Good afternoon. I would like to thank Governor Linde and his colleagues at Banco de España for their hospitality and for co-hosting this conference on Spain’s journey from recovery from crisis to renewed confidence. There are many useful lessons that can be learned from Spain’s experience, so it is fitting to come together and reflect on the challenges overcome, and the challenges ahead as Spain builds upon its impressive economic gains.
Over the past 20 years, the world has learned the hard way always to be alert that the next economic crisis may be right around the corner. That has taught us two things: First, the importance of having strong buffers that enable a country to respond to difficult shocks. That means maintaining strong defenses like healthy fiscal buffers and robust capital levels in financial systems.
But we have also seen that playing defense alone is not enough. So, the second lesson is to make institutions and markets flexible enough to ensure more resilient and speedier recoveries. That was a key takeaway in this morning’s discussion of fiscal policies and labor markets. All countries will need resilience and flexibility to respond to a world changing at a breathtaking speed, driven by new technologies and by globalization. What that means in practice is to create a policy framework to encourage and make the most of innovation and economic dynamism by facilitating experimentation, while at the same time ensuring that people’s skills, and markets and institutions are flexible enough to absorb the inevitable creative destruction that the future holds.
I will return to both these points in a moment, but first a word about the European setting. IMF Managing Director Christine Lagarde spoke in Berlin last week about European integration—both the successes and the remaining gaps in the Euro Area’s financial architecture.
Euro Area Financial Architecture
Those include the need to create a unified capital market, to complete the banking union, and to establish a central fiscal capacity. She advocated a rainy-day fund. Building these buffers at the European level are a key unfinished reform agenda item.
Strengthening the architecture of the euro area has been and remains a key priority for all European countries, because each has a stake in a healthy and prosperous Europe. But none of that relieves national governments of the responsibility for addressing vulnerabilities in their own sphere and promoting higher levels of growth and well being for their own citizens.
That is what I would like to focus on today—how national policies have been essential to recovery within the policy framework defined by the Euro Area. So, let’s take a moment to look back at how Spain responded to adversity over the past decade, and to take note of Spain’s significant economic achievements—most notably the resurgence of international competitiveness.
Spain’s experience demonstrates what can be gained when a country’s leaders work with common purpose to increase the flexibility of its economy. And it is instructive for other countries that may face similar challenges.
In the run-up to the Global Financial Crisis, this country and its lenders, seduced by the low rates and ample credit availability that came with currency union, generated an overheating of demand, an unsustainable real estate bubble, and rapidly rising private debt. Wage growth outstripping productivity led to a 30 percent faster increase in Spain’s unit labor costs, compared with countries like Germany, ultimately making exports uncompetitive.
By 2012, output was plummeting along with real estate prices, the construction industry had crashed, and unemployment was above 25 percent—higher for young people. Banks were failing, and the government’s fiscal position was eroding rapidly as it sought to combat the crisis. Fortunately, Spain had a significant fiscal buffer in its modest pre-crisis public debt that helped it to address the aftermath of the boom.
Spain’s membership in the European Monetary Union meant that the standard countercyclical policy responses of exchange rate devaluation and loose monetary policy were not available to the Spanish authorities. I don’t want to make light of Europe’s eventual contribution to Spanish recovery. The ECB crucially opened the money supply taps in 2012, and the ESM helped to restore financial stability. These supportive policies from Europe were important catalysts in Spain’s recovery.
But as a member of a currency union, overheating and a loss of competitiveness left Spain facing the daunting task of achieving an internal devaluation, which is economic adjustment with your hands tied behind your back.
As you know, this was accomplished with tough fiscal measures and labor market reforms that supported wage moderation and greater employer flexibility. Bank restructuring reduced NPLs and shifted lending to more productive purposes. So, Spain used its buffers, and created flexibility where it was most needed to improve its external competitiveness.
The results speak for themselves: growth at more than 3 percent for the past three years, and GDP above its pre-crisis level. It’s also worth noting that per capita GDP in PPP terms has reached an all-time high. With its recent acceleration, Spain is steadily making up for losses suffered during the crisis in the convergence process with richer European economies.
Exports relative to GDP are now 10 percentage points above 2007 levels. The economy is also more competitive, with the costs of Spain’s exports relative to its trading partners reduced nearly 15 percent in real terms. In contrast, countries like Germany and France saw little movement after the crisis.
Most importantly, 1.8 million jobs have been created—about half of those lost in the crisis and about one-fourth of all Euro Area job creation in the past four years. However, youth unemployment remains unacceptably high.
A Successful Adjustment
Spain’s successful response to the crisis demonstrates that internal adjustment within a monetary union is possible. It was a difficult adjustment for the Spanish people. But the Spanish economic house was in danger of collapsing in a storm, and Spain managed to shore it up.
