Spain’s 1993 Economic Crisis, Recovery, and Maastricht
Spain’s 1993 Economic Crisis
The international economic situation was rather unstable. Japan’s real estate bubble had burst in 1990, which led to a global crisis fueled by rising oil prices due to the first Gulf War.
However, these effects did not impact Spain immediately. High public spending, partly due to major events like the 1992 Universal Exposition of Seville and the Olympic Games of Barcelona, initially contained the impact, which fully manifested in 1993. By then, Spain had accumulated significant public debt and struggled to face the crisis.
Restrictive monetary policies failed to address the core problem and instead increased the currency’s value, further hindering competitiveness.
This led to a major collapse. Spain had to carry out three consecutive devaluations. The UK, Italy, and Portugal also faced similar pressures, leading to devaluations and their departure from the ERM (Exchange Rate Mechanism), the system that maintained a floating but controlled exchange rate between European countries.
In 1993, unemployment reached 23.9%, rising to 24.1% in 1994.
Recovery Measures After the 1993 Crisis
Firstly, due to the strain on Social Security funds, healthcare system expenses were separated from these funds to ensure the pension system’s future (under the Pactos de Toledo).
Secondly, the crisis contributed to a political shift. The Socialists, in power for over a decade, lost the 1996 elections to the People’s Party. This brought a change in economic policy, characterized by decreased public investment and the privatization of state-owned companies like Repsol, Endesa, and Telefónica. The economic focus shifted towards construction, which ultimately encouraged indebtedness and real estate speculation.
Subsequent Period of Economic Growth
Overall, Spain subsequently enjoyed a long period of growth and financial stability, which paved the way for its entry into the Euro. This growth was characterized by several factors:
- Growth driven significantly by the construction sector (fueled by a boom, low interest rates, and sometimes dubious local regulations).
- Utilization of European funds to increase government spending and provide transfers to certain economic sectors.
- An increase in exports.
The Maastricht Treaty (1992) and Spain
Spain, along with other members of the European Community, signed the Maastricht Treaty, establishing the foundation for the European Monetary Union (EMU). Among other elements, convergence criteria were agreed upon to ensure financial and price stability within the future Eurozone:
- Inflation Rate: Must not be more than 1.5 percentage points higher than the average of the three best-performing (lowest inflation) EU member states.
- Government Deficit: The ratio of the annual government deficit to Gross Domestic Product (GDP) must not exceed 3%.
- Government Debt: The ratio of gross government debt to GDP must not exceed 60%.
- Exchange Rate Stability: Applicant countries must have participated in the Exchange Rate Mechanism (ERM) under the European Monetary System (EMS) for two consecutive years without devaluing their currency during this period.
- Long-Term Interest Rates: The nominal long-term interest rate must not be more than 2 percentage points higher than that of the three best-performing member states in terms of price stability.