Luis M Linde: Economic recovery in Spain
Opening remarks by Mr Luis M Linde, Governor of the Bank of Spain, at the XXII Meeting of
the Financial Sector, organised by ABC, Deloitte and Sociedad de Tasación, Madrid, 8 April
2015.
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Let me first thank Bieito Rubido, the Editor of ABC, Yolanda Gómez, the Deputy Editor, Fernando Ruiz, the
Chairman of Deloitte and Juan Fernández-Aceytuno, the General Manager of Sociedad de Tasación, for their
invitation to the opening of this Encuentro del Sector Financiero forum.
In my address I shall briefly set out the situation of and outlook for the Spanish economy in
the European setting; I shall review monetary policy developments in the euro area; and I
shall conclude with some thoughts on the connection between political tensions and the
functioning of the Monetary Union which, today, as a legacy of the crisis dating back to 2007,
are evident and significant.
The Spanish economy
I shall begin with the situation of the Spanish economy. Recent figures confirm the
momentum and strength of our economic recovery, against a background in which the
correction of the macroeconomic imbalances and the improvement in the external
environment continue.
The policies deployed at home and in Europe are underpinning this sound performance. But
there are other factors contributing to the recovery: the fall in oil prices, which is translating
into a boost to household incomes and into a reduction in firms' production costs; the very
significant depreciation of the euro; and the favourable economic activity figures of some of
our trading partners within the Monetary Union.
Turning to prices, the annual rate of inflation has been negative in the first three months of
2015, running at -1.3%, -1.1% and -0.7%, respectively, although the non-energy CPI and
the core inflation index have been more stable, posting positive figures. In particular, in
March, on preliminary figures, the annual rate - though still negative - is estimated to have
stood at -0.7%, an increase of 0.4 pp on February, which largely stemmed from the
correction in oil prices.
Following several quarters of sluggish growth, a recovery is discernible in the euro area.
Most member countries are posting positive GDP growth rates, although there are significant
differences. Among the major economies, the pace of economic activity is highest in Spain
and Germany.
In 2014, euro area GDP grew by 0.9%, compared with a decline of 0.4% in 2013. Driving this
recovery has been the increase in private consumption, in a setting of improved household
confidence and income. Other favourable factors have been the contribution of exports and
gross fixed capital formation, the latter due to the pick-up in construction.
The data available on the Spanish economy suggest that, during the first quarter of 2015, the
expansionary trajectory observed in 2014 has stepped up. GDP is estimated to have
increased by 0.8% in quarter-on-quarter terms, which would place the year-on-year rate of
change for the first quarter at 2.5%, a higher level than expected.
The recovery in the Spanish economy this year and in 2016 will be underpinned by the
strength of private domestic demand and by stronger exports. Moreover, the decline in the
tax burden, following the reform that came into force in January, and the monetary policy
measures recently adopted by the ECB - including most notably the asset purchase
programmes - will also support growth. The projections published by the Banco de España
in its Economic Bulletin two weeks ago point to GDP growth of 2.8% this year, followed by
similar growth in 2016, at a rate of 2.7%.
As to the labour market, the projections of the Banco de España are for growth in
employment of 2.7% this year and 2.6% in 2016. The increase in employment will enable the
unemployment rate to continue shrinking at an even greater pace than in 2014, to stand at
around 20% of the labour force in the fourth quarter of 2016. These projections, which do not
appear to be overly optimistic given the figures - published on Monday - for the decline in
unemployment and the rise in Social Security registrations in March, highlight the need to
continue pursuing policies geared to boosting competitiveness, investment and exports, the
only foundations suitable for sustainable job creation.
Price developments in 2015 and 2016 will be greatly influenced by oil prices. Consumer
prices might fall by 0.2% on average in 2015, and rise by slightly more than 1% in 2016.
Stripping out the energy component, consumer prices are expected to rise modestly, in line
with the scenario of growing household expenditure, the lessening of surplus capacity in the
economy and the depreciation of the euro. The risk of deflation appears to have been clearly
averted in the Monetary Union and, consequently, in Spain.
Recent monetary policy conduct
Let me turn now to recent monetary policy conduct.
Monetary policy in the euro area has been progressively adapted to medium- and long-term
inflation expectations, in a setting marked by the weakness of economic growth in the area.
The armoury of instruments used by the ECB includes conventional or standard measures -
such as interest rate movements and the provision of liquidity in its ordinary refinancing
operations - together with non-standard or extraordinary measures, among which the setting
of negative interest rates on the discount facility, and long-term liquidity-provision and
assetpurchase programmes.
The need to keep the deflationary risk at bay, i.e. to keep inflation expectations anchored in
the proximity of the ECB's objectives, has been pivotal in determining the successive steps
to be taken in terms of monetary easing.
In June 2014, the ECB cut its official interest rates, setting the main refinancing operations
rate at 0.15%. Also, for the first time, it set the interest rate on the deposit facility in negative
territory, at -0.10%.
In addition, it announced new long-term refinancing operations maturing in September 2018,
with the specific aim of boosting lending. It is worth noting that these operations combine
credit-enhancing elements, as they link the granting of liquidity to bank lending, with
quantitative easing, through the expected increase in the Eurosystem balance sheet.
In September 2014, the ECB adopted new measures. First, it made a fresh cut to interest
rates, whereby the MRO rate stood at 0.05%, its technical minimum, and the deposit facility
rate became even more negative, reaching -0.20%.
