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