These include the raising of the limit on deposit guarantees, the creation of the Fund for the Acquisition of Financial Assets to purchase high-quality assets from Spanish banks, guarantees for bank bond issues, various special financing facilities instrumented through the ICO (Official Credit Institute), and the introduction of new personal income tax deductions and the launching of the State Fund for Local Investment and of the Special State Fund for revitalising the economy. In Spain, the international crisis has impacted the economy at a particularly delicate time. Already under way was a process of adjustment of the imbalances that had built up over a long growth phase in which Spain had shared some of the above-mentioned factors of fragility of the world economy, though not all of them and not to the same degree of intensity. Certain components were undoubtedly particular to Spain. Starting with the shared elements, the expansion of Spanish household and corporate spending was based excessively on debt. True, the private sector was starting from relatively low debt levels. Admittedly, too, euro area membership provided a particularly valuable framework of stability and broadened financing possibilities. No less true, however, was the fact that the single monetary policy stance proved overly lax during all these years for Spanish domestic conditions and that fiscal policy, even though substantial budgetary consolidation was undertaken, was not enough to offset the excessive monetary looseness. A greater containment of current spending in the upturn would have helped curb the imbalances and would have strengthened the underlying budgetary position.

On the supply side, the weakness in activity passed through to all productive branches, but with particular force to construction and industry. Employment was rapidly eroded following fourteen years of uninterrupted job creation. In late 2008 and early 2009, job destruction was most intense and, since the labour supply remained notably strong, the unemployment rate surged to 17.4% in the first quarter of the year, bearing down most on the young and the lesser skilled. 4  BIS Review 79/2009  Regrettably, this high unemployment figure shows that one of the risks I referred to when presenting the Annual Report for 2007 has materialised. I insisted then on the need to prevent the adjustment of the Spanish economy from falling predominantly on employment, as in previous recessions, since that would have significant adverse multiplier effects on demand and activity, via disposable income and future income expectations. And as stated, this is proving precisely to be one of the most powerful channels for the propagation of contractionary trends. One of the traditional behavioural patterns of the Spanish economy is thus recurring, revealing the persistent weaknesses in its institutional framework and arrangements that must be corrected. The high increases in labour costs witnessed last year, reflecting the rise in inflation in the first half of the year, were not favourable to employment. Wage cost pressures have only begun to abate in 2009, in line with improved inflation expectations, following the declines in the rate of change of the CPI in recent months.