3 See Box 1, “An estimation of the impact of the recent protectionist measures”, in the “Quarterly report on the Spanish economy”, Economic Bulletin, 2/2018, Banco de España; Box 1, “Implications of rising trade tensions for the global economy”, in Economic Bulletin, 3/2018, ECB; and International Monetary Fund (2018), “Scenario Box 1. Global Trade Tensions”, World Economic Outlook: Challenges to Steady Growth, October, pp. 33-35. 4 See IMF (2018), “Euro Area Policies: Selected Issues”, and J. L. Vega (coord.) (2019), “Brexit: current situation and outlook”, Occasional Papers, no 1905, Banco de España. 5/16  Among the European countries, Germany’s industry and export-based growth model has been greatly affected by external developments. But Italy has been the most beleaguered, given its weak GDP growth, the result of the uncertainty over the course of its economic policy. Indeed, the latest available information generally points to a slowdown in the growth rate across the euro area, concentrated especially in the industrial sectors. Moreover, the weakness of the external sector is also spreading to investment. That means the sluggishness of external demand, heightened political uncertainty in some countries and the easing in corporate profits are already bearing down on firms’ spending plans. Furthermore, the leading indicators of euro area exports show no signs of having touched bottom. The flash estimate for euro area GDP in the second quarter shows quarter-on-quarter growth of 0.2% (compared with 0.4% in the first quarter), with negative growth of 0.1% in Germany and stagnation in Italy.

Reform headway is particularly slow as regards the elimination of obstacles in the provision of professional services and in the network industries, and improving the business environment by reducing the administrative burdens that hinder new start-ups. Greater efforts should be a priority in at least two areas. First, we must improve human capital and active employment policies to promote the rapid reallocation of workers towards the growth industries. Second, public and private spending on innovation must increase to create new business opportunities. Europe cannot stand on the sidelines as new  15  See P. Hernández de Cos (2019), “A framework for the Countercyclical Capital Buffer”, opening address at the Second Financial Stability Conference, Banco de España/CEMFI. 16 The reason for this is that supply-side expansionary policies tend to be deflationary. This limits their expansionary effects in a setting such as the present one in which the capacity of monetary policy to accommodate these inflationary pressures by means of further interest rate cuts is relatively limited. See Ó Arce, S. Hurtado and C. Thomas (2016), “Policy Spillovers and Synergies in a Monetary Union”, International Journal of Central Banking, 12(3), September, pp. 219-277. In addition, structural reforms may be particularly effective in the euro area economies where the private sector remains immersed in a deleveraging process; see J. Andrés, Ó. Arce and C. Thomas (2017), “Structural Reforms in a Debt Overhang”, Journal of Monetary Economics, 88, pp. 15-34. 13/16  technologies are developed and as the United States and China battle for technological supremacy.