European Financial Crisis andPolitical Economy of Austerity
Measures in SpainOUTLINE OF THE PAPER AND IMPLICATION

Outline

Hypothesis; independent variable and dependent variable

The outline of the paperConclusion and issues for further researchHypothesis: independent variables
and the dependent variableHypothesis: the successful provision of the financial support fromEFSF was due to the following two variables
 The spontaneous fiscal entrenchment and the austerity measures madethe coherence between the EFSF and the government of Spain The existence of the two-dips in the crisis from 2008
 The first dip made Spain implement stimulus packageThis made the fiscal debt worse The necessity of the fiscal entrenchment and the austerity measures
 These measures were kept under implementation under the leftist

administration before the general election in 2011 And after the general election under the transition of power to the rightist

party, it had made the coherence of the conditionality and the measures inSpain

Hypothesis: independent variables and thedependent variable (Cont’d) The common profit for sustaining the international market stablefacilitated the agreement

 The contagion in the market made the bond yields to correlate, which

entailed the possibility that the EFSF’s financial procurement and the one of
Spain becomes more difficult simultaneously.

 The specific structure of the system mechanism of EFSF, which is the limited

liablity company in the Luxemburg, under the auspices of Luxemburg law.
This mechanism magnified the influence of the largely contributing countries, suchas Germany, France and so on.

Chapter 1; the background indicators during thefinancial crisis and chronology of the response ofSpanish governmentThe two dipped crisis from 2008
GDP growth rate (%)
4.00
3.00

2.00
1.00
0.00
2007
-1.00
-2.00
-3.00
-4.00
-5.00

2008

2009

2010

2011

2012

2013

2014

Chapter 1; the background indicators during thefinancial crisis and chronology of the response of
Spanish government
The rise of the bonds yields

Chapter 1; the background indicators during thefinancial crisis and chronology of the response of
Spanish government
The housing bubble
housing price index(seasonaly adjusted) index
based in 2005
140
120
100
80
60
40
200

The chronology of the politicalactions of Spanish government
March 2008

Prime Minister Jose Luis Rodriguez Zapatero wins a second term in office, but without an outrightmajority.

Third quarter 2008



Economy officially enters recession. Standard & Poor's is the first credit rating agency todowngrade Spain, cutting its treasured AAA rating by one notch to AA+. Spain adopts aneconomic stimulus plan worth an estimated 5pc of GDP, including €8bn (£6.5bn) euros ofinfrastructure projects.

The Bank of Spain bails out regional lender Caja Castilla-La Mancha, the country's first bankrescue in recent years.

May-June 2009Spain creates a bank bail-out fund, known as the FROB, with firepower of up to €99bn euros andurges weaker savings banks to merge to improve solvency.

First quarter 2010Spain's economy exits recession. o lend country up to €100bn to shore up its banks and Madrid
said it would specify precisely how much it needs once independent audits report in just over aweek

April 2010



As talks intensify on granting Greece an economic bailout, attention turns toSpain amid worries over its public deficit - 11.2pc of GDP in 2009.

May 2010



After initially denying Spain was in trouble, Zapatero announces austerity
measures worth around 1.5pc of GDP. Austerity measures passed over thefollowing six months, including a two percentage point rise in VAT, are worth anestimated total of 5pc of GDP

June 2010Spain's cabinet approves a labour market reform. The bill is passed throughparliament in September.



December 2010

The central government forces the country's 17 autonomous regions, considered
the weak link in spending cuts, to publish more details of their accounts.

January 2011Spain passes pension reform that will gradually raise the retirement
age to 67 from a previous 65.

June 2011



Zapatero decides to bring forward national elections to November,four months early.



September 2011Parliament passes a constitutional amendment forcing governments
to keep balance budgets.



November 2011Mariano Rajoy's centre-right People's Party wins an absolute majority inNovember 20 elections as voters punish the outgoing Socialist government forthe economic crisis.

