Impact Of Catalonia Separatist Movement On Spanish Economy: An Essay.

Analyse the article chosen to identify linkage between the economic concepts you have learnt in class with the discussion of the macroeconomic event in the article.   Apply the economic concepts and models learned to discuss the economic challenges faced by the economy concerned and to explain the rationale for the economic policy (ies) chosen by the government to overcome the challenges.  You should use other related news articles, reports and academic journals to support your discussion as well. 

Political Turbulence and Its Effects on Aggregate Demand

The article that is discussed in the study is related to the economy of Spain which has experienced impressive reduction joblessness or the unemployment rate in the economy. The unemployment has reached all-time low since the year 2008 amidst the political turbulence due to the separatist movement from the side of Catalonia.  The movement is creating a great problem for the economic performance of the country as this region’s economic product contributes importantly to the overall national product of the country. The investment decisions of the country has been postponed and other decisions are being affected due to the political turbulence that needs to be solved in order to have a better impact from the reducing unemployment rate in the economy. The objective of this paper is to shed light on the details of this problem which is faced by the economy of France. The discussion includes the impact of the problem on the economy at aggregate level. Apart from that the study also includes the intervention that has been initiated by the government to get rid of the problem.

There are many factors that can impact an economy at the macroeconomic level. Among them, one of the biggest problems is the political turbulence. Political turbulence not only reflects the lack of control of the government but it also is a potential threat for the stability of the economy. The instability arising from the political turbulence can hamper the activities, ruin the infrastructure and trouble the administrative processes of the government. Apart from that, political turmoil can also reduce the intensities of the economic gains as well.

For example, economy is going through a phase of continuous reduction in the unemployment rate. This reducing unemployment rate can have a lot in store for the Spanish economy. However, the existing political turmoil is marring the positive gains of the economy. Littleboy, Taylor and Weerapana (2016) highlighted that Spanish economy has been performing very average since it was struck by the global financial crisis of the year 2007. The credit crunch and lack of investable capital stalled the infrastructure development and new business creation. The Spanish unemployment rate started immediately after the global crisis and hit the peak around 2012.

Apart from that, the government of Spain also had to reduce the growth projection of the future years due to the existing trouble of the Catalonia. The projection of the government and the political situation plays a key role in the investment inflow. Among the number of factor that influences the return of the investor are the support from the government and the political stability in the destination country. Therefore the economy of Spain has failed to retrieve the pre-crisis GDP growth. Many of the other European countries have rebounded from the lack of aggregate demand due to the global crisis. The political unrest within the economy also affected the external and the internal debt of the government. Terra (2015) noted that, government had to inject capital from the external sources to keep the aggregate demand high. This kept on increasing with the increasing political unrest of the Catalonia area. This challenge further amplified with the rise in the interest rate that reached 10% during the year 2016. Therefore the political unrest in one part of the country created a lot of challenged for the government of Spain.

Income Disparity and Its Effects on the Labor Market

In the terminology of economics, post-financial crisis of 2007, the economy of Spain experienced lower aggregate demand. That means, the Aggregate demand curve shifted to the rise as a consequence of credit crunch following the crisis. While on one hand it reduced aggregate price level of the economy it reduced the opportunities of the economy putting the economy into a recessionary phase (McCrickard, Raymond, Raymond and Song, 2018). The separatist movement in Catalonia hampered the improvement of the Spanish economy from this vicious cycle.  

The main reason for the problem is the political unrest in the Catalonia region of the country. This region has been protesting against the government to get separated from the main country of Spain (De Paula and Saraiva, 2016). However, as discussed in the article, Catalonia contributes a huge chunk towards the national GDP of Spain. Therefore it will not be a great idea for the central government to lose control over the Catalonia region of the country. One of the attractive features of the Catalonia region of the country is that it has a better per capita income compared to the other parts of the country (Stilwell, 2015). This part of the country paid for the betterment of the other parts of the country following the damages due to the financial crisis. This aggravated the political unrest within the economy of Spain that led to lack of investment from the side of the foreign investors.

Another reason for the problem that led to the lack of aggregate demand in the economy of Spain is the low amount of disposable income to spend on the consumer goods and services. The income of the consumers of Spain had reduced after the financial crisis of 2007 that failed to generate the aggregate demand in the economy of Spain. Different parts of the economy such as the service sector, manufacturing and many more did not get enough gains from the economic growth of the country leading to stagnancy in the economy of the country. The excess supply in the market corresponding to a low demand for goods and services in the economy hampered the profitability of a segment of sellers of the market. Kwan, Chen, Chindarkar and Thampapillai (2017) noted that, the turbulence and the financial crisis of the year 2007, together contributed to a situation where the profitability of the companies reduced that reflected on low labour requirement. Therefore, the economy of Spain went to the vicious circle of stagnancy.

High Debt and Its Effects on Foreign Investment

Catalonia region of the country historically has a high average wealth that did not hamper the local economy of Catalonia and hence it managed to survive the challenges from the financial crisis of the year 2007. However, Catalonia was now creating problem for the whole of Spain due it separatist movement that incited political turbulence in the country. The government of Spain had to collaboration with the local government of Catalonia and eventually the central government took over the financial management of the region from the local government (Patel, Al-Bahrani and Sheridan, 2015). That further triggered the anger among the people of that region and hence the economic disturbance.