Now, the global and European economies are recovering and strengthening. So, as we at the IMF like to say, the time has come to fix the roof while the sun is shining.
Taking bold measures during a crisis, as Spain did, is extremely difficult; taking bold measures during the good times can be even harder, as there may be less political urgency to act.
But that is where Spain stands now—the reform imperative is, of course, to preserve what has been achieved, but also to avoid losing momentum and to push ahead.
The strong economic performance seen over the past few years masks weaknesses that still leave the country vulnerable to shocks.
Today, with the sun shining on the global economy, Spain is receiving some lift from strong foreign demand. This is not a time to take global growth for granted, as a likely medium-term scenario involves some slowdown. The present recovery has a strong cyclical component. As that cycle proceeds, global interest rates are headed higher, and financial conditions tighter. At the same time, the multilateral trade system, which has been a source of growth and jobs for millions of people, is subject to new uncertainty amidst threats of trade actions. In short, downside risks are accumulating.
That is where bolstering Spanish defenses and rebuilding the buffers that were so critical to smoothing the process of adjustment becomes so important. Fiscal reserves that were essential during the crisis still need to be rebuilt. In particular, public debt is still close to 100 percent of GDP—almost three times higher than at the eve of the crisis. That debt burden needs to be reduced.
Ongoing Fiscal Reforms
In simple terms, the fiscal effort is not yet complete. Future adjustments can be gradual, but they should be persistent and structural in nature. The private sector, too, has more to do to strengthen its own balance sheets. The process of removing NPLs and distressed assets from bank books needs to continue, and weaker firms with high debt levels still need to strengthen their balance sheets.
At the same time, there is still the need for greater flexibility in labor markets to provide a new engine of growth. While job growth is strong, the unemployment rate remains about 16½ percent and is more than twice that for the young. More than 40 percent of all unemployed have been without a job for more than a year. And too many new jobs are temporary, with nearly half of the new hires being employed on a temporary basis. This keeps productivity and wages low in too many sectors. While the impact of informality on these statistics is hard to pinpoint, Spain surely has unfinished business in the area of labor market reform.
That reform is sure to be difficult, but it should be viewed fundamentally as an opportunity. Active labor market policies could put more people to work and help young people get a leg up. Easing conditions for employers to rely less on fixed-term contracts would encourage more investment in workers’ human capital.
In fact, the stakes are bigger than ever, because the future of work is in flux. The whole world faces the immense challenge of adapting to the transformative effects of new technology. For countries to take advantage of the digital economy and advances in artificial intelligence, they must build a policy foundation that embraces and enables change. This applies to advanced and developing economies alike.
There is little time for hesitation or distraction. Jack Ma, the founder and chairman of China’s Alibaba Group, recently quipped that in this world of change at a breakneck pace “if you are three years behind, you are a century behind.”
His point is clear: only countries that have their policy act together can create the right climate for new technology and new business models to flourish and be a source of new wealth.
So, what to do?
Preparing the Younger Generation
Spain needs to equip its young people with the higher productivity skills that tech-oriented businesses will demand. That requires resources for education and training—resources that will only come from sound fiscal policies that make room for investing in human capital.
Labor markets must be more flexible so that businesses can respond to a rapidly evolving marketplace. When companies are nimble and flexible, they can combine capital, technology, and people in new ways, generating growth and jobs for all of their employees and communities.
These are issues that Spain has in common with many other European countries. Everyone is grappling with the same structural problem—how to get ahead when the price of failure is lost competitiveness, the lost opportunity to raise income levels, and a lost generation of young people.
Ongoing reforms are essential for countries that hope to keep up in the global competition for markets. How countries respond to today’s hard realities may end up determining who wins and who loses: aging work forces, inequality, lack of competition in product and service markets, misallocation of resources through the banking system, and insufficient R&D. Europe faces all of these realities.
And then there are the new opportunities: online retailing, third-party mobile payments, Fintech, big data. Countries must position themselves today by investing for tomorrow. And that leaves little space for failing to address the structural legacies laid bare by the financial crisis.
In conclusion, Spain has made more progress than many other European countries. Now, taking on difficult and comprehensive reforms is the path to avoid falling behind. The combination of strong buffers and increased flexibility were essential for getting Spain through the crisis, and remain essential for the future.
The strong growth you are experiencing represents the fruits of reform—the success of policies that introduced flexibility in to the economy. But if Spain’s commitment to reform slackens, it’s hard to see this higher growth being sustained in the long term. The key to future dynamism is the continued pursuit of flexibility that encourages innovation and strengthens competitiveness and resilience.
Clearly, this requires more than any one country itself can guarantee. Global partners must avoid sudden shocks, and that includes threats to world trade from protectionism.
Europe must continue to strengthen the architecture of integration. Spain has its own challenges that it must address to enable it to ride the winds of change. We at the IMF look forward to being Spain’s partner on that journey.
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