Spain: How did we get in this mess? How did we get out?

Spain: How did we get in this mess?

How do we get out?

Elena Nieto CX Economics Paris, March 2012

Supportive factors that, during the boom years, were taken for granted 1. Lower financing costs (Euro membership provided confidence in the Spanish economy) Spain :10 yr Bond rate and spread vs German Bund 16

700

14

600

Spread (right)

12

500

Interest Rate 10 yr 10

400 8 300 6

200

4

Jan-12

Jan-11

Jan-10

Jan-09

Jan-08

Jan-07

Jan-06

Jan-05

Jan-04

Jan-03

Jan-02

Jan-01

Jan-00

Jan-99

Jan-98

Jan-97

Jan-96

Jan-95

0 Jan-94

0 Jan-93

100

Jan-92

2

Financial markets finally penalized excessive deficits. Country risk reappeared within the Euro-area (break-up risks, but not only).

Supportive factors that, during the boom years, were taken for granted 2. Massive inflow of immigrants (flexibility in labor markets, support for housing‌)

Labor Force (yoy growth and contributions)

4.0% 3.5%

Foreign

3.0%

Spanish

2.5%

% yoy total

2.0% 1.5% 1.0% 0.5% 0.0% -0.5%

These flows proved to be highly cyclical

Sep-11

Mar-11

Sep-10

Mar-10

Sep-09

Mar-09

Sep-08

Mar-08

Sep-07

Mar-07

Sep-06

Mar-06

-1.0%

Apparently cautious economic policy

• Fiscal policy: compliance with Stability and Growth Pact, debt reduction... • Banking Supervision: pioneer in the design and adoption of countercyclical provisions

Public Debt (% GDP)

Public Deficit (% of GDP)

4.0

80

2.0

Failings in existing fiscal discipline frameworks at national and European levels.

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

0

2001

-12.0

2011

10

2010

-10.0

2009

20

2008

-8.0

2007

30

2006

-6.0

2005

40

2004

-4.0

2003

50

2002

-2.0

2001

60

2000

0.0

2000

70

But at the same time ‌ Building up of imbalances

1. Housing bubble

Housing Starts

Thousands 900 800 700 600 500

400 300 200 100

Jan-12

Jan-10

Jan-08

Jan-06

Jan-04

Jan-02

Jan-00

Jan-98

Jan-96

Jan-94

Jan-92

Jan-90

0

But at the same time‌Building up of imbalances

1. Housing bubble

2. Sharp increase in household and corporate debt

3. Increasing vulnerability of credit institutions

4. Public sector bubble (extraordinary revenues linked to real estate boom were taken as permanent)

Need to adjust these excesses simultaneously

What now?

One picture is worth a thousand words

Unemployment rates

% 24 22 20 18

Spain

Germany

Italy

France

Greece

16 14 12 10 8 6 Mar-11

Mar-10

Mar-09

Mar-08

Mar-07

Mar-06

Mar-05

Mar-04

Mar-03

Mar-02

Mar-01

Mar-00

4

What now? The path to long-term growth

• Foster structural reforms to adapt the structure of goods and factors markets to the requirements imposed by membership of a monetary union.

• Promote a productive model less oriented to construction • Tighter fiscal policy to gain credibility • Clean-up the banking sector (re-structure while minimizing credit crunch)

The problem is that the adjustment process and the growth enhancing policies must be done simultaneously and against the clock.

Spain: How did we get in this mess?

How do we get out?

Elena Nieto CX Economics Paris, March 2012