There are a large number of direct and indirect problems that rippled through the economy of Spain due to the political unrest. First and the foremost is the lack of aggregate demand as was discussed in the earlier part of the study. Apart from that, the income disparity or inequality has also been a major impact of the political turmoil that the country faced. The income of a part of the consumer remained the same while the income of another part increased that led to a gap between the incomes of the consumers of the market. Coupled with the income tax reform that was initiated around this time further discouraged the low-income population to supply their labour in the market (Martín, 2016). Consequently, the income gap between the different citizens widened during the time of turmoil after the financial crisis of the year 2007. The productivity per capita of the labour dropped drastically eventually reducing the overall product of the organisations and the economy as a whole. Beaudin, Berdiev, Kaminaga, Mirmirani and Tebaldi (2017) noted that, the government did not introduce a proper tax regime during this time that could boost the productivity and the further demand in the economy. Progressive tax rate discouraged middle-income earners to save their money and low-income earners to supply their labour in the economy. The low savings rate at that time hindered the capital formation in the economy of Spain. According to the microeconomics theory, the capital formation and the saving are important component for the investment. 

Another major impact on the economy has been the lack of circulation of money in the economy of Spain. The money market of the economy faced severe attack for which the government of Spain undertook many action that included the injection of money in the market. The debt of the economy increased more than before leading to a high absolute value of the external tax of the country. One of the main reasons for the high capital requirement was the damage of infrastructure and property due to the violence from the side of the Catalonian population. The debt of the country increased to 159 billion Euros putting an immense pressure on the government of the country. Terry, Macy, Clark and Sanders (2015) noted that Spanish economy had a great growth potential especially after the reduction f the unemployment in the economy. However, the high internal and external debt of the economy reduced the potential. The government of Spain could not reinvest the capital for the job creation and hence the shrink of the aggregate demand. The Spanish government even issued debt at negative interest rate due to the reduction in the overall interest rates. The main aim of the government was to increase the money supply among the consumers of the market so that consumers spending can be triggered. One of the shocking facts is that at the third quarter of 2015, the private debt was 182% of the GDP of the country (Bofinger, 2016). This figure suggests the level of vulnerability of the economy at that time.

Government Intervention to Increase Consumer Spending

The government of Spain intervened in the economy to increase the consumer spending. The consumer spending is one the major component of aggregate demand and amplification of this could be used to further boost the demand in the market (Kampamba, Nkwae and Tembo, 2015). That means the government of Spain tried to shift the aggregate demand to the right side to that both the price and the output of the market could be increased. The political unrest did not allow the government to source the investment from the foreign capital market. Therefore the government of Spain issued debts at the individual level to increase the consumer spending (Sabiston, Leung and Terrazzano, 2017). In addition to that, the government of Spain also pegged the value of the interest rate a very low level in order to discourage high savings rate. The more the savings lower the consumers spending and hence the problem would have prevailed. The main objective of the government was to increase the demand for money for the transaction in the economy. The government used the quantity theory of money which states that, output of the market can be increased through the increase in transaction in the market and the money supply (Brink, 2016).

Apart from that, the government also bought t- bills and government bonds from the market. This open market operation allowed the government to inject a significant amount of money in the market. Tariff rates were also increased in order to discourage the consumers of the market to buy products from the external markets. In order to have a significant impact on the aggregate demand of the national economy, all the money required to be reinvested in the domestic market (Dullien, Goodwin, Harris, Nelson, Roach and Torras, 2018). Therefore, this strategy was a positive one towards the betterment of the economy. However, the taxation policies of the government attracted a lot of criticism as it reduced the tax revenue of the government. The tax structure discouraged the low-income consumers to reduce their supply in the market leading to a reduced productivity and tax revenue of the government.

Lastly, the government also increased the spending from the raised capital from the foreign debt. Government spending is an important remedy to boost the aggregate demand of the market. The government of Spain spent a huge amount of money for the development of infrastructure in the Catalonian part of the country (Williams and Franic, 2016). The other parts of the country also received capital for the infrastructure development. Special economic zone was created under the investment opportunities for the consumers of the market. Supply side of the market was also managed by the government (Venkatesan, 2015). The government spent money for the cold storage and the surplus storage of the market in order to deal with the excess supply of the market. Consequently, the aggregate supply of the market remained the same so that the overall output level of the market can be stabilised. The government provided other kinds of financial support to the sellers of the market to make sure a healthy aggregate supply of the market that would eventually allow the economy to have a higher output corresponding to a good aggregate demand (Ngulube, 2018).

Conclusion

Therefore, the paper finds out that, unemployment rate reduction that has been seen from the article has been a great opportunity for the economy to get out of the influence of the crisis of 2007. However, the Spain has been experiencing turmoil over the separatist movement in the Catalonian part of the country. This political unrest not only made the economy an unattractive destination for the investor, but it also harmed by the economy through different indirect channels. The main problem of the economy of Spain that halted the activities was the lack of aggregate demand and consumer spending. Government has undertaken a lot of measures to correct the consumer demand and expenditure through capital injection. External debt was taken by the government for the infrastructure development post the crisis. Private debt was also provided to the consumers in order to boost the expenditure and hence the demand for the product. Nevertheless, the political turmoil and the crisis together damaged the economy to such extent that reduction in the unemployment rate did not have the intensity to produce again for the economy as a whole.   

Reference

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