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14 November 2013

BoS/Linde: The exit from the crisis and the firming of the recovery in the euro area and in Spain

Linde said that the latest data on the euro area and on the Spanish economy gave a glimpse of a horizon in which the serious difficulties had been overcome, although sustained recovery would require perseverance.

The latest economic indicators point to an incipient pick-up in activity in the euro area, and most international agencies and private analysts forecast a firming of economic growth over the next two years.

In the euro area, the crisis has most acutely affected those countries whose economies evidenced greater dependency on external funding (i.e. those running bigger current account deficits) and less flexible economic structures. Most of these countries had not sufficiently adapted their institutional frameworks and economic policies to the membership requirements of a monetary union. The institutional arrangements designed 20 years ago in Maastricht did not have the wherewithal to prevent and, where appropriate, correct this lack of adaptation of national policies to the requirements of a monetary union; and nor did they have the mechanisms to manage the far-reaching and protracted crisis we have experienced.

From the onset of the crisis, the ECB applied a series of measures with a three-pronged aim: to relax the monetary policy stance in order to accommodate it to the cyclical circumstances of the economy; to prevent liquidity tensions from triggering bouts of instability that would have compounded the loss of output and employment; and, at the height of the tensions, to dispel the risk of the euro area potentially breaking up, a risk that was very real in 2012.


In Spain, our experience since the outbreak of the crisis has been extremely difficult. We have witnessed a double-dip recession, something unprecedented in our economic history over the last half-century. Adjustments were needed to overcome the serious real and financial imbalances - namely the budget deficit, private and public debt, the external imbalance and unsustainable activity in the construction sector - which began to build up in 2002-2003, during the period of real negative interest rates in the United States and in the EU. And matters worsened with the international financial crisis and the confidence crisis in the euro area, the latter driven by the public finances crisis in several countries, Spain among them.

But we are correcting these imbalances. Headway is most visible in our improved competitiveness, and more incipient in the recomposition of the contribution of domestic demand to activity, or in the reallocation of productive and financial resources towards industries with higher growth potential. The Spanish economy grew slightly in the third quarter - the first rise in output since the opening quarter of 2011 - amid a somewhat more favourable external setting, and with financial tensions lifting and confidence indicators improving. In recent quarters, net external demand has played a key role in sustaining activity, owing to the sound export performance, the weakness of imports and the highly favourable tourism figures.

In Spain, adjustment in competitiveness has been done through what is known as "internal devaluation", the direct containment of costs and margins, not through the nominal depreciation mechanism, which was the normal device prior to our joining the monetary union. Internal devaluation is, evidently, more complicated and slower than nominal depreciation; but, in turn, the gains to be had are more durable.

The export sector has shown great capacity and has notably increased its presence and sales both in the euro area and in other markets. Our trade balance with all regions has improved, with the exception of the oil-exporting countries. Spain is running a surplus both with the euro area and with the rest of the European Union.

One fundamental challenge the Spanish economy faces is to reallocate the surplus productive resources in non-tradeable sectors to others with higher growth and export potential. The sectoral reallocation is only just beginning and still has a long way to run. Economic policy has to contribute to completing this process by removing the obstacles associated with barriers to competition and the red tape hindering business start-ups.

Another task is that of completing the adjustment of Spanish corporate and household debt. This is progressing slowly because their income is weak and so the adjustment has to proceed mainly through the contraction of credit. Under these conditions, aggregate credit to the private sector will probably still take some time to achieve positive rates.

Full speech

© BIS - Bank for International Settlements

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