Furthermore, the ECB initiated asset purchase programmes. In the fourth quarter of 2014,
the ECB launched its third covered bond purchase programme and, subsequently, its ABS
purchase programme. By end-March, covered bond purchases had reached almost
€63 billion, with slightly over €7 billion of these being made by the Banco de España. As to
ABS purchases, these stood at €4.6 billion at end-March, indicating that this was evidently a
less significant component of the programme.
In January 2015, the ECB decided to add a third programme, called the "Expanded Asset
Purchase Programme". This involves government bond purchases and marks the launch of
quantitative easing.
Adding government securities and paper issued by supranational European institutions to the
asset purchase programme was a very important step in the monetary easing and economic
stimulus policy: the programme will run to September 2016 at least, with a monthly target of
€60 billion for the three programmes as a whole, although government bonds will be the
main component of the purchases and of the increase in the Eurosystem balance sheet.
The programme is expected to give a significant monetary boost to the economy, keeping
inflation in the medium term below, but close to, 2%. The monetary stimulus transmission
mechanisms include both the easing of financing conditions for households and firms and,
indirectly, the depreciation of the euro.
Purchases of public securities will be allocated as follows: 88% to euro area sovereign and
national government agency securities, and 12% to supranational institutions and
international agencies resident in the euro area.
Of the 88% of national government securities, 8 pp will be acquired by the ECB and the
remaining 80% by national central banks, according to their capital key in the ECB, with
some special rules for national central banks whose government debt markets are so small
that these targets cannot be met.
Purchases under the public securities purchase programme commenced on 9 March and, to
31 March, had reached over €47 billion, of which more than €5.4 billion related to purchases
of Spanish public debt by the Banco de España and the ECB itself.
With this expanded asset purchase programme in train, monetary policy may be said to have
exhausted its room for manoeuvre. It should be added that the programme is already yielding
its first fruit in terms of wholesale funding market prices and, more importantly, signs of
easier financing conditions for households and firms.
The politics of the Monetary Union
I would like to conclude with some thoughts on the political environment in the euro area and
its relationship to the economic recovery and the improvement in employment throughout the
area.
The crisis that commenced in 2007, which is still not completely over, has obviously exacted
a high cost in terms of political support for what Monetary Union means.
The Monetary Union, whose ultimate justification lies in the advantages it brings for
economic growth and welfare, entails a common monetary policy and, as a corollary,
relinquishing the possibility of using devaluation of the exchange rate as a national
instrument to correct monetary and fiscal imbalances, and also the possibility of central bank
financing of budget deficits (known as "monetary financing"). In this situation, there is no way
of correcting imbalances other than by means of an "internal devaluation", i.e. through the
adjustment of domestic prices and costs relative to external ones, and by curbing
government spending and revenue shortfalls, in real terms.
This is what the Spanish economy has, with great effort, been achieving since 2012. In the
truly difficult circumstances of 2012, Spain avoided a bail-out that would have been very
painful in many ways, and certainly from an economic and social standpoint. Spain never lost
its access to the capital markets. Admittedly at very high interest rates, and with very large
risk premiums, our Treasury was always able to fund itself on the markets, because the
markets, while mindful of the risks involved, very quickly appreciated (I am referring to the
summer of 2012) the seriousness and decisiveness of the corrective action being taken.
Spain reacted as a responsible and loyal European Union and Monetary Union member. It
did not attempt to shift the blame onto anyone else, even though the euro crisis, which
affected us very directly, obviously did not arise exclusively, or originally, in the Spanish
economy.
To call the correction of unsustainable imbalances (like the balance of payments deficits of
2007 and 2008, of around 10% of GDP, and the budget deficits, which ranged from 9% to
11% between 2009 and 2012) austerity, is not really a very good description of reality.
Changing direction when on a path towards impossible and unsustainable situations is not
"austerity" but common sense and, in a very real sense, patriotism. Inevitably, correcting
major imbalances comes at a very high cost in terms of employment and welfare, and that is
the lesson that we can draw from the Great Expansion that ended in 2008 with the bursting
of the real-estate bubble.
Imbalances have to be corrected, although obviously not anyhow or at any speed. It has
been argued, with a striking image, that if you are on the twenty-fifth floor of a building and
wish to descend to street level, it is better to use the lift or the stairs than to jump out of the
window, even though that would definitely be the fastest way down. The reforms that have
been approved in Spain - in particular the adjustment of public spending and revenues, bank
restructuring and labour market reform - have been rigorous, but also prudent, and this has
also contributed to the recovery. That is certainly the opinion of our European partners and of
the markets.
The European Monetary Union originated more than twenty years ago in the Maastricht
Treaty, and became a reality in the markets more than fifteen years back. In those days, the
idea of a Monetary union was capable of mobilising extensive political support, but with time,
and the crisis, this has been somewhat eroded.
The Monetary Union alters economic policy priorities and their relative importance and
changes the way in which economic pressures are relieved. It is an economic construct, but
also a political one, and cannot survive without political support.
If the Monetary Union - now bolstered by the Banking Union - is to remain one of the great
landmarks on the road to European union, the support for it needs to be renewed and
strengthened. And this naturally cannot be achieved by monetary policy, or even, I would
say, by economic policy, alone. Governments must press ahead with the reforms needed to
make the economies of the European Monetary Union more flexible and productive, thereby
spurring innovation and investment.
Thank you very much.