On the latest available data for May, the official number of registered unemployed fell by almost 112,000, placing the year-on-year rate of change at –6.5%, 0.8 pp better than in April. Social Security registrations increased this same month by 198,000, or at a year-on-year rate of 1.6%, 0.4 pp above the growth recorded in the previous month, marking four consecutive months of growth. This change in the Spanish economy has arisen from a combination of external and domestic factors. Let me take the former first. The external boost to recovery in the Spanish economy First, the rise in activity and global trade in the second half of 2013 and the resumption of economic growth in the euro area shaped a favourable environment for our exports. Second, a favourable impact has also been exerted by the measures adopted by euro area Member State governments in terms of fiscal consolidation and the approval of structural reforms, particularly visible in those economies that were subject to financial tensions. The support programmes for Greece, Ireland, Portugal and Cyprus also unfolded favourably. Indeed, Ireland and Portugal have already exited their respective financial assistance programmes without resorting to any additional precautionary mechanism. Greece, for its part, posted a primary fiscal surplus in 2013, indicating that its public finances have been redressed. But the challenges ahead remain significant, as highlighted by the European Commission in the annual revision of the exercise on macroeconomic imbalances within the area. Measures by the ECB are contributing to shaping a setting favourable to recovery.

To avoid that mistake today, under the structural impediments scenario, the Fed should revert to a “business-as-usual” monetary policy and begin to consider removing excess accommodation before inflation rises above its target and inflation expectations start to creep unalterably upward. There is a second competing storyline – one that I refer to as the “liquidity trap scenario”. First, consider what occurs during normal times when nominal rates of interest are considerably above zero and real rates of interest are positive. If the supply of savings increased but the demand for investment remained unchanged, market forces would drive down real interest rates to some natural rate of interest that equilibrates savings and investment. This market dynamic is thwarted in the case of a liquidity trap. Here, cautious behavior holding back spending – whether it is due to risk aversion, extreme patience or deleveraging – causes the supply of savings to exceed the demand for investment even at very low interest rates. Today short-term, risk-free interest rates are close to zero and actual real rates are only modestly negative. But they are still not low enough – because short-term nominal interest rates cannot fall below zero, real rates cannot become negative enough to equilibrate savings and investment. As I weigh the evidence, I find the case for the liquidity trap scenario more compelling than one for the structural impediments scenario. My assessment has been influenced by the book titled This Time Is Different: Eight Centuries of Financial Folly3 by Carmen Reinhart and Kenneth Rogoff.