Admittedly, low productivity gains can be explained in terms of the intense employment generation in the economy and of a composition of growth which, in recent years, has been largely based on construction and on services. But they nevertheless reflect low productive investment, a limited incorporation of technological improvements into the stock of productive capital and the relative lack of competition in certain segments of the economy. BIS Review 39/2004  5  Safeguarding a sound competitive position for the Spanish economy is undoubtedly a priority for economic policy management within EMU. As I have said, the activities most exposed to foreign competition have begun to feel the effects of the losses in competitiveness that have built up. And after squeezing their margins in recent years, they have begun to adjust their staff levels. Competitive pressures are heightening, moreover, as new competitors emerge on the international scene with a similar specialisation pattern to Spain and with a notable edge due to their low labour costs. In particular, the enlargement of the EU to 25 countries, while entailing the opening up of potential new markets for Spanish products, means above all a substantial increase in competition. The Spanish productive system must prove itself able to respond to this with dynamism, innovation and flexibility, as it has in the past when opening up to its external environment. The second source of risk lies in the patterns of financial behaviour of the private sector of the economy.
As pointed out in the Annual Report, it is particularly important to push ahead with labour market reform (in the areas of wage negotiation and hiring), improve the workings of the housing market (and of the related land market) and continue with the liberalisation of the network industries. Measures are similarly required to foster the incorporation of technological innovation in productive processes and to improve the stock of infrastructure and of public capital. The current house price situation means that urgent action is needed to overcome the restrictions on the supply of land via more flexible town planning to make building land more readily available and to improve the workings of the rental market. Finally, although the improvement of the services sector depends on many structural considerations, the importance of more flexible retail trade regulation for price formation and the economic system’s overall efficiency should not be overlooked. In short, without making any attempt to cover the entire scope of the economic policy requirements in the present situation, I do feel it is important to emphasise that fiscal stability and structural reforms can provide an appropriate means of addressing risks arising in relation to competitiveness and to the growing indebtedness of the non-financial private sector, which are the ones that could jeopardise the continuity of real convergence. Financial system 2003 brought an improvement in the situation of the international financial markets and, in this favourable setting, the financial institutions of a good number of countries reported better results and higher profitability.