December 2011

New government says on December 30 that the public deficit for 2011 would
come in at 8pc of GDP, well above a target of 6pc. The government alsoannounces new austerity measures with a cut in public spending by €8.9bn in2012 for all ministries.

Treasury Minister Cristobal Montoro announces tax hikes to focus on the wealthy,
raising around €6bn.

January 2012Spain ends 2011 with almost one-in-four of its economically active populationout of work. The jobless rate jumps to 22.85pc, or 5.27m people - the highest inthe European Union.

March 2012Spain will aim to save more than €27bn in its 2012 budget throughcorporate taxes, freezing civil servant wages and ministerial
spending cuts. Rajoy has said he will reduce the budget deficit toequal to 5.3pc of GDP in 2012 from 8.5pc of GDP in 2011.

First quarter 2012



Economy falls back into recession.

April 2012

Thousands of people protest across Spain against government cuts aimed at tackling the debt
crisis.

May 2012Government says 2011 public deficit 8.9pc of GDP.

May 2012

Bankia asks for a €19bn state rescue on May 25. Spain is nationalising Bankia, which holds some
10pc of the country's bank deposits, weighed downn by heavy losses from the property crash.

June 2012Montoro says Spain's high borrowing costs mean it is effectively shut out of the bond market andthe EU should help Madrid recapitalise its debt-laden banks. Spain still needs to refinance about€82bn of debt in 2012, while helping its regions to repay maturing debts of about €16bn in thesecond half of 2012.

June 9, 2012Spain bows to bailout of struggling bank sector. Eurozone finance ministers agree to lend country
up to €100bn to shore up its banks and Madrid said it would specify precisely how much it needs
once independent audits report in just over a week.

The establishment of EFSF as an supra national bodyfor financial stability
The EFSF was created as a temporary crisis resolution mechanism by
the euro area Member States in June 2010.

Gocaj(2013) points out the existence of path dependency “in thesubsequent management of an unrelenting crisis, enshrined
intergovernmentalism as the modus operandi, and led tosuboptimal solutions”.

Also suggests that suggests that the establishment of EFSF entailed“political sunk cost” in each country to pass the bill for approval, forthe purpose of being persuasive to market, by pointing out thevolatility of the downgrading of EFSF in the case of the one ofadvocating countries.

Chapter 2; Evaluation of the facts
The model of responsiveness and responsibility
 the theory Bosco et al (2015) suggests explains that there are twoconcepts in contradiction, responsiveness and responsibility, imposed
upon incumbents in authority

 In fact, the case of Spain in Europe financial crisis, the government ofSpain was at first hesitated to admitted that the economic crisis as crisis
but continued to say it was a “de-acceleration” for the first time, interms of the relationship with the domestic voters,

 In addition, Mascio et al(2012) suggests that “there is a broad consensus

that the New Public Management(NPM) has constituted the most visible
attempt to reform the public sector across the western world andbeyond”,

Evaluation of voters, from the rational perspective

Evaluation of voters, from the rational perspective

The analysis of the austerity measures

Lessons from Spanish CrisisThe reason of the smooth provision of the financial support

Chapter 3; Conclusion


The response of the government of Spain was an unpopular andcontradictory to the European welfare state tradition pervasive inEurope as well as there were actual damages and ignorance of theprofit of the citizens, which can be a persuasive reason for thenegative perception of the citizens toward the government action.



it can be led that the successful provision of the financial support
from EFSF was due to the spontaneous implementation of theausterity measures and the coherence of the motivation of thegovernment of Spain and EFSF including the other major economies
in Europe.



For the further research, the more chronological interactions
between Spain and the authority of EU should be scrutinized, since
this paper was rather inclined to the ideological analysis of austerity
measures and the historical approach.

And the more detailed analysis on the dilemma of the generalelection and the implementation of the austerity measures should
be viewed from wider perspective.

