Financial And Political Risks In Spain Economics Essay

Currently, Spain is facing its worst crisis in over fifty years. They are now in a financial crisis which has gotten worse because of the internal imbalances that have been accumulating even before occurrence of the crisis. Recovering from this situation is a struggle for the country because of being so deep in debt.

Spain’s situation has triggered a lot of concerns to international bodies and other countries especially those in Europe that are in association with it. Everybody has their attention on the country’s governance and the reforms that they are making to curb this problem.

In this paper there are several issues addressed so as to help guide business persons who deal with hotels and are interested in setting up their business in Spain. Economy of Spain, financial and political risks in Spain, Hotel and tourism industry, competition in the hotel sector and problems faced by the country internally are some of the things that naturally will interest these people.

Key words: Economy, Recession, Real estate, Hotel, Tourism, Competition, Corruption, Austerity.

Introduction

The economy of Spain

Spain’s economy has been progressing very well since the end of its civil war in 1939. The rapid economic growth got the name Spanish miracle because it did come from a very devastating point to being the 13th largest capitalist economy in the world and one of the best in Europe. It ended up adopting the use of the euro after joining the European Union. Today, agriculture and tourism play a major role in the country/s economy (Hugh, 2012).

The economy in Spain went into recession in 2008 after it had started slowing down. The boom experienced before late 2007 was because of the real estate bubble that was financed by cheap loans to the constructers and homebuyers. But from 2004 to 2008, house prices were on a rise with up to 44% of the normal prices. This is known to be the main reason for the fall of the economy by a third which is the main reason for the problems experienced today in Spain (Hadzelek & Prieto, 2012).

The Gross Domestic Product which is the measure of the health of a country’s economy, reduced in Spain by 0.3% in the third second of 2008. 0.5% was the contraction in private consumption whereas investment plunged by 1.4%. The Spanish economy is facing a hard time and is expected to shrink even more through the year 2013 (Hugh, 2012).

Because of this recession, the unemployment rate is also rapidly increasing it has gone by 26% in the fourth quarter of 2012.A continuous rise in this will make it harder for the government to attain its fiscal deficit targets. The industrial production of Spain is also on a downfall as it went down by 7% in November 2012. This is predicted to bring even more pressure to the industry in 2013 mainly due to the government’s austerity measures. Foreign trade can also be affected in Spain because of lack of international competitiveness on their part (Hugh, 2012).

Financial and political risks in Spain

With the current recession in Spain and the downgrades it will be it hard and expensive for the country to finance its debts and this increases concerns over the credit worthiness of Spain. It is the fourth largest economy in the euro-zone with 16 countries and this makes analysts believe that Spain is too big to be left out and a default in Spain would most probably lead to the break of the breaking of the euro-zone. The European Union and the International Monetary Fund have intensified their pressure on the Spanish Prime Minister Mariano Rajoyto to introduce a series of austerity measures (Schuman, 2013).

The possibility of the draconian cuts in the government expenditure is already getting resistance from the Spanish voters. As people from abroad are for the cuts, trade unions in Spain are calling for strikes nationally. This poses a threat to the stability of the reigning government. With the rise in social tension in the country, Rajoyto has given into the intense pressure from the European Union where he introduced some of the measures. These include increase in Value Added Tax, retirement age prolonged by two more years and hiring new civil servants. With the rebellion from the union leaders and the people about the austerity plan, the country is clearly facing social, political and economic instability (Jones, 2012).

Hotel and tourism industry & the regulatory structure of Spain

Tourism industry has been of great importance to the Spanish economy as it plays a big role in it. Hotels, Food services and real estate are some of the economic activities that are part of the tourism industry. The geographical position of Spain has been of great influence to them since time immemorial. But the current recession seems to be threatening the hotel and tourism sector in some ways (Jones, 2012).

Spanish people have cut down their expenditure because of the hard economic times. The hotel owners themselves have ended up turning their services from being too luxurious and in place of the pampering they focus more on entertaining their guests. This is to avoid too much spending in creating the luxurious environment which people cannot handle with this economic times. Business minded people now fear in investing in hotel businesses because of the high maintenance and the levels of the Value Added Taxes put in place (Jones, 2012).

