more marked in those sectors, such as construction and real estate development, that had become oversized to a greater extent before the crisis. in contrast, the need for adjustment is less in those large corporations whose growth has largely been based on increased geographical diversification. all the foregoing factors will influence the pattern of exit from the recession. the need to reduce debt levels will, coupled with fiscal consolidation demands, continue to limit the possibilities of expanding domestic spending, meaning that the recovery should turn on net external demand. at the same time, it is necessary to begin to reverse the dynamic of external debt, which will require further progress in attaining a more balanced foreign trade position, overcoming the obstacles posed by the high investment income component and the dependence on energy imports. a pick - up in competitiveness will thus be pivotal if external demand is to stand in for the shortcomings of domestic demand and boost growth on the supply side, which in the current circumstances is the only way forward. to overcome the crisis an economic policy geared to the medium term is needed to help complete the correction of the macroeconomic imbalances still in place, to further the restructuring of all sectors and to allow the structural reforms outstanding to be tackled. bis central bankers ’ speeches fiscal consolidation is unavoidable if growth in the medium term is to be restored, despite the fact the scale and timing of the adjustment required may have adverse effects in the short term. this is the only strategy available for restoring market confidence. compliance with the objectives set requires rigorous budgetary implementation, to which all levels of government should contribute. the strengthening of the budgetary framework under the recent budgetary stability law should assist in this connection. the law sets explicit ceilings on deficit and debt levels in line with demands at the european level, and it includes stricter reporting requirements and new coercive mechanisms to ensure compliance by all tiers of government with fiscal targets. the fiscal consolidation strategy should also take into account the medium and long - term considerations affecting public finances, in particular those associated with population ageing, namely spending on pensions and health care. lastly, it should be said that the weakness of the labour market and of growth have been the main factors behind the limited progress in correcting the budget deficit in 2011. without a recovery in employment and in growth, it will be costlier in the long run to pursue fiscal consolidation, so boosting structural reforms must be a priority. among these, promoting so - called flexicurity to the full is

about by job destruction, while the easing in inflation has corrected to a lesser extent the gap built up during the upturn. this behaviour highlights the slow and imperfect functioning of the competitiveness channel, which should in principle lead to a containment of prices and costs in those economies that accumulate bigger external misalignments. indeed, achieving lasting improvements in competitiveness requires greater cost and price adjustments and productivity gains associated with genuine improvements in productive efficiency. however, since 2007 the spanish economy ’ s external deficit has been substantially corrected, dipping from 10 % of gdp in 2007 to 3. 4 % of gdp in 2011. underpinning this narrowing of the deficit has been the buoyancy of exports and the sluggishness of imports, in step with the weakness of domestic demand. notwithstanding, the culmination of this adjustment is conditional upon certain elements such as the deficit on the energy balance and the magnitude of the investment income payments component, with a negative balance equivalent to 2. 7 % of gdp in 2011, which is very closely related to the high level of the international investment position. these factors all accentuate the importance of those reforms contributing to correcting the deficit through the boosting of sustainable competitive gains in the medium and long term. the correction of this imbalance is particularly pressing in that the reliance on external saving has become a major factor of vulnerability of the spanish economy during the crisis. the increased dependence on external financing in the pre - crisis period is the consequence of the sizeable accumulation of debt by households and firms, which also led to the spanish banking system becoming oversized. the need to correct these imbalances poses an added difficulty to recovery in the economy, given that it restricts the headroom available to raise investment and consumption through resort to external financing. it is also crucial to continue with the restructuring of the banking system. hence, when solvent demand recovers, it may be serviced by a normal flow of financing which, both in spain and in the rest of continental europe, is routed essentially through credit institutions. but households and firms still have a relatively lengthy process of debt reduction ahead of them. accordingly, in the short term, the recovery in growth cannot be credit - led as in the past. along these lines, credit to the non - financial private sector in 2011 fell by around 4 %, although there were significant differences from sector to sector. in the case of households the pace of debt reduction was somewhat slower, whereas in that of firms the reduction in credit was