The Spanish and American economies resemble each other quite a lot in that they both experienced a “property bubble” which was followed by a rise in private-sector debt. Moreover, both economies underwent recession and were faced with increasing unemployment. Both economies have seen their budge deficit balloon because of plunging revenues and other costs. However, Spain, unlike America has adopted the euro, a currency shared with other countries. There are many pros and cons of this and I will analyze these.
There are many cons to having a shared economy. Spain, because of its shared currency is faced with paying debts of borrowing costs. When Spain first adopted the euro and was experiencing rapid growth, it had other problems developing at the same time. Their prices and wages rose rapidly in order to feed a large trade deficit. When the recession came along however, and the “bubble burst”, Spain was forced to pay for debts and costs. At this time, they should have been taking measures to restore profitability and stability to Spanish industries, and doing all they could do boost their economy, not paying for costs and being left uncompetitive in critical foreign markets. Because of its uncompetitiveness, it must achieve “internal devaluation”: cut in wages and prices until costs are back in balance with its shared currency economies. An internal evaluation mean years of high unemployment in order to decrease wages, which leads to falling incomes.
The pros of having a single currency include being able to finance deficit in the long-term. A single currency allows for more flexibility. Moreover, if Spain had a single currency and had to face with uncompetitiveness, it could easily let its currency fall, “making its industry competitive again”.
Although America’s recovery from the recession has not been good, it has still seen GDP growth and can expect growth to balance their current deficit. Spain however, has had no significant recovery and this has implications of Spain’s fiscal future.
