, the rapid fiscal deterioration has been one of the factors that has increased our country ’ s exposure to the euro area debt crisis. our starting point was a healthy one, with a budget surplus in 2007 and a low public debt ratio. but the deterioration was so sharp that, in the space of scarcely two years, the deficit climbed above 11 % of gdp and debt moved into a delicate dynamic just as the financial markets began to worry about the expansionary deviation of public finances in other countries. in this climate of nervousness, the high levels of private - sector debt, the need for balance - sheet write - downs in the financial sector and the difficulty the economy faced in growing at a sufficiently high level all weighed on the perception of the sustainability of our public finances. moreover, the banking system, which had negotiated the first wave of the international financial crisis without excessive difficulties, came up against bigger problems when the main elements of the underlying macroeconomic crisis began to be felt at banks. combining with this was the tightening of financing conditions for credit institutions raising funds abroad, as a result of the prevailing instability on financial markets. faced with all these circumstances, it was vital to firmly show that matters could be turned around and that spain was not bound to follow the path of instability of other countries. to do this, the change in economic policy stance last spring was essential, since it demonstrated a willingness to react to and redress the imbalances. given the source of the tensions, the priority was to right the trajectory of public finances. to this end, an ambitious fiscal consolidation plan was approved in may last year. it brought forward the bulk of the adjustment to be made to the years 2010 and 2011. in parallel, there was a patent and pressing need to tackle the labour market shortcomings that were hampering the absorption of unemployment and the adjustment of the economy. hence a labour market reform was launched. finally, in the financial field, the restructuring initiated a year earlier was accelerated to overhaul the savings bank sector. thanks to these measures, the recovery of the spanish economy remained on track, although it continued at a slow pace, due to the very need to undertake unavoidable adjustments. in this respect, the weight of real estate activity in output continued to decline and the external deficit was also further corrected. there was no significant progress in inflation, but this was due to the influence of temporary factors, such as the rise in vat in bis central bankers ’ speeches july last year and

miguel fernandez ordonez : presentation of the 2010 annual report testimony of mr miguel fernandez ordonez, governor of the bank of spain, to the parliamentary committee on economic and financial affairs, on the occasion of the presentation of the 2010 annual report, madrid, 21 june 2011. * * * ladies and gentlemen, i appear before you today on the occasion of the presentation of the 2010 annual report. as was the case last year when i gave testimony, the circumstances surrounding us remain complicated. it would not be overstating the case to say we are at a crucial crossroads for the future of the economic and monetary union and for the anchoring of the recovery in spain. the crisis that broke in the summer of 2007 has gone through various phases and is bringing major consequences to bear. a year back, before this committee, i spoke of the events that had shaken the euro area in the spring of 2010, with the emergence of the sovereign debt crisis, the response of the authorities with the approval of the financial assistance programme for greece, and the first steps towards the reform of the euro area governance mechanisms. the effects of the crisis on the spanish economy were very serious, but economic policy responded with an ambitious fiscal adjustment plan, fresh impetus to the financial restructuring process and the launch of structural reforms in various fields. set against the serious circumstances then facing spain, it may be said that the right approach was chosen, and the initiatives adopted helped mitigate the risks that had materialised. despite this favourable change of course, the situation twelve months on remains complex, both from the european perspective and from the domestic standpoint of the spanish economy. the european sovereign debt crisis is the most serious episode to impact the euro area since the single currency was founded. its very nature and the difficulties in tackling it have, moreover, highlighted the shortcomings of the institutional framework of the euro. these include most notably the insufficient degree of fiscal discipline imposed by the stability and growth pact, the absence of mechanisms to check the build - up of macroeconomic imbalances and the lack of tools with which to manage crisis situations such as those witnessed. yet we must also acknowledge that there has been significant progress in recent months in these three areas. there have been various legislative initiatives to reinforce the stability and growth pact, to establish arrangements for the prevention and correction of macroeconomic ( other than fiscal ) imbalances and, finally, to address crisis situations with the so - called european stability mechanism. but beyond the necessary reform