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Compare and contrast the economic performance of Spain with Italy.

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Introduction

Data question: Spain and Italy 1.) Compare and contrast the economic performance of Spain with Italy The graphs show a similar trend in the economic growth rate of Spain and Italy during the first half of the decade (1990-1995). In 1990, Spain's economic growth rate was relatively high, at around 3.7% and in comparison to this, Italy's growth rate was lower as it was just above 2%. Both Italy and Spain faced short-term recession for the first year of the decade but they also recovered and the growth rate of both countries rose during 1991-92. For the year after this, Spain and Italy experienced deep recession but fortunately the growth rate rose during 1993-95. There is a big difference in the growth rate of the two countries after 1995. Italy's economic growth rate rises dramatically and peaks in 1996 at 9%. During this time, Spain's growth rate decreases slightly to around 2.4%. From 1996-97 Italy again undergoes deep recession, following a similar pattern as earlier in the decade and this time, Spain's economic growth rate rises. By the year 2000, Italy's growth rate is back where it was in 1990, at around 2%, whereas Spain's growth rate ends up at around 3.4%, which is a little lower compared to the beginning of the decade. In both Spain and Italy, inflation decreased overall during the decade, which meant that the prices kept falling annually. ...read more.

Middle

During the 1990's Italy had adopted policies to reduce its inflation rate and curb it government spending deficit. These policies have tended to have a deflationary impact because from 1995-97, inflation deceased by 4%. In recent years, Spain has had an economic growth rate that is among the highest in the EU. At the same time, the country has succeeded in reducing unemployment and balancing public finances. This has led to better living standards. In spite of the fact that approximately two million new jobs were created between 1996 and 2000, the official unemployment rate remains high (approximately 13% of the work force). Average income in Spain is only 80% of that of the rest of the EU, therefore the country still has some way to go. The inflation rate of 3% in 2000 was above the EU average. 2.) What problems may these countries face in the future and how would they impact on their economic performance? The main economic challenges facing Italy are keeping the government deficit under control, implementing a plan to reduce the high level of government debt and addressing unemployment. Since Italy's economy barely rose in the beginning, growth will fall short of the government's target of 1.3% for all of 2002. Instead, real GDP will probably edge up by 0.5%. Despite slow economic growth, Italian inflation is creeping up. ...read more.

Conclusion

Actions taken by the ECB may not reflect the optimal policy for the Spanish economy. Supporting a fixed exchange rate with its main trading partners may pose particular problems for Spain in the near future. Although Spain currently enjoys a very high growth rate, the low interest rate provides little incentive for saving and is driving investment far above net domestic savings. The negative current account has worsened with the growth in GDP, as Spain imports more and foreign demand has still not fully revived exports. Foreign capital funds an increasing portion of investment. These problems are even more complex given the uneven growth patterns in the Euro currency zone. Spain needs to look towards ensuring further steep reductions in unemployment from its striking high levels and achieving a broader distribution of the benefits of economic growth. A deepening of reforms would also engender a more rapid convergence of incomes to the levels of other European Union countries, much greater resilience in the face of shocks to the economy, and a more secure future for coming generations. Italy, on the other hand, is not expected to have a growth rate as high as Spain in the next few years and it is believed that the effect of global economic slowdown on Italy has been growing. It had originally been forecasted that the economy would grow to 2.9% in the next few years and this was later trimmed to 2.5%. Thinking that the figure was too optimistic, it is now believed to have gone down to 2% economic growth. Rashminder Ryatt 20/09/02 ...read more.

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