inflation

   Spain has had on the whole a high inflation economy both before, during and after the period of rapid development of 1960–74, and it was only in the 1990s that the monetary authorities at last appeared to be on top of the problem. Already towards the end of the 1950s inflation was hitting 15 percent but was brought under control following the Stabilization Plan of 1959. During the 1960s inflation was held down to single figures, but the quadrupling of world oil prices in 1973–4 and official and private sector yielding to trade union pressure for high wage increases resulted in spiralling costs and consequent price rises. Neither the government nor the employers knew how to stand up to the new power of the unions and the latters" explosive wage claims: in 1976 alone the total wage bill went up by 22 percent and the following year inflation hit the roof with an official rate of 24.5 percent and unofficial estimates of 30 percent. The remorseless rise in unemployment from 1975 to 1985 also paradoxically added to the inflationary pressures by forcing the government to borrow in order to meet its ever-increasing commitments to the burgeoning welfare state.

   The Moncloa Pacts of 1977 between government, opposition, unions and employers did not help the government's fight against inflation as it was meant to do. As the price of their support for the pact, the socialist opposition and the unions insisted that the government contain the threat of rising unemployment by maintaining high levels of public expenditure, which made the control of inflation that much more difficult. The prices and wages policy had little effect, partly because the wage norm was too high and not even adhered to in the private sector, and partly because the Spanish retail price index: average yearly percentage change government itself approved huge price rises in many of the areas which it controlled (e.g. public transport). The oil price increases of 1979 also added to inflationary pressures.

   It took ten years from the time of the Moncloa Pact to bring inflation down to the 5 percent mark, but the continuously high interest rates that this required proved a serious disincentive to investment by private businesses and may help to explain in part the lack of job creation in Spain. The boom of the late 1980s induced by Spain's entry to the EC and the renewed foreign investment that this attracted threatened to push inflation up again, but a new climate of moderation in wage claims and the pressures on the government to meet the convergence criteria laid down at Maastricht have ensured a less permissive atmosphere. By 1996 headline inflation was down to 3.2 percent, the lowest for thirty years. Nevertheless the higher level of inflation in Spain as compared to most of its international competitors has inevitably meant that over the years the exchange value of the peseta has fallen, and indeed the loss of value measured against more stable currencies such as the German mark and the US dollar has been substantial.

   Further reading

   - OECD (published annually or bi-annually) OECD Economic Surveys: Spain, Paris (sober and reliable regular surveys of the Spanish economy including all macroeconomic indicators).

   C. A. LONGHURST