Spain Economy Essay Example | Topics and Well Written Essays - 1500 words

Spain Economy - Essay Example The ERM is essentially a managed float exchange rate regime where the currencies of the participating countries are allowed to float at a specific band. Most of the currencies of participating countries are allowed with a fluctuation band of 2.25% against a central rate while the Portuguese escudo and the Spanish peseta were allowed a broader band of 6%. Constant intervention of the participating countries' central banks became prevalent to control exchange rate. As the German mark is the most stable currency of the group, it became the yardstick or the central rate with which all the other currencies are measured. The mark has become the unofficial reserve currency, meaning that if Spain was intervening to buy pesetas it would be selling marks in exchange for pesetas (Weerapana, 2004). The reunification of East and West Germany commenced the collapse of the ERM in 1992. It is important to note that the reunification necessitated the transfers of huge amounts from the large rich economy of the West Germany to the smaller, poorer East. These huge transfers which accounts for 50% of the West Germany's savings created a budget deficit which reached 13.2% from the original 5%. As the German government is becoming nervous on the prospects of high inflation, it started pursuing contractionary monetary policy. However, the combination of the expansionary fiscal policy (transfers to East Germany) and contractionary monetary policy yield to a surge in German interest rate (Weerapana, 2004). As inflation raged through Germany, the world interest also rose. Due to these, there was an outflow of money from European countries thereby causing the devaluation of ERM currencies like peseta.... The regime of General Franco left an essentially fascist economy to Spain which is characterized by lack of economic freedom. The economy is dominated by large public institutions controlling all sectors and monopoly was prevalent. However, the accession of the country in the European Union during 1986 necessitated Spain to â€Å"open its economy, modernize its industrial base, improve infrastructure, and revise economic legislation to conform to EU guidelines.† These huge developments in the country’s policies and structure irrefutable introduced changes in its economy. The immediate years following the country’s ascent to the EU marked Spain’s economic boom. It should be noted that from 1986-1990, Spain saw substantial mount in Gross Domestic Product, reduced the ratio of public debt to GDP, decreased unemployment from 23% to 10%, and curb inflation to under 3%. By the end of 1990, GDP reached more than 50 trillion pesetas while the annual per capita income amounted to 1.1 million pesetas. However, this economic boom was followed by a recession in the mid-1992 to 1994 which was the most severe economic depression since the international oil crisis. Spain faced huge challenges which greatly affected its financial system and international relations. Meanwhile, changes in trade policies, specifically lowering trade restrictions facilitate a freer movement of merchandise among Spain and its trading partners, while promoting efficiency in the economy. The situation in the United States in very much different by the economic state of the European Union. Europe is currently considered as the largest economy at the moment while the United States is recognized the largest and one of the most technologically advanced nations.