The intensity and duration of this new phase of recovery will be influenced by conditioning factors that are largely external to the area, such as oil prices, or the sustainability of the US recovery, given the persistence of its financial imbalances. But, above all, a sound recovery will depend on the ability of European economies to underpin their growth with domestic factors supportive of robust investment that increases productive capital. BIS Review 38/2002  3  The monetary policy stance should be tailored to the prospects of maintaining price stability. Particularly important in this respect (besides oil prices, which have already hampered any reduction in inflation in the first half of the year) is continuing wage moderation which, in some countries, is beginning to be questioned. The single market and monetary union provide the European economy with a particularly suitable framework for developing its growth potential and for consolidating it as one of the central pivots of the world economy. Notwithstanding, the area still lacks sufficient flexibility and innovative capacity to compete satisfactorily with other more dynamic areas, mainly in the more technologically advanced industries. The Barcelona Summit has clearly shown the ability of the European authorities to pinpoint key issues and to design a blueprint for reforms (of differing ambition but of equal importance) that will make Europe a more dynamic economy. While greater ambition would conceivably have been desirable, meeting the targets laid down in Barcelona on schedule would entail a qualitative change of enormous importance.

Consequently, particular attention must be paid to the fiscal policy stance and to monetary and financial conditions. The year 2001 saw the attainment of a balanced budget, without the slowdown in the Spanish economy preventing strict compliance with the commitments made under the Stability Programme, consistent with the requirements of the Stability and Growth Pact. Last year, moreover, new fiscal discipline measures were adopted which will contribute to maintaining sound public finances in the medium term. I refer here to the budgetary stability legislation and to the new regional government financing arrangements, which increase the degree of fiscal co-responsibility of the regional governments under the transparency requirements demanded of general government. I have already mentioned that monetary and financial conditions in the Spanish economy were more generous than in the rest of the euro area, although the significance of this difference lessened as demand lost momentum. The credit aggregates grew at high rates for the third year running. That said, they did slow during the year, in step with cyclical developments, although this remains insufficient. The growth of financing to Spanish households and corporations translated last year into a fresh increase in this sector’s debt as a percentage of GDP, with the rise in lending to households for house purchases proving particularly notable. The greater ease with which the private sector has been able to finance its spending decisions has contributed to limiting the depth of the ongoing cyclical slowdown, but at the expense of incurring high debt levels.