Spain is doing enough

Written by Bloomberg | Updated: May 1 2010, 04:18am hrs
Elena Salgado

I should start by going over some of the facts regarding the current Spanish economic situation. It is true that Spain faces a large fiscal deficit reductionfrom 11.2% of GDP in 2009 to less than 3% in 2013. Its also true that part of the deficit comes from structural vulnerabilities in the Spanish economy. But its equally important to emphasise some strengths in our economy that are often overlooked.

First, our levels of public debt are quite low by European standards. With a current debt-to-GDP ratio of 53%, 20 percentage points lower than the euro-area average, we arent expecting the debt levels to exceed 75% of GDP at any time in the future.

Second, Spain has an institutional framework characterised by stability. Third, Spain has a dynamic and diversified economy, with large companies that in the past 15 years have become dominant global players in growth areas, such as infrastructure, telecom, financial services and renewable energies.

The first step to convince global investors of our fiscal sustainability is to show them we have the right diagnosis for the current situation. The second one is to prove that we have put forward the right set of policies. We firmly believe both steps are being taken, so let me elaborate on these two points. We believe that due to the domestic imbalances built in the last decade and as the result of the crisis, Spain needs to do three things. The first is to reallocate between 4 and 5 percentage points of GDP that was employed in housing to other sectors of the economy, particularly the tradable ones and build a more sustainable growth pattern that will reduce the unemployment rate. Next is to restructure the financial sector, as a consequence of the reduced relevance of real estate activities, which are particularly intensive in financing. And finally, to return to a fiscal path thats sustainable in the medium term.

On the first point, we believe there is a misconception regarding the capacity of our tradable goods and services to meet the challenge. Some analysts argue that we have lost price competitiveness and that our external sector wont be able to generate the growth to absorb the spare resources. But when you look at the data for the last 10 years, most of the decrease in competitiveness is located in the non-tradable sectors of the economy, and the performance of our external sector has been remarkably good compared with our most immediate neighbours.

This is the case in a context where the gravity of the global economy moves to Asia and where strong internal demand made it costly to devote resources to the tradable part of the economy. We have taken important steps to promote structural measures in the goods and services markets. Although this process is crucial to start reducing unemployment, reforms in the labour market are necessary to solve some of its structural problems. Employers and trade unions have signed an agreement to guarantee wage moderation during the next three years, thus contributing to competitiveness. Secondly, the government is working with social partners to bring forward a deep reform of the labour market.

Regarding the financial system, we have introduced a fund to facilitate access to capital for banks and savings banks engaged in the necessary restructuring. This Fund for Orderly Bank Restructuring has already approved three restructuring processes involving eight savings banks and we expect it will announce further processes soon. We believe this will be sufficient to face possible problems. In fact, the work done by the IMF in the latest Global Financial Stability Report, as well as similar analyses conducted by the Bank of Spain clearly show the resources devoted to the restructuring process are more than enougheven if the situation was to evolve into something much worse than expected.

Finally, regarding medium-term sustainability of our public finances, we have a plan that has been considered adequate by the European Commission. By now, about 45% of the adjustment included in the plan has already been approved, while the rest of the measures will be approved according to our legislative process. Some analysts have criticised the outlook for revenue, considering it too optimistic and others have claimed that the forecasts included in our plan are also optimistic. Regarding revenue, once you take into account changes in taxes and implemented one-time measures, our forecast leads to government receipts slightly more than 34% of GDP, which is three points lower than that at the peak of the housing boom and is in line with 2002 levels, prior to the boom. Most of the difference between our economic forecasts and those of some analysts and international organisations is due to the behaviour of the external sector, as discussed above, the contribution of private consumption and the savings rate.

The household savings rate is at a record high, more than 19%, compared with an average prior to the crisis of 11% to 12%. This increase is due to two things: the need for deleveraging and the need to build precautionary savings. We believe the second ingredient is an important one, and as soon as the economy generates employment, and confidence picks up, the savings rate is going to adjust smoothly to historical levels, allowing both for a decrease in leverage and a stronger recovery of private consumption than others predict.

Finally, to strengthen long-term fiscal sustainability, we have brought forward a proposal for pension reform that includes, among other measures, a postponement of the retirement age from 65 years to 67 years. The partial elimination of the house-investment deduction from income taxes will also increase fiscal revenue in the medium and long term. As a result, investors can rest assured that Spain will rise to the challenge. We are devoting all our efforts to putting our fiscal house in order and, at the same time, laying the groundwork for more balanced and sustainable growth.

The author is the second vice-president and the minister for economy and finance in the government of Spain