Comparison Italy vs Spain in Crisis

Comparison Spain vs. Italy Similarities * Left-centred coalition government * Member of the EU * Low birth rate * High immigration * Declining competitiveness * Latin, Mediterranean (used to take siestas), highly emotional citizens * High costs, low productivity firms (likely to be overtaken by Chinese competition) * Low spending on R&D * Poor educational system Differences * Italy has a high black economy, Spain does not (tax deficits for Italy) * Spain: monarchy and democratic * Italy: republic Corruption percentage index (Italy: 6. 5 and Spain 4. 8) * Unemployment rate (Italy: 10. 7% Spain: 25. 1%) How did Italy and Spain become struggling economies? Spain * Real estate crash Nearly every Spanish representative did heavily investments in the real estate market. So there was an illegal connection between reforms undertaken and unnecessary low interest rates concerning the housing sector in their own interest. Cajas, which are semi-public banks, are the most involved banks, whic h lenthuge amounts of money to the real estate sector.Those real estate companies went bankrupt. This was followed by a huge price increase of housing done by the cajas, since they needed to get their money back. * Increase in unemployment * Huge trade deficit (increasing oil prices, lack of resources) * High inflation rate (caused by real estate price increase and family indebtedness increase) Italy * High governmental debt (118% of GDP) * Very difficult to start businesses -> high bureaucracy and sluggish justice system * Very weak economy Weak investment, elderly population, poor regulations (->less increase in productivity) * Very low annual growth rate (lower than the rate of interest it pays) -> causes a huge governmental debt * Due to a bad outlook and insecurities of Italy the interest rate increased tremendously for Italy * If nobody will lend to Italy, then Italy cannot repay its debts. And if Italy cannot repay its debts, then nobody will lend to it. (Vicious cir cle) What procedures did the government do to decrease the effects of the crisis? Italy * Monti tries to boost growth in Italy â‚ ¬10 billion of savings should be reinvested to boost growth * New policy: reduced tax to encourage firms to hire women and young workers * Full-scale liberalisation of shopping hours (to stimulate consumer spending) * â‚ ¬3. 8 billion for infrastructure projects (to attract FDI) Spain: * Restructuring Spain’s banking sector A lot of small and weak banks have had to merge by larger banks. This caused a job loss by 11% in this sector. Bankia, Spain's fourth-largest bank is now part nationalised this caused a huge governmental money spending to save the bank. * RecessionTo get help from the market (borrowing funds) would be too cost intensive (high interest rates). So Spain had to ask for financial help at euro members. So far Spain does not want a full bailout or rescue, to avoid another increase in interest rates and close supervision of the S panish finance system. So far the government decided for: a 12% average cut in ministerial spending, freeze in public sector pay for the third consecutive year, new independent authority to monitor government finances, increase in pensions, new 20% tax on lottery wins, new car scrappage scheme. Ms Saenz de Santamaria said that efforts to close the government's deficit would focus more on spending-cuts than tax rises. * The only areas of spending to increase in 2013 would be pensions, student scholarships and interest payments. (to calm the Spanish citizen) * Government tries to reduce the deficit to 6. 3% of the GDP this year. *BUT, government said that tax revenues will be higher than budgeted for this year, so they are expected to increase by a further 3. 8% in 2013. Analysis – Spain * Since the big real estate bubble was mostly caused by the government and politicians, they also should help Spain to overcome the crisis. Spain’s rescue plan so far is to cut governmen tal spending and reduce taxes. This should stimulate consumer spending, which will help the market to get in a better flow again. At the other hand by requesting a potential bailout plan from the EU, Spain makes its citizens and its potential investors highly insecure. The potential bailout plan indicates that Spain is not able to overcome the crisis by itself and herewith no foreign investors and no loans out of the market with acceptable interest rates will be further available for Spain. At the moment Spain cannot come out of the crisis by itself. Due to this, help will be needed. As mentioned above, Spain already requested a potential bailout plan, which is not yet requested by the Spanish government, to prevent an increase in interest rates and a strict observation and regulation of the Spanish governmental actions. * It is inevitable that Spain quickly decides about a crisis plan, which should be strictly followed for the next years. * In my