Set against the serious circumstances then facing Spain, it may be said that the right approach was chosen, and the initiatives adopted helped mitigate the risks that had materialised. Despite this favourable change of course, the situation twelve months on remains complex, both from the European perspective and from the domestic standpoint of the Spanish economy. The European sovereign debt crisis is the most serious episode to impact the euro area since the single currency was founded. Its very nature and the difficulties in tackling it have, moreover, highlighted the shortcomings of the institutional framework of the euro. These include most notably the insufficient degree of fiscal discipline imposed by the Stability and Growth Pact, the absence of mechanisms to check the build-up of macroeconomic imbalances and the lack of tools with which to manage crisis situations such as those witnessed. Yet we must also acknowledge that there has been significant progress in recent months in these three areas. There have been various legislative initiatives to reinforce the Stability and Growth Pact, to establish arrangements for the prevention and correction of macroeconomic (other than fiscal) imbalances and, finally, to address crisis situations with the so-called European Stability Mechanism. But beyond the necessary reform of the economic governance of the euro, the difficult position of the Irish, Portuguese and, above all, Greek economies must be redressed. Tensions are at a peak and the outcome of the situation may have very important consequences for the euro area as a whole.
In this climate of nervousness, the high levels of private-sector debt, the need for balance-sheet write-downs in the financial sector and the difficulty the economy faced in growing at a sufficiently high level all weighed on the perception of the sustainability of our public finances. Moreover, the banking system, which had negotiated the first wave of the international financial crisis without excessive difficulties, came up against bigger problems when the main elements of the underlying macroeconomic crisis began to be felt at banks. Combining with this was the tightening of financing conditions for credit institutions raising funds abroad, as a result of the prevailing instability on financial markets. Faced with all these circumstances, it was vital to firmly show that matters could be turned around and that Spain was not bound to follow the path of instability of other countries. To do this, the change in economic policy stance last spring was essential, since it demonstrated a willingness to react to and redress the imbalances. Given the source of the tensions, the priority was to right the trajectory of public finances. To this end, an ambitious fiscal consolidation plan was approved in May last year. It brought forward the bulk of the adjustment to be made to the years 2010 and 2011. In parallel, there was a patent and pressing need to tackle the labour market shortcomings that were hampering the absorption of unemployment and the adjustment of the economy. Hence a labour market reform was launched.