One of the countries most affected by the COVID-19 pandemic is Spain. In the second quarter of the year, it performed the worst, with a contraction that exceeded even the one seen in the United Kingdom. Only in the third quarter, the United Kingdom’s economy did contract more than the Spanish economy.
Why do we compare it with the United Kingdom? Because, like it or not, to this day, the United Kingdom is still part of the European Union. However, if we limit only to the members to continue within the EU, Spain is definitely the most affected country.
Key Challenges Ahead for the Spanish Economy – And the Euro
The purpose of macroeconomic analysis is to identify factors that may contribute to the deterioration of financial conditions. As we have seen during the 2008-2009 Great Financial Crisis, one single sector (i.e., the housing sector in the United States) may be responsible for a crisis that quickly spread on multiple continents.
The Spanish economy barely recovered after the Great Financial Crisis. In fact, the 2012 sovereign crisis represented another challenge. Even before the pandemic, the youth unemployment in Spain was extremely elevated, well into double-digits. However, the economy managed to grow for five consecutive years.
As a result of the severe economic contraction seen in 2020, income inequality is on the rise. Also, temporary employment is one of the highest in the European Union, making it difficult to interpret the true nature of the labor market.
The second wave of infections brought with it a new round of restrictions. While not that severe as the lockdown in the spring, they are enough to stall the economic growth.
While the current account remains on surplus, trade flows took a severe hit due to the pandemic. Moreover, Spain was hit by the pandemic on its core revenue stream – the tourism industry. With little or no one traveling anymore (e.g. tourist arrivals in Spain was down 79% in Spain in September 2020 when compared to September 2019), the tourism industry suffers like never before.
As a result of all the factors presented here, and some more, the Spanish economy is on track to deliver its worst performance in the last half a century. No matter how one puts it, this is not bullish or hawkish for the common currency. The European Union is just that – a union made of different nations coming together with the purpose of fostering economic growth and welfare.
It is no one’s fault that a pandemic struck the world. However, rising inequalities, high unemployment, uncertain economic growth can easily turn sentiment around. No one should underestimate the difficulty of climbing back from such a deep recession.