Luis de Guindos: Euro area and Spain - current status and
challenges ahead
Remarks by Mr Luis de Guindos, Vice-President of the European Central Bank, at the 1st Edition
of the Prize José Echegaray of elEconomista, Madrid, 15 October 2018.
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Despite the recent slow-down, economic growth in the euro area remains solid and
broad-based, as confirmed by the latest data. Real GDP has expanded for 21 consecutive
quarters, growing 0.4% quarter-on-quarter during the second quarter of 2018.
In the first half of 2018, growth weakened from the very high rates of last year, reflecting lower
exports. In the coming period, however, we expect the economy to continue to grow at a pace
above its potential. In fact, the duration and amplitude of the current expansion is still below
historical averages, having lasted no more than five years and with real GDP now 10% above the
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trough in the first quarter of 2013. By comparison, on average, growth phases in the past lasted
seven and a half years from trough to peak, with GDP increasing by 21% over the same period.
While risks to growth have remained broadly balanced, those related to global factors,
including the threat of increased global protectionism, rising oil prices and emerging market
vulnerabilities, Volatility in sovereign debt markets and the rise
have become more prominent.
in populism add to overall uncertainty.
The ongoing expansion has led to strong employment gains. Since the beginning of the
recovery, the number of people employed in the euro area has risen by 9.2 million. Euro area
unemployment declined to 8.1% in August, its lowest level in almost ten years.
Consumer spending is being driven by steady growth in households' real disposable
income. Strong labour markets - with increasing job creation and rising wages - boost
household income and, in turn, consumer spending.
The investment outlook remains solid on the back of robust demand, improving
Since the end of 2014, bank lending rates in
profitability and favourable financing conditions.
the euro area have declined significantly, by around 130 basis points for non-financial
corporations and by around 110 basis points for households. Lending rates on very small loans,
which can be used as a proxy for loans to small and medium-sized enterprises (SMEs), have
fallen by more than 210 basis points. This is encouraging, as SMEs provide two-thirds of total
private sector employment in the euro area.
Overall, the underlying strength of domestic activity in the euro area continues to
support a sustained adjustment in inflation. According to the flash estimates, HICP inflation
increased to 2.1% in September, from 2.0% in August. On the basis of the latest oil futures
prices, headline inflation is expected to hover around the current level for the rest of the year. Our
most recent projections foresee annual headline inflation at 1.7% in 2018 and in each of the two
subsequent years. The stable path of inflation conceals a decline in the contribution of the energy
component, as the impact of the past oil price hike fades, offset by a gradual increase in
underlying inflation.
Although measures of underlying inflation remain generally muted, they have been
increasing from earlier lows. Tighter labour markets and the emergence of wage pressures
are expected to continue to bolster underlying inflation.
Given the underlying strength of the economy, we are confident that the sustained
convergence of inflation to our aim will proceed even after a gradual winding-down of our
net asset purchases. At the same time, an ample degree of monetary accommodation will still
be necessary to ensure a durable convergence of inflation over the medium term.
Against this background, we have reduced our net asset purchases to €15 billion as of this
month, and we continue to anticipate that net purchases will terminate by the end of the year. But
in order to ensure that sufficient monetary policy stimulus continues to support the further
buildup of headline inflation that we see in our projections, the Governing Council decided:
to enhance our forward guidance on the likely future path of our policy interest rates,
expressing our expectation that they will remain at their present levels at least through the
summer of 2019, and in any case for as long as necessary to ensure the continued
convergence of inflation towards our aim;
and to re-assert our intention to continue to re-invest the principal payments from maturing
securities in our portfolio for an extended period of time after the end of our net asset
purchases, and in any case for as long as necessary to maintain favourable liquidity
conditions and an ample degree of monetary accommodation.
These measures will continue to provide the necessary degree of monetary policy
accommodation to bring inflation back towards a level that is below, but close to, 2%.
Let me now turn to the Spanish economy.
Following the severe recession in 2008-09 and 2012-13, Spain's economic recovery has
with five years of growth since 2013. During this time, the economy has expanded
been strong,
by an estimated 14% and the level of GDP is now above its pre-crisis peak.
This strong recovery reflects substantial policy efforts at both national and European level,
particularly the reforms initiated at the height of the sovereign debt crisis.
Under the EU financial assistance programme, numerous measures and reforms were
undertaken to strengthen the banking system. These included the stress testing and
recapitalisation of troubled banks; the identification of troubled real estate assets and their
transfer to SAREB (Spain's "bad bank"); and the reform of the savings banks. At the same time,
actions and reforms at European level, including monetary policy (longer-term refinancing
operations, LTROs, asset purchase programme, APP) and the move towards banking union,
have ensured liquidity and strengthened confidence in Europe's monetary and financial system.
