The aim of these purchases is to improve the functioning of the monetary policy transmission mechanism, which is still adversely affected by the financial market segmentation induced by the crisis. Progress in the internal process of adjustment The turnaround in the Spanish economy would not have been possible had the internal process of adjustment not been sustained and deepened. Thus, in 2013, there was progress in correcting the imbalances in terms of competitiveness, fiscal consolidation, private-sector debt and financial system reform. I shall briefly discuss each of these developments. Competitiveness and correction of the external imbalance The continuity of the ongoing moderation in labour costs and prices allowed further gains in competitiveness to be built up during 2013. On the indicators available, based on unit labour costs, the gap opened up since Spain joined the euro area is expected to have closed. The internal devaluation process is exerting a favourable effect on our foreign trade. The year ended with our first current-account surplus since 1997. That said, our continuing excessive dependence on imported energy and the persistent deficit on the incomes balance, owing to our high external debt, stood in the way of an even bigger improvement. Fiscal consolidation Turning to public finances, once the extraordinary effects of the aid to financial institutions is excluded, the year 2013 closed with a deficit of 6.6% of GDP, 0.1 pp above the objective set, in a macroeconomic environment marked by cyclical weakness and by higher interest payments.

In 2013 Spanish banks persisted in their efforts to increase efficiency, readjusting their operating capacity by pruning staff and branch numbers in their business in Spain, which, compared with the highs in mid-2008, were down by around 20% and 25%, respectively. In an environment characterised by persisting downward pressure on earnings from factors such as weaker lending, low interest rates and still-high provisioning needs, banks have to persevere in reducing their operating costs and improving their efficiency. Conservation of banks’ capital In 2013 the banking sector strengthened its solvency. The aggregate core capital of all deposit institutions stood at 11.5% at the end of that year, up somewhat more than 2 pp on end-2012. From a medium- and long-term standpoint, the banking sector has to maintain its capital conservation policies. The economic recovery is still incipient and some fragmentation persists in the euro area financial markets. Moreover, the new solvency legislation which came into force in Europe last January implementing the requirements of the Basel III Accord, but whose application has yet to be completed, calls for, inter alia, higher levels and quality of capital. The Banco de España, recognising that it is desirable to conserve capital and strengthen solvency levels, last February renewed its recommendation that banks should limit their dividend payout policies. Challenges facing the Spanish economy and the role of economic policy I shall conclude with some thoughts on the challenges facing the Spanish economy and the role of economic policy. Our economy is currently setting its growth on a firm footing.