But these factors do not suffice to explain either the scale of the deficit or the speed at which it has widened, and they should not therefore conceal the existence of a genuine deterioration relating to the losses in competitiveness built up in recent years, as I shall now seek to illustrate. But let me first address the significance and scope of an external deficit when the country concerned belongs to a monetary union, so as to qualify interpretations whereby such a deficit would have ceased to be a cause for concern. It is true that under the new circumstances there is no danger of a burgeoning external deficit generating financial or foreign-exchange pressures that then trigger a sharp adjustment in the economy, since fundamental variables such as the interest rate and the exchange rate are determined at the area-wide level. But that does not mean that the economy is immune to competitiveness problems. On the contrary, when a large external deficit emerges in a monetary union as a result of an economy’s difficulties in competing, a very costly dilemma may arise: nominal costs are either adjusted head-on, or the loss of competitiveness will check the generation of value added and job creation. A first sign of competitiveness problems is to be found in the growing difficulties Spanish products face in maintaining their market shares. Spanish export shares on foreign markets, which had held stable since the start of Monetary Union, tended to decline in 2004, even on the European market.
Fiscal stability and fiscal discipline are basic assets of Spanish economic policy which, however, are not always easy to manage, as shown by the vagaries of the European fiscal framework. It is thus very important that the review of the Fiscal Stability Law and of the Autonomous (Regional) Government Financing system should not lead to a weakening of fiscal discipline. In a situation in which it is necessary to make headway simultaneously in job creation and in productivity gains, the role of supply-side policies geared to improving the workings of the economy and expanding its potential growth is crucial. One of the main messages in the Annual Report presented today is precisely that it will become increasingly difficult for the Spanish economy to keep raising its levels of well-being if it does not make progress on both these fronts. Maintaining high levels of job creation is, and will continue to be, a powerful means of expanding the economy’s growth potential, but it will be impossible to sustain economic momentum in the long term if the economy does not improve its competitive position in the increasingly dynamic international setting. And to do this, it is essential to significantly improve the poor performance of productivity. Under this approach, labour market reform heads the list of transformations that are needed.