Miguel Fernández Ordóñez: Pressing tasks needed to improve Spain's
economy
Address by Mr Miguel Fernández Ordóñez, Governor of the Bank of Spain, at the "XXVII
Reunión del Círculo de Economía", Sitges, 3 June 2011.
* * *
Good morning.
Let me first thank the Círculo de Economía for kindly inviting me to participate in this forum.
Had you invited me in March last year to talk about the foundations for a new economy in the
21st century, I would surely have focused on what I see as the main challenges facing us this
century. Firstly, population ageing, which will affect not only the developed countries but also
other emerging nations such as China. Secondly, the growing inequality that has appeared in
some countries along with the positive effects of globalisation. Thirdly, the pressing need to
use natural resources - and energy resources in particular - rationally. And finally, I would
have taken the opportunity to discuss the changes under way worldwide in financial
regulation to avoid a repetition of the crisis we have experienced.
But I'm not going to talk about this, as in April last year the Greek sovereign debt crisis broke
and, since then, the euro area has been immersed in a crisis still to be resolved and which
might have very serious consequences not only for its members but for all Europeans and for
the world economy as a whole. If this crisis is not suitably resolved, the effects on the global
economy and financial markets might be most significant not only due to the strong links
connecting the main economies, but also because the doubts over the sustainability of public
finances might ultimately pass through to other major developed economies.
The euro area is the epicentre of a crisis whose resolution is key to what may happen in the
European and global economies in the opening decades of the 21st century, and it is on this
that I shall focus today. European integration can only move forward if the euro area
economy operates once again without upheavals. And since European integration is
fundamental to the well-being of all Europeans and, naturally, of Spaniards, Spain must, like
the other countries and the European institutions, make every effort to resolve the crisis.
The truth is, as the Governor of the Bank of France said last week, if we don't resolve this
crisis properly, a "horror scenario" might ensue. But I'll resist the temptation of detailing all
the adverse consequences that failure to overcome this crisis would have for European
citizens. To quote Fernando Pessoa, "to be a pessimist is to see everything tragically, an
attitude that's both excessive and uncomfortable". Therefore I'm going to take a realistic but
optimistic approach, stressing the steps forward we have taken to date and presaging a
happy ending for this crisis if the necessary measures are adopted.
All the EU Member States have a responsibility to resolve the crisis. On one hand are the
governments of the countries that show the biggest divergences, and whose conduct is key
to exiting the crisis. And on the other are the governments of the countries which, given their
importance in the area, are central to euro area and EU decision-making, since overcoming
the crisis will only be possible if the European institutions' complex decision-making process
works well.
But we will better understand what each of these players must do to emerge from the crisis if
we reflect firstly on the mistakes they have made over the 11 years that a monetary union
has been in place without a political union.
Let's begin on that point. You will all recall that when the euro was created, many academics,
especially from Anglo-Saxon circles, warned that the monetary union was doomed to fail,
since it did not meet the essential conditions of what is known as an "optimal currency area".
Among other aspects, it was stated that a monetary union could hardly be successful if there
were no fiscal transfer mechanism allowing asymmetrical shocks affecting a specific part of
the monetary union to be accommodated. In this connection, critics of the euro project
said - and still say - that a monetary union should not be maintained if there is no political
union. They argued that the potential divergences between different areas could only be
offset or resolved if there were a single budget for the entire area. Otherwise, a durable
single currency would not be feasible.
Yet given that political union in Europe over the short term is inconceivable, will a monetary
union not be able to survive without political union? In my view, the most important lesson
we've learned in this crisis is that it is possible to enjoy the benefits of a single currency
without political union, but only if strong divergences between the member countries are
avoided.
This has been understood by the European Union and is what has prompted the changes to
the Stability and Growth Pact and to economic governance, which are intended precisely to
correct divergences before they become so great that they are difficult to redress. And it
must be acknowledged that here a good deal of progress has been made over the past year.
The unfolding of the crisis has shown that the governance model in place to date in the EU
has been of no use in ensuring economic policy consistency or in managing crisis episodes
flexibly and effectively. It's now clear that public finances were not sufficiently restructured in
the upturn, that macroeconomic divergences were excessive and that we need a
well-designed financial aid mechanism to assist ailing countries swiftly and effectively.
Mindful of this, European governments and institutions have taken major steps towards
correcting deficiencies in three fundamental areas: the strengthening of fiscal discipline,
closer surveillance of macroeconomic maladjustments and the creation of a permanent
crisis-management framework.
