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Spain Economy

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Spain's accession to the European Community--now European Union (EU)--in January 1986 required the country to open its economy to trade and investment, modernize its industrial base, improve infrastructure, and revise economic legislation to conform to EU guidelines.

These measures helped the economy grow rapidly over the next two decades. Unemployment fell from 23% in 1986 to a low point of 8% in mid-2007. The adoption of the euro in 2002 greatly reduced interest rates, spurring a housing boom that further fueled growth. The strong euro also encouraged Spanish firms to invest in the United States where several Spanish firms have significant investments in banking, insurance, wind and solar power, biofuels, road construction, food, and other sectors. The end of the housing boom in 2007 and the international financial crisis led to a rapid deceleration during 2008. Housing sales and construction declined dramatically, and the unemployment rate was over 17% in the first quarter of 2009, the highest rate in the European Union.

The government has predicted that the economy will shrink by 1.6% in 2009 and begin to grow again in 2010, while many nongovernmental analysts expect a contraction of around 3% in 2009 and a small contraction in 2010. Inflation, after peaking at a year-on-year rate of 5.3% in July 2008, fell to negative 0.9% in May 2009 because of the decline in oil prices in the second half of 2008 and reduced domestic spending. In part because of cautious regulation by the central bank, Spanish banks have few assets based on U.S. mortgages and were less affected by the international financial crisis than banks in many European countries. However, banks and especially savings banks have many outstanding loans to troubled construction and real estate companies, and authorities intervened in one savings bank in March 2009. The Zapatero government took a series of measures in late 2008 to support the financial sector and announced 11 billion euros of additional spending, much of it for municipal government public works, in an effort to provide employment and encourage economic activity. This spending, and declining revenues, have generated a high budget deficit. However, surpluses for several years before 2008 meant that the government’s debt-to-GDP ratio was low, giving it some room to maneuver.

Information by U.S. Department of State

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