But when you are part of a monetary union, the most valuable economic policy instrument is, as our own experience indicates, the deepening of reforms in order to increase the responsiveness of supply and the adaptability of the business and productive sectors to the major changes the economy is undergoing, such as globalisation and population growth. 4  BIS Review 67/2007  Specifically, the dynamism and flexibility injected into the labour market by the aforementioned phenomena of immigration and growing female participation need to be accompanied by the development of a more appropriate institutional framework, without forgoing the unquestionable achievement of good industrial relations. Despite the progress achieved by labour market reforms in recent years, the need remains to better tailor collective bargaining arrangements to the different industry- and firm-level requirements and to reduce the costs associated with permanent contracts. These measures should be complemented by others aimed at improving the quality of the labour factor, by giving greater priority to educational policy in order to redress the secondary education deficit, adapt university courses to new demands and promote effective continuous training for workers. Improving the efficiency of the economy likewise requires increasing investment in physical and technological capital, fostering innovation, pushing through privatisation where appropriate and stepping up the pace of the processes undertaken in recent years to heighten competition. The infusion of competition is particularly relevant in industries pivotal to spreading gains in efficiency to the rest of the economy, such as the network industries, the telecommunications market, the energy sector and rail transport.

8  BIS Review 67/2007  One positive aspect is that institutions are raising finance especially by resorting to medium-term resources, which are more stable than those that might be obtained on the interbank market. Insofar as the secondary markets are sufficiently liquid, subordinated debt or preference share issues can contribute to greater market discipline. Moreover, asset securitisations allow a portion of risks to be transferred towards other investors, thereby contributing to better risk management. Despite the challenges ahead for Spanish institutions, their resilience was heightened in 2006. Profits – the first line of defence against potential problems – not only increased notably but were also sound. This was reflected in the main income statement margins which, combined with moderate growth in operating expenses, contributed to the favourable dynamics of earnings last year. The return on equity increased once again, maintaining, as earlier indicated, a wide spread over long-term government bond yields. The solvency of Spanish institutions held stable in 2006, with the attendant ratio comfortably above regulatory requirements. This came about, moreover, in a setting in which the sharp growth of activity exerted upward pressure on capital requirements. Earnings in 2006 and solvency levels thus attested to the sound position of Spanish institutions. And this was further corroborated by the available market indicators, by the stress tests conducted during the IMF Financial Sector Assessment Programme (FSAP) and, subsequently, by the loss distribution method, which shows that, even in a highly unfavourable scenario, any losses generated would be amply covered by the capital in the system.