic policy adopted by the EU and applied in Spain, far from having attenuated the crisis and offered a solution to the countries affected by debt overhang tended to make the situation more difficult. The chapter defends that the relief for the problem of sovereign debt will require both a policy change in the EU, with creditor countries adopting an expansive fiscal policy, and a reform of EU institutions in order to complete and rebalance the Monetary Union.
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