What is the current economic situation in Spain and what is the outlook for 2010-2011?
The economic situation in Spain is similar to other European countries. Basically the recession hit Spain very hard. GDP contracted by 3,6 % in 2009, and the growth prospects for 2010 and 2011 are worse than for the rest of the European Union, even though we have to acknowledge that these prospects may change. For example, Germany was projected to start growing this year and the latest figures indicate that it is stagnating again.
The problem in Spain is that in addition to the international financial crisis, we suffered a real estate bubble that was growing during 14 years of very strong growth, at around 4 % per annum.
Therefore, the Spanish economy had two interrelated problems that aggravated the international financial crisis. Firstly, the dependence on foreign capital, that was financing this real estate bubble. When the crisis hit and international capital flows contracted, Spain had difficulties financing its current account deficit.
The second issue for Spain was a loss of competitiveness vis-à-vis its trading partners. Given that we are in the Eurozone, and that most of Spain’s trade with other European countries (up to 65 % of Spain’s trade is intra EU), what happened was that the unit labour costs in Spain grew more than in other countries, particularly Germany. Therefore, every year Spain lost competitiveness vis-à-vis its trading partners, which increased the country’s current account deficit. Now that we are in a strong recession with domestic demand contracting, we cannot rely on foreign demand, that is exports, because of this loss of competitiveness.
On a more positive note, I have to say that during the last fourteen years of strong growth, Spain reduced dramatically its level of debt-to-GDP to 35 % of GDP (to compare Greece has 115 %, Germany is at around 60 %, Italy and Belgium are above 80 %). This means that although Spain still has a high public deficit, it has some room for manoeuvre when issuing debt because its level of national debt is relatively low. This means that it is in a better strategic position than, for example, Greece or Portugal.
Is Spain is in a similar situation to Greece, Ireland or Portugal?
The short answer is no. Spain is much better than Greece and Portugal. Ireland is also much better than Greece.
Spain and Ireland have differences between their situations. Both have a low level of debt-to-GDP, both have a real estate bubble, but Ireland has more potential for export than Spain.
So at this particular point, Spain is much better than Greece and more importantly Spain has no problem issuing new debt in the international market. Greece’s risk premium has increased dramatically which is not the case for Spain. This is because the markets consider that Spanish public finances are moving in a right direction, towards a more sustainable future if Spain implements some reforms. Spain has to carry out some reforms in order to regain its competitiveness and transform its productive structures. This has to begin now in order to be ready in one or two years time so that growth will be more sustainable after the crisis.
Which kind of measures has the Spanish government taken to tackle the crisis?
There are two different aspects. First of all the Government is tackling the public deficit. This is short term measure that is important to keep the markets calm and to show that Spain is committed to reducing its deficit in the medium term. In that sense, we are taking action that is similar to Greece. However, Greece is in a much worse situation, so it will have more difficulty tackling its public deficits. Basically, Spain will have to cut the public spending in a number of areas. Today the Prime Minister is presenting a plan that outlines where he is going to make cuts. The budget for 2010 is already restrictive in that sense, and that is essential.
However, in order to return to growth in the long run, I would say that there are three reforms that are key to turning the situation around.
Firstly, reform of the pension system. We have to increase the retirement age, probably up to 67 years like France and Germany are doing. This is necessary for demographic reasons, not necessarily for the financial crisis.
Secondly, labour market reform. We need to make the labour market in Spain more homogenous because we currently have a dual market: one which is very protective and another which is not protective at all, and this explains the high level of unemployment in Spain.
Thirdly, reform of education and research and development policy. We need to invest much more in R&D because Spain is no longer a low-wage country, a country where we can use our cheap labour for export. We need to upgrade our productive system to make it more research and development focussed, and for that we need a better education system.
After the Eurogroup meeting, do you think that the other members of the Eurozone are going to help Greece? What is the position of the Spanish Government?
Yes I think the Eurozone countries are going to help Greece. The message from the European Council on the 11 February, that was reinforced by the Eurogroup and Ecofin meetings this week, is that it is too dangerous to let Greece fall because that would trigger a negative effect for the rest of the eurozone that could damage both the banks that own Greek debt, particularly German banks, and it could cause a crisis of confidence in the Euro which has to be avoided. The message was clear: Greece will be given assistance.
Spain is in the group of countries that have supported this position because Spain has benefitted enormously from the euro, and because the risk of the panic in the financial markets is spreading to the other eurozone countries. Spain, Portugal or Ireland are relatively more vulnerable, than for example, Germany.
In that sense, we still have to see what kind of measures will be required because the problem with the Greek debt will be posed in the next month. Greece will need to refinance a large amount of debt in the Spring. We will have to see when this arises if the countries of the eurogroup will be required to give some support or collateral to the Greek debt, or if Greece will be given a direct transfer of funds which would be highly controversial because of the ‘no bail-out clause’ in the Treaty.
Do you think Spain, Ireland or Portugal will need European support?
I don’t think so. Ireland has already presented a very credible plan for reducing its deficit. Ireland can issue debt on the international market without any problems. Spain is the same situation: it can issue debt. Portugal might have some problems, but I don’t think so. The markets are going to lend to most of the countries and also to Greece if it makes the reform that are required.
What is your position about the creation of a European Monetary Fund?
I think it’s very important that we solve this problem within Europe. We don’t want the IMF to have to intervene. The Monetary Union is a political project, and the EU has to show it can deal with its domestic issues. However, I don’t think there is a political consensus to create another institution that would have to fit into the complex system of the treaties. I think we have to use the existing mechanisms to help to the countries in difficulty.
There is a strong monetary policy at EU level, what can be done to create greater economic coordination or an “economic government” at EU level?
This is very controversial. There are two points: I think we need economic governance but I don’t think it will happen.
On the one hand, we need a stronger European Commission or Eurogroup that can tell countries what to do when necessary. We should reinforce the growth and stability pact to require countries to have a surplus in times of growth and also create incentives for countries to make structural reforms. If we had this in the past, Greece would not be in the difficult situation it finds itself in right now.
On the other hand, we need more governance in economic terms to tell Germany that it needs to spend more. If there was a stronger demand from Germany which is a country that has structural surplus, other countries would be better off. I mean if Germany consumes more and buys more from Spain, Greece or France, this would boost demand at the European level and that would help.
I think we need more governance in both of these aspects. But I don’t think that Germany is willing to do this at this particular point in time. So I think that the prospects are not very positive for more economic governance at the moment. Perhaps the strategy EU 2020 can enable the EU to make some progress on encouraging countries to make structural reforms.
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Special section on the economic crisis and the eurozone