Starting with fiscal discipline, public debt levels will be more closely monitored and countries
will have better incentives to comply with their commitments, through the introduction of
broader and transparent sanctioning arrangements, which will moreover be applied at an
earlier stage and, as far as possible, automatically. Further, the reform of national fiscal
frameworks is being promoted, so that budgetary policy rules and surveillance systems will
be adopted that help curtail spending.
Moreover, a new framework for the prevention and correction of macroeconomic imbalances
is being established. The aim of this mechanism is the early identification of the emergence
of potentially "excessive imbalances". When imbalances are considered to be too big, an
excessive imbalance procedure will be initiated which will include recommendations for the
adoption of corrective measures.
The third key element of EU economic governance reform is the creation of a permanent
crisis-management instrument, the so-called European Stability Mechanism, which will come
into force in mid-2013. Geared to lend up to €500 billion, this mechanism will provide funds to
countries with liquidity problems under strict conditionality.
Finally, a mention for the Euro Plus Pact, approved in March by the euro area Heads of State
and of Government. This pact involves a commitment at the highest political level to adopt
the measures needed to attain competitiveness and employment-promoting objectives, to
contribute to the sustainability of public finances and to reinforce financial stability.
There's always room for improvement and, at the ECB, we have called on Heads of State to
strengthen governance procedures further, for instance by making sanctions more automatic
in cases of non-compliance so as to prevent governments succumbing to the temptation of
being excessively lax. This was seen in 2005 when the core countries failed to meet their
deficit commitments and the Commission and the European Council agreed to change the
rules so as not to sanction these countries. But the lesson whereby maintaining a monetary
union is only possible if divergences remain within a moderate range must also be taken into
account by the national governments of each of the euro Member States, because the
policies that may prevent the emergence of these imbalances or help to correct them are, for
the most part, the responsibility of national governments.
Many tasks lie ahead for all the euro area countries in contributing to reducing divergences.
But it is our duty to pay more attention to what Spain should do. Our country reacted a year
back when the sovereign debt crisis broke, and it showed resolve in adopting far-reaching
measures to correct our economy's imbalances without resorting to aid from its fellow
members. It was able to do so, firstly, because its divergences were not overall as great as
those of the countries that have had to apply for external financial assistance. And secondly,
because the Spanish parliament was prepared to approve some of the harshest and most
difficult measures adopted in Europe to rapidly reduce the budget deficit.
But the task is by no means complete and, therefore, the responsibility of Spain's
parliamentary forces remains of paramount importance. True, the countries that required
financial assistance have more problems to resolve, but in their favour they have precise
programmes of measures agreed with the International Monetary Fund and the European
Union with which they must unfailingly comply. If they fail to do so, they will be withdrawn.
They know perfectly well what they have to do and when they have to do it. In our case the
responsibility is greater, since we ourselves must decide on the content and timeframe of the
reforms and that means we must be capable of adopting the right measures for exactly as
long and as intensely as required, and over a sufficiently short timescale so as to convey to
all the firmness of our resolve to overcome the crisis.
Let us turn to the most important and pressing tasks facing us: to bring about far-reaching
change in the legal and institutional framework for employment, to comply with the
deficit-cutting plan and to complete the restructuring of the financial system and the overhaul
of savings banks.
Nothing is more necessary for improving the well-being of workers and of all Spanish citizens
than reducing the unemployment rate and raising productivity so that wages may grow at a
higher rate. But this task has also become a pressing one since, as euro area membership
precludes using the devaluation tool, reform of the employment institutional framework is vital
for increasing productivity, and thus for restoring competitiveness and raising our growth
rate.
Lately, those convinced of the importance of this reform have grown in number. But among
those showing reluctance, a new argument has now arisen which seeks to play down the
need for reform because, they say, it will take time to bear fruit. I have two
counter-arguments here. First, Spain has moved so far away from the various employment
institutional framework models in the developed countries that a rapid approximation to them
could have more immediate effects than in other countries. Admittedly, a reform of this type
would not swiftly lower our unemployment rate to the average European level, which is below
10%; but a reduction in the unemployment rate, no matter how modest at first, would have
most favourable consequences for domestic and external confidence in the Spanish
economy. What's more, even if it is thought that results will only emerge gradually, slowness
in taking effect is no argument for delaying this reform a minute longer; rather, it is an
excellent reason to adopt it immediately so as to be able to enjoy its effects as soon as
possible.
Regarding fiscal consolidation, there is little to say and much to do. Little to say because the
government-approved Stability Programme, which envisages quickly attaining a significant
deficit cut, has been favourably assessed by the EU and strictly met in its first year. The
now-difficult task is for all levels of government to rigorously meet their adjustment
commitments this year and to enable the 6% overall general government deficit target to be
attained. Henceforth, we should expect local and regional authorities not to put off any longer
the vigorous expenditure-cutting decisions that are needed to meet this overall target.
