In the exposed sectors, price increases cannot be far removed from those made abroad, whereas in the sheltered sectors there has been a continuous tendency to widen margins, irrespective of where the economy is in the cycle. Hence, the combination of a rather inflexible wage structure and still-insufficient competition in certain services sectors has led to the phenomenon of dual inflation, which feeds the inflation gap with the euro area. Another fundamental variable for the economy's competitiveness is productivity, although it is difficult to measure and interpret. Clearly, what lies behind the low labour productivity gains in recent years is the beneficial effect of employment-promoting policies, which have raised the economy's employmentgenerating capacity. However, research indicates that such low gains may also be reflecting a low increase in certain components of the stock of capital and an insufficient incorporation of technological progress. BIS Review 38/2002  5  The most significant means of expanding the economy's growth potential has therefore been the incorporation of workers into the labour force. This is a suitable way to improve the Spanish economy’s endowment and utilisation of productive factors, and should be maintained. But it cannot be the sole avenue. In parallel, investment must be bolstered, especially in those forms of capital most conducive to the incorporation of technical progress and innovation. Policies supportive of a more flexible and efficient corporate environment and aimed at the better functioning of the economy must also be persevered with.

The firm, concerted response by the monetary authorities in the main economic areas softened the initial impact on financial markets and meant that the effects on the world economy were relatively short-lived, though sharp, and confined to specific sectors. Broadly, the design of the euro area members' fiscal policies in 2001 prevented expansionary discretionary measures being adopted. Such measures would have jeopardised the sustainability of recent fiscal consolidation achievements and, given the lag with which such measures operate, they could have had a counter-productive effect on the cyclical stability of the economies in the area. However, the available estimates of the structural budget balance show that, at the aggregate level, there was a slight deterioration last year as a result of the tax cuts applied in certain countries before the cyclical weakening had become apparent. Further, fiscal results have shown that, in certain countries, not enough room for manoeuvre was available to absorb the budgetary effects of the slowdown without drawing too close to the limits set in the Stability and Growth Pact. Clearly, in such cases the consolidation drive made has not been sufficient to attain a balanced budgetary position. In this respect, it is of paramount importance that EMU members maintain the commitments entered into under the Pact and do so symmetrically, as reflected in the conclusions of the Barcelona Summit. The appropriate response by economic policies to the slowdown in 2001 has therefore contributed to the recovery of the European economy apparently under way since the beginning of the current year.