In the first ten years of membership of the euro area, Spain enjoyed a long phase of growth in an environment in which monetary policy, with relatively low interest rates, was highly expansionary. This period saw rapid increases in the standard of living and in economic welfare, as reflected by the rapid rise in GDP per capita, which in 2007 edged above the average of that of the countries then comprising the euro area. This achievement largely reflected very labour-intensive growth. The insufficient adaptation to the euro gave rise to significant imbalances However, the expansion in those years was based on a pattern of household and corporate spending which, driven by the property sector boom and by cheap and easy credit, systematically exceeded the economy’s productive capacity. This imbalance has been at the root of the difficulties of the Spanish economy since the international financial crisis began. First, demand-side pressure led to significant pressure on costs, margins and prices, which tended to grow systematically faster than those of our European partners, with a notable worsening of our external competitiveness. This was not at all consistent with the decision to forgo the exchange rate as an economic policy instrument. Second, the lack of sufficient domestic output to meet domestic demand had to be increasingly covered by imports. This caused a sizeable imbalance in our foreign trade, as reflected by the balance of payments, which in 2007–2008 ran a deficit of around 10% of GDP.
Great efforts are being made, involving significant sacrifices from broad sections of society; but they will eventually bear fruit and help to absorb the mass unemployment that is currently Spain’s most serious problem. To overcome the deterioration in solvency stemming from the economic crisis and the end of the unsustainable growth in construction and related lending activity, part of the banking sector has required an extensive clean-up, restructuring and recapitalisation. The main thrust of this process is already well-advanced, and this is having positive effects on the ability of our banks to raise funds abroad. Its completion will be a fundamental step in the recovery of confidence, activity and employment. We can affirm that the tensions experienced by the Spanish economy over the last 18 months have begun to abate, as a result of greater confidence in both the ability of the euro area to reform and in the adjustment drive of our economic policy. The deep-seated change in our trade balance, which will be manifest in a significant balance of payments  4  BIS central bankers’ speeches  surplus in 2013, is the prime example of the adjustment under way in the Spanish economy and of the competitiveness gains that are materialising. To conclude: you ask me what my prognosis is (not surprisingly, given who you are). I think you will understand if I reply that I still reserve my judgment. But, it was significantly worse a few months ago.