luis m linde : a review of the spanish economic situation ; spain ’ s budget for 2014 testimony by mr luis m linde, governor of the bank of spain, before the senate in connection with the draft state budget for 2014, madrid, 25 november 2013. * * * ladies and gentlemen, when i appeared before this senate last year, the spanish economy was undergoing a phase of great difficulty and uncertainty. developments since then show it has notably improved and, at present, it may be beginning to emerge from the second recession of this prolonged crisis. in any event, prudence advises avoiding any complacency since the risks have not disappeared and the momentum for a sustained recovery is still weak. the euro area and spanish economies several reasons explain the change in the spanish economic situation in recent months. firstly, the international economic setting has improved, despite the uncertainty over the behaviour of the emerging economies. this improvement has, above all, affected the united states, japan and, most importantly from the standpoint of the spanish economy, the euro area. in the third quarter of this year euro area gdp posted limited growth, of 0. 1 pp in quarter - onquarter terms, following its dynamic performance in the second quarter, with 0. 3 pp of growth, which surprised most analysts and ended six consecutive quarters of contraction. since then, the indicators have broadly tended to entrench expectations that output will continue to increase at positive rates in the immediate future ; into the medium term, however, forecasts anticipate very moderate growth rates, which will be insufficient to allow a rapid reduction in euro area unemployment levels, which remain very high. the positive effects that the turn for the better in the external environment have had on the spanish economy have been reinforced by the headway in the economic governance of the euro, enabling the serious confidence crisis that gripped the monetary union in 2012 to be overcome. admittedly, though, the degree of fragmentation persisting in euro area financial markets is still high and is not allowing monetary impulses to be transmitted efficiently to all countries in the area. indeed, the spanish economy as a whole – households, firms, credit institutions and general government – continues to face financing costs which, though they have moderated, remain excessive when taking into account the strongly expansionary stance of the ecb ’ s monetary policy. in this respect we may recall that at the start of this month the ecb decided once again to cut its official interest rates, which are now at an

our economy requires. for 2014, a central scenario has been outlined in which the factors that have been affecting domestic demand progressively slacken. it is projected that the processes of adjustment in the economy, and most particularly the redressing of private - sector debt and the ongoing fiscal consolidation, will continue to influence the pace of recovery of demand and activity ; but, at the same time, the reduction in uncertainty and the culmination of the restructuring of credit institutions, along with their improved results, will lay the foundations for improving financial conditions for the resident sectors. this outlook of progressive re - balancing of the external and domestic components of demand is not free from uncertainty. in particular, while the likelihood of fresh bouts of instability in the euro area has lessened significantly, this cannot be ruled out completely in the future. moreover, should growth in certain emerging regions be checked more sharply than is currently projected, this might have consequences for spanish exports, which in recent years have been increasingly underpinned by these markets? in this respect, the potential reduction in the degree of monetary expansion in the united states might significantly affect the emerging countries, in their capital movements and in their exchange rates, most particularly latin america. the state budget for 2014 it is against this macroeconomic background that the discussions on the draft budget for 2014 are framed. i shall first refer to the forecasts for the end of the current budgetary year and the macroeconomic projections for the coming year. as regards 2013, the revised figure for the overall general government balance, in national accounts terms, has been released for the second quarter. it shows a deficit of 2. 8 % of gdp, excluding the effect of the public assistance to financial institutions, compared with the figure of 3 % recorded in the same period a year earlier, marking an improvement of 0. 2 pp of gdp. more updated figures ( to august ) have also been released for overall general government, bis central bankers ’ speeches excluding local government. the cumulative deficit to august is estimated to stand at 4. 8 % of gdp. as indicated by the european commission in its autumn projections and having regard to the budget outturn in the first half of 2013, meeting the budget deficit target of 6. 5 % is achievable. however, as the commission has stressed, there are risks of slippage arising from the weakness shown by revenue, meaning that, to meet the target, revenue will have to pick up in the closing months of the year. the effort involved in