Financial reforms were accompanied by a series of reforms to labour and product
markets and to the public sector. The 2012 labour market reform gave priority to collective
bargaining agreements at firm level over those at sectoral or regional level. Reforms to product
markets, including the law on market unity, have sought to reduce regulatory obstacles to firms'
growth, although implementation has been challenging.
The Spanish economy has rebalanced as far as "flow" variables are concerned, while "stock"
imbalances are gradually correcting.
Banks' asset quality and solvency has substantially improved, as reflected in higher
capital ratios and a steadily declining ratio of non-performing loans (NPLs). The NPL ratio
of Spanish banks has more than halved from 13.6% in 2013 to 6.4% now and continues to fall
steadily. The banking sector has been able to finance growth with new loans while steadily
deleveraging as legacy loans mature.
Private sector debt has fallen considerably. Deleveraging of firms and households is well
under way, with debt having declined by almost one-third since 2012. At the same time, the
public debt-to-GDP ratio, while remaining very high at almost 100%, has stabilised. The public
deficit ratio came down from double-digit levels at the peak of the crisis to 3.1% in 2017.
More than two million jobs have been created since the end of 2013 and the
unemployment rate has fallen from a peak of more than 26% to 15%. Throughout the
recovery, the pace of employment growth has broadly matched that of GDP growth, generating
around half a million jobs each year. In a context of subdued wage growth and low inflation,
employment growth has supported disposable income and a recovery in consumer spending,
which is now close to its pre-crisis level.
Export performance has substantially improved, helping to reduce external debt. The
current account deficit of almost 10% of GDP before the financial crisis turned into a surplus in
2012 and has remained positive throughout the recovery. The number of exporting firms has
grown and exports now go to more destinations than in pre-crisis times.
Finally, wage moderation and low inflation are supporting competitiveness. In fact, the
Spanish economy recovered the competitiveness lost in the decade prior to the financial crisis.
However, the recovery of the Spanish economy may have passed its cyclical peak and
While still growing at a reasonable pace, the rate of economic
downside risks have emerged.
expansion has slowed gradually in recent quarters. Real GDP growth has decelerated in 2018
compared with the growth we have seen since the second half of 2014. This slowdown mainly
reflects weakness in net trade. Looking forward, global protectionism and weakening conditions
in emerging markets represent further downside risks to growth. Internally, the present low
savings rate of Spanish households and the need to restore savings in the near term, points to
moderation in consumption going forward.
Let me point to the three main challenges that the Spanish economy is facing at present,
in my view. The first relates to the process of fiscal consolidation. While well advanced,
it is still incomplete. The government deficit ratio is still the highest in the EU and it needs to be
further reduced to bring the government debt ratio on to a downward path. In fact, adequate
buffers need to be rebuilt now, in times of solid growth and favourable financing conditions. This
would enable fiscal policy to support the economy in the event of any future shock.
Secondly, unemployment remains very high, as does the share of temporary employment.
Spain's unemployment rate remains well above pre-crisis levels and is roughly the double of the
euro area rate. This situation calls for further reforms to address the duality of the labour market
and more effective active labour market policies to re-integrate young people and the long-term
unemployed.
Finally, productivity remains low and needs to be raised to maintain economic growth
Productivity gaps between regions and between large
and enable sustainable wage growth.
and small firms point to regulatory fragmentation which still needs to be addressed. To enhance
productivity, measures to increase the scale of small firms in the SME sector, which tend to be
smaller than in peer countries, need to be pursued. More attention needs to be placed on the
education system and professional training to enhance human capital and reduce skills
mismatches. Finally, greater investment in R&D and innovation by Spanish firms would enhance
their competitiveness and contribute to generate more growth through higher value added.
Only by raising productivity and correcting macroeconomic imbalances can the long-term growth
potential of the Spanish economy rise. This is a condition to place Spain on a solid growth path,
increase employment and raise wages to finally leave behind the financial crisis that erupted ten
years ago.
Let me conclude. The importance of increasing long-term growth potential is true for
Spain as it is for the whole euro area.
At the same time, I cannot emphasise enough that a robust euro area economy has to rely on
sound economic governance. Solidifying the institutional architecture of EMU is essential at this
juncture in order to foster cohesive economic performance without fragmentation or excessive
imbalances.
Reforms at the national and EU level are needed to uphold a stable financial system and a
resilient monetary union. A common stabilisation function, which - in the spirit of a true
countercyclical fiscal policy instrument - would maintain convergence in the event of large shocks, is an
overriding priority. Completing the banking union with the establishment of a European Deposit
Insurance Scheme, its third pillar, and firm moves towards capital markets union, promoting
deep and liquid bond and equity markets in Europe, are necessary reforms of the financial
sector. Attaining these goals is essential to safeguard financial stability, foster further integration
and support economic growth and well-being of European citizens.
Thank you for your attention.
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See also Camba-Mendez, G. and Forsells, M., "The recent slowdown in euro area output growth reflects both
cyclical and temporary factors", Economic Bulletin, Issue 4, ECB, 2018.