opinion Spain needs to use a bailou t package to save its banking sector.By this action, the government would show its citizens, who are mostly unemployed and highly indebted, that it takes actions to get Spain out of the crisis. The government already tried to be more neoliberal by not intervening a lot and just helping the banking sector out by providing financial rescue help („lightâ€Å" bailout). This financial aid did not solve the problem in depth. At this point of time the Spanish population needs security provided by the government to become more active again. * It will be a difficult procedure to intervene with more cuts and reforms.Many reforms will touch the welfare state, such as pensions, education and health. * A further intervention would probably cause a further erosion of popular support for the EU and might lead to a formation of a new-formed government lead by technocrats. * BUT: Spain needs more jobs, to decrease its high unemployment rate. * To achieve that, the government should subsidize firms, which create jobs for Spanish citizens. Also Spanish government already took over its biggest bank, this could be a start to get control over important and big institutions, in connection with job creation. Spain should provide a mixture of private businesses, which receive subsidies if they create new jobs and state owned or partly owned firms to control the issue of unemployment better. * More employment and lower taxes would then stimulate the consumer spending, which would be followed by a highly stimulated and profitable economy.* Now it is the turn of the government to spend more and reduce taxes as long as the private sector is ready to take the economy forward (Keynesian theory) * If the Spanish economy and the market cools down FDI will continue to come in, which is also a positive fact. As far the market is not as ttractive for foreign investors, the government could also create subvention plans for them. * I am positive about Spain’s FDI future, since Spain is located in the gateway to the Mediterranean, North Africa and Latin America, its labour market provides young and qualified workers, so far the VAT and the Corporate Tax rebate system is relatively low in comparison to the other EU countries. (FDI is a very important source for Spain, it counts for 44% of its GDP, and 7% of employment) Analysis Italy * After Adam Smith every country should specialize in the sector where its competitive advantage is the biggest.But in the case of Spain and Italy there is no huge competitive advantage in a certain sector. So I would propose the theory of David Ricardo. He suggested focusing on a comparative advantage, which means that less efficient countries can still benefit from free trade if they export those products where they have the least productivity disadvantage. * In order to overcome governmental debt, the Italian government cut governmental spending, froze on public-salaries and stopped tax increases. * It also reformed the labour ma rket to overcome the high unemployment rate. Those actions were all caused by the government, which leads to the assumption that the government holds the control over all future market actions. (Keynesian approach) * The Italian government also plans a new structure of the tax system that includes a greater level of control concerning tax evasion. The tax structure is going to be more growth friendly, which includes diverting income from the wealthy to the lower paid citizen, this should increase the consumer spending. (Keynesian approach) -> Stimulating consumer spending leads to Porters Diamond Italy after 1945 again.The Demand Conditions, which were very sophisticated in Italy, should be improved again. * In April 2012, the government proposed a labour market reform. This reform needs to be adopted as soon as possible to overcome Italy? s competitive loss with trade partners. (->Improve competitiveness) * The government also introduced fiscal incentives focusing on the empl oyment of women (action on childcare and elderly care facilities). Elderly Italian women are forced to find work since the pensionable age will rise by five years between 2012 and 2018. ->Fostering employment) ->Factor Conditions after Porter Diamond * Another beneficial step for SMEs the government took is that companies can exclude the notional return on new injections of equity capital from taxable income. This will increase the size of firms of SMEs and investments in innovation. Italy? s economic strength lies in processing and manufacturing goods of SMEs. (->Governmental investment and policies to increase the international competition of Italy) -> Porter Diamond-Related Supporting Industries * The government also forms policies to financially help SMEs at their R&D division.This will trigger firm- specific advantages, which can be useful for Italy? s USP at the global market. 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