its cheap labor and its capital on a cheap money monetary system. Eventually, as a result of Spain’s lack of adapting to the rest of the world’s technological advances, there was an economic crisis that broke out in the mid-1970’s. A dramatic rise in the price of oil had an unfortunate affect on Spain’s economic situation, and because it relies so much on oil and because there was a fall in world demand for steel and shipbuilding, Spain became less competitive with the new industrialized countries in South East Asia. As a result, the public deficit increased and there was a steep fall in commercial surpluses. Inflation then followed when the authorities attempted to make amends instead of adjusting the domestic prices and applying an extensive financial policy. The government financed these losses by returning to the currency reserves, therefore, putting Spain deep into debt. Finally in 1977, the Moncloa Pacts were adopted which lessened the value of the peseta. It was a moderately restrictive monetary policy, and an income policy with a commitment to begin structural reform. This was unsuccessful as the industry failed to familiarize itself to the new parameters of prices and demand. Spain went deeper and deeper into debt until 1982. To bluntly show the economic situation for Spain from 1975 to 1982, the Gross Domestic Product grew by an average rate of 1.5%, while the gross formation of capital decreased by an average rate of 2.5%. Spain’s political situation was revolutionized when the first socialist government took over in 1982. These unfortunate new leaders were handed down high inflation rates (14%), a deficit in the balance of payments on current account of four billions dollars, low growth rates, as well as a public deficit of almost 6% of the GDP. All this is while Spain still had a high and growing rate of unemployment. In an attempt to fight the unemployment, a gradual adjustment poli...
