Spanish Economic Policy

 

 

The starting point of the design of economic policy must be the identification and analysis of the magnitude of the difficulties faced by the Spanish economy. Prior to the present economic downturn – which has so far prevailed for more than four years – Spain enjoyed powerful growth. The growth of real gross domestic product (GDP) per capita from the mid-1990s to 2007 was higher than the European Union average by 0.5 points. It is indubitable that Spain’s membership of the Economic and Monetary Union and the adoption of the euro were significant growth drivers. However, the absence of cyclical synchrony with the core economies of the euro area and a monetary policy that was overly expansionary for Spain encouraged the emergence of imbalances.

During the years of economic growth and the early years of the downturn there arose major macroeconomic imbalances – a high public deficit, high private indebtedness spurred by negative real interest rates, high external debt and loss of competitiveness. A large portion of these imbalances is explained by the buoyant growth of credit in the years leading up to 2007, by the growth of mainly property-related investment, and by the rigidities of the labour market. The high rate of investment in the years leading up to 2008 explains the powerful increase in external indebtedness: in particular, the sharp rise in the weighting of housing investment alone explains half of the severe external imbalance created over the course of the years leading up to 2008. Alongside this, certain structural features of the Spanish labour market (its dual nature and the structure of wage bargaining), in conjunction with other factors, coupled with a shortfall of competition in some markets in goods and services, worsened this imbalance in the form of a trend toward a loss of outward competitiveness.

In the recessive economic context of the early stages of the crisis, a strongly expansionary fiscal policy was adopted, so as to increase public financing requirements rapidly, up to a maximum deficit of 11.2% in 2009. In the period 2000-2007 the growth of external debt was due to a need to finance the private sector; from 2009, the increase chiefly stemmed from the public sector.

Some of these imbalances have begun to be corrected; significant progress has been made in flow variables such as inflation, exports of goods and services, and the current account balance: in 2011, inflation followed a more moderate path, and ended the year at 2.4%.

In 2012, prices continued to follow a more moderate trend, especially in the first half, although they underwent a short-lived spike owing to isolated factors, such as indirect taxes and levies. The consumer price index ended 2012 at 2.9%, so confirming the trend toward a moderation of prices. However, consumer prices at constant tax rates, an index which eliminates the effects of these isolated factors, came to 0.9% in December.

The external sector in 2012 continued to perform strongly, as in previous years: external demand contributed to GDP growth with 2.5 percentage points, as against 2.3 percentage points in 2011; in 2012 a current account surplus was achieved as from the month of July – the first positive balance since August 1998 – and the non-energy trade balance also showed a positive balance. In 2012 as a whole, Spain registered a financing need of 2% of its GDP; it is expected that in 2013 its financing capacity will be 0.6% of GDP for the full year.

Despite these corrections, however, the financial and economic imbalances of the Spanish economy continue to be significant. It is necessary to address them promptly and decisively by adopting an ambitious and accurately designed economic policy.