Surprisingly even with the recession, the hotel sectors seem to be holding up a bit well because of the many tourists attraction which are still preferred by the foreigners. The rich culture of the people still awes a lot of people from different countries who end up visiting the country even with the problems they are facing currently. The historic landmarks and the people’s hospitality have also been of great importance in maintaining the hotels stature even though attendance levels have been going down (Jones, 2012).

Competition

With the situation in Spain, tourism and hence the hotel industry are facing a lot of competition both internally and externally. The high levels of the Value Added Taxes deter the small scale hotel owners from going on with the business and so they clearly cannot compete with the big hotels. According to research, hotel financing is almost non-existent especially for the hotels that do not have connections with banks. Big hotel branches are the only ones who seem to be getting the favor. Because of lack of enough credit by the bank, they end up assuming ownership of the troubled assets. Externally, hotels in other countries in Europe are keeping their rates low which make some of the foreign visitors opt to visit their and not Spain. This is hard to compete with since the hotels in Spain cannot lower their rates any further (Hadzelek & Prieto, 2012).

The biggest hotel chain in Spain, Melia Hotels International, has been able to sustain itself during these devastating times Spain is facing economically. This is mainly because of the extensive properties they have abroad that account for most of its operating properties. Melia’s executive Vice President admits to the fact they still accommodate a good number of foreigners in their hotel but that is not the same with the Spanish visitors. There are many other top competitors in the Spanish hotel industry (Hugh, 2012).

Countering competition from the already existing hotels in Spain can be quite demanding. This includes assurance of great financing from own sources and not relying on sources like banks in Spain. The new business should also put their hotel chain on the map by using great advertising methods and providing top notch services that appeals the customers needs. Also before starting up the new hotel chain, the owner can try and win more people by strategically setting it up in one of the most appealing places in Spain to both foreigners and locals (“Facts,” 2013).

Concerns such as corruption and internal problems faced in Spain

Despite the economic recession, high levels of unemployment and the draconian austerity programs, Spain still seems to be facing corruption problems. The numbers of corruption scandals arising are too many to be ignored both by the people of Spain and the rest of the watching countries. This mostly is the doing of the local governments and their political leaders where they get bribes from the wealthy persons in exchange of building permits, business permits and contracts that they really do not deserve. From research work, people in Spain are annoyed by the fact that they are subjects to high taxation whereas their money is being used corruptly instead of making the country’s situation better (Kern, 2011).

Internal problems facing Spain are not only the economics’ ones. With the opposition facing the government after imposing the austerity program, the mood is threatening the country’s unity as demonstration seems to be increasing at an alarming rate in some regions of the country. This environment is seen as a challenge for business people since this is a show of instability in the societies where the demonstrations end up in confrontations between the police and the people. This may bring about a lot of negative things such as closing of businesses, looting of things by the aggravated people and even the injuring of other citizens (“Facts,” 2013).

On the positive side, the government is enforcing reforms that will help in getting back the economy to a better position. Such are the bank sector’s reform and the labor market reforms. With this effort the country is putting together with help from their counterparts in other countries and the international body, Spain can be rid of these problems. This will also require them to put more effort in improving their internal affairs (Hugh, 2012).

After about four years of crisis, Spain’s economy is still stagnant with people not knowing when things will get better. For a business person wanting to set up one of their chains in Spain, they should be prepared to face a lot of challenges as of now. The best option might be trying to set up the hotel in another country with good economic stability or wait for some sort of assurance that Spain will be able to redeem itself from the ugly situation they are in. Being a U.S hotel, it might be a little difficult setting up the business because of the ease one is used to in the United States because of the county’s transparency compared to that of Spain. Hopefully with the reforms being put in place, redemption of their economy might happen sooner than later. But if confident enough that when setting up the new hotel chain will be successful because of good services, management and reliable financing, then my recommendation is to go for it a business minded person is all about taking risks (Schuman, 2013).