Finally, concerning the restructuring of savings banks, the final part of what was legislated by
Parliament in the recapitalisation Decree-Law approved in February remains to be done, but
so far the Decree-Law has been implemented under the conditions and within the timeframe
set.
On 11 March the Banco de España published the core capital requirements of all Spanish
credit institutions. Among them, 12 (4 banks and 8 savings banks) were identified as having
a core capital deficit for a maximum amount of €15.15 billion. Later, when one of the
integration projects came unstuck, the number of institutions needing additional capital rose
to 13.
On 14 April, the Banco de España approved the strategies and timetables submitted by
these 13 institutions or groups. Two were subsidiaries of foreign banks, which have been
recapitalised by their respective parents; the two Spanish banks have reinforced their capital
by resorting to the markets; four savings bank groups have considered an initial public
offering or the raising of capital from investors as a priority option, with a subsidiary
alternative of resorting to the FROB (Fund for the Orderly Restructuring of the Banking
Sector) if their initial approach did not work out as planned; another savings bank has stated
its preference to participate in an integration process with another more capitalised
institution; and, lastly, the remaining four savings banks have expressed their preference to
reach the required level of capitalisation by means of the FROB taking a stake in their
capital.
Before 28 April, those institutions that had considered going to the FROB as a priority source
submitted their specific recapitalisation plans to the Banco de España. In the meantime, the
FROB has formally undertaken, with all institutions that have submitted strategies envisaging
the possibility of resorting to it, to provide the necessary funds so that all institutions in the
Spanish banking system may comply with the new core capital ratio.
At present, the recapitalisation plans submitted by the institutions are being analysed, as a
further step in the timetable. By 30 September 2011, these institutions must have completed
what was stipulated in their strategies. This deadline may, as provided for in the Decree-Law,
be extended by three months by the Banco de España if considered necessary for justifiable
operational reasons, and by up to six months if an initial public offering is involved.
A conclusive step will thus have been taken in the savings banks sector restructuring
strategy, which has entailed unprecedented change on many levels: balance-sheet
write-downs at institutions; integration projects among savings banks to achieve bigger and
more efficient institutions; a change in corporate model to smooth access to capital and to
encourage enhanced governance, and, lastly, the recapitalisation of the sector. If these three
reforms are resolutely seen through, there will be a favourable change on the markets similar
to that seen in the first half of this year when the pensions reform and the recapitalisation of
credit institutions were approved. Spain might feature next year as a euro area country that
still has a high deficit - 6% at end-2011 - but comparable to that of other major euro area
countries and with the lowest debt level among the biggest economies in the area. Moreover,
once the restructuring and recapitalisation of the banking system has been completed, it will
be more apparent that all credit institutions have a high degree of capitalisation and that only
a small portion of the sector has required public aid. Finally, if a sufficiently far-reaching
reform of the employment institutional framework is undertaken as to turn employment
around, confidence will be restored in the capacity of our country to generate robust growth
once again.
The favourable assessment of these reforms along with the progressive improvement in
economic figures as a result of headway in the adjustment of the imbalances (the reduction
in net borrowing, the resumption of moderate inflation, the adjustment of the real estate
sector, the lessening of the negative contribution of the construction sector to GDP growth,
etc.) will prompt a positive change in the perception of the Spanish economy and in domestic
and foreign investors' confidence. That would lower the risk premium of the Kingdom of
Spain, providing for better financing conditions for our companies and for the public sector,
and giving an additional boost to growth which has in fact ceased in the first quarter of this
year to bring up the rear among the major euro area countries.
To conclude, I have focused today on discussing the most important and pressing tasks
needed to improve our economy. Evidently, though, there are many more that will take time,
not least of which is doing everything possible to raise the level of educational attainment of
our labour force. What I am certain of is that it would suffice to comply satisfactorily with the
three tasks I have set out in order to bring about a change in perception by the domestic and
foreign agents that fund us, and that this would be the best contribution Spain can make to
resolving the euro crisis. Experience has shown that Europe has learned and even emerged
stronger from crises. If the other countries and European institutions fulfill their tasks, this
crisis will have ceased to be a determining factor of the course of the European and world
economy in the 21st century. And we may then move on to talking more calmly about ageing,
inequality and the rational use of national resources, matters which I view as essential for
understanding what is going to happen in the world economy this century.
Thank you very much.