For the bridge to the point, this paper could have successfully
introduced Historical Institutionalism that positions internationalorganization as the product of path dependency.
 Actually, a lot of isseus are piled up in Spainish economy even after thesuccessful implementation of the measures, such as high unemploymentand etc.

References

Estrada-Cañamares et al (2014), Constitutional Change through Euro Crisis Law:
“Spain”, European University Institute, Research Council of the EUI, 2014Mark Blyth (2013), The Austerity Delusion: Why a Bad Idea Won Over the West,Foreign Affairs, May/June 2013 Issue, available athttps://www.foreignaffairs.com/articles/2013-04-03/austerity-delusion, accessedon August 2nd, 2015



Nicholas Wapshott (2013), No, austerity did not work, Reuters, November 7th2013, available at http://blogs.reuters.com/nicholas-wapshott/2013/11/07/noausterity-did-not-work/, accessed on August 2nd, 2015Mark Blyth (2013), The Austerity Delusion: Why a Bad Idea Won Over the West,Foreign Affairs, May/June 2013 Issue, available athttps://www.foreignaffairs.com/articles/2013-04-03/austerity-delusion, accessedon August 2nd, 2015



Nicholas Wapshott (2013), No, austerity did not work, Reuters, November 7th 2013,available at http://blogs.reuters.com/nicholas-wapshott/2013/11/07/no-austerity-didnot-work/, accessed on August 2nd, 2015



CESR (2015), Spain Austerity Driving Poverty, Growing Inequality and Human Rights
Deterioration, Factsheet 2015, No. 14, Center for Economic and Social Rights, 2015




CESR (2015), Spain’s Austerity Criticized again in US Human Rights Review, Global
Policy Forum, January 30th 2015, available athttps://www.globalpolicy.org/home/213-financing-for-development/52732--spainsausterity-criticized-again-in-un-human-rights-review.html, accessed on August 1st 2015



Christopher J. Anderson(2000), Economic voting and political context: a comparative
perspective, Department of Political Science, Binghamton UniversityReferencesEuropean Financial Stability Facility (2013), European Financial Stability
Facility (EFSF), available at
http://www.efsf.europa.eu/attachments/faq_en.pdf



Crotty James, Working Paper Structural causes of the global financial
crisis: A critical assessment of the "New Financial Architecture", Universityof Massachusetts, Department of Economics, No. 2008-14

International Monetary Fund (2014), Spain: Financial Sector Reform—Final Progress Report, International Monetary Fund Publication ServicesLedina GOCAJ et al (2014), Time Will Tell: The EFSF, the ESM, and theEuro Crisis, European Integration, 2013 Vol. 35, No. 3, 239–253

References

Ozlem Akin et al (2014), The real estate and credit bubble: evidence
from Spain, SERIEs Journal of the Spanish Economic Association 2014

Anna Bosco et al (2012), Electoral Epidemic: The Political Cost ofEconomic Crisis in Southern Europe, 2010–11, South European Societyand Politics Vol. 17, No. 2, June 2012, pp. 129–154



Sven Steinmo (2008), What is Historical Institutionalism?, Forthcoming inApproaches in the Social Sciences, Donatella Della Porta and Michael
Keating eds., Cambridge UK: Cambridge University Press, 2008

Netixis (2011), Covered Bond Market Weekly, Netixis, issued on February
23, 2011

References
Intereconomics review of the European Economic Policy, Austerity
Measures in Crisis Countries - Results and Impact on Mid-termDevelopment,
http://www.intereconomics.eu/archive/year/2013/1/austeritymeasures-in-crisis-countries-results-and-impact-on-mid-termdevelopment/, accessed on 7th August 2015

International Monetary Fund (2014), 2014 ARTICLE IV
CONSULTATION—STAFF REPORT; STAFF SUPPLEMENT; PRESS RELEASE;AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR SPAIN, IMF Country
Report No. 14/192

Questions, comments and discussions.