Again, a simple thought experiment is illustrative: counterparty credit risk, unanticipated margin call and the scale of margin related liquidity flows around the system would have been greater and destabilising had the pandemic struck ten years ago. So if the banking and derivatives markets reforms operated broadly as intended can we conclude that the financial system as whole has – so far – functioned well and proved resilient in the current crisis? Here the judgement is more difficult. We have not seen systemic bank failures, credit crunches or ballooning counterparty credit risks. But we have seen a massive liquidity shock and incipient dysfunction in core financial markets that required central bank intervention on an unprecedented scale. 11  Ben Bernanke has pointed out that panics can be a major cause of credit crunches. Reforms that avoid such panic reduce the likelihood that financial stress transmits to real economy stress. 9  All speeches are available online at www.bankofengland.co.uk/news/speeches  9  It is arguable, as I noted at the outset, that the extreme liquidity shock was simply a function of the scale of the economic impact of the COVID crisis, and the central bank response a necessary and unavoidable consequence of a tail event. Supported by central bank intervention, markets have certainly stabilised.12 Indeed, some seem to have fully recovered their pre-crisis levels. I would reiterate, however, that the crisis is far from over and further negative COVID19 developments could cause financial instability to return.
One significant characteristic of the current expansionary period is the fact that the sustained growth of activity has given rise to a high rate of increase in employment. Here, however, much remains to be done, since the current level of occupation is still some distance off the pre-2008 level. Another notable feature of the current recovery is the progress made in restoring macroeconomic and financial equilibria. This is playing a key role when it comes to explaining the intensity and duration of the current upturn. In this respect, it is worth mentioning the continuing and notable positive external balance and the subsequent reduction in the economy’s – and in particular the private sector’s – over-indebtedness; such progress has proven vital for restoring the confidence of foreign investors and of Spanish households and firms. The current account balance stood at close to 2% of GDP in 2017, a similar figure to that observed the previous year and up on the figures recorded in the early years of the recovery. True, some factors that have contributed to this improvement in the economy’s external balance have effects that tail off over time. This is the case of oil prices which, despite their recent rise, remain lower than those in force until mid-2014. Also, the improvement in financing conditions in recent years has provided for significantly lower interest payments abroad. Other explanatory factors behind the improvement in the balance vis-à-vis the rest of the world are structural in nature.