Despite some recent easing, tightness in financial conditions still persists and the tightening of business loan lending standards continued – albeit at a slower pace – during the second quarter. We predict that bank lending rates for consumer loans would follow gradually, as the lagged effects of cumulative easing of 950 basis points since November 2008 would start to ease credit conditions towards the last quarter of this year. However, the current unfavorable labor market conditions are expected to restrain the recovery in consumption, and therefore domestic demand conditions would continue to support disinflation. The fiscal discipline is crucial in maintaining low levels of medium and long-term interest rates for the recovery of both consumption and investment. The implementation of a credible fiscal framework would bring down risk premiums further, and hence lead to a permanent fall in longer-term interest rates. This, in turn, would foster investment and labor demand, and thereby support the recovery process, providing the Green Shoots with the breathing room. Therefore, the determined execution of the medium-term program to ensure fiscal discipline and debt sustainability would have an expansionary rather than contractionary impact on economic activity. In sum, while Turkish economy contracted sharply during the recent crisis, its well capitalized and sound financial system is likely to support the economic activity along the recovery. In fact, recent GDP releases suggest that economic activity in Turkey displayed a solid rebound in the second quarter.
Undoubtedly, the monetary policy of the European Central Bank, which has successfully achieved its objective of keeping euro area inflation and price expectations under control, has had a sharply expansionary effect on the Spanish economy. Indeed, lower interest rates have facilitated the growth of corporate and household debt and boosted spending and activity. But this cannot be identified as the sole cause behind our growth, and nor does it suffice to explain our better performance, since other southern European countries have also seen their financial costs substantially cut and yet have not recorded comparable growth. Nor can there be many doubts about the favourable influence that the fiscal policies pursued since 1994 have had on economic agents' confidence. With the help of European funds, these policies have enabled the budget deficit to be reduced to the extent that, in the past two years, we have run a surplus. The beneficial effects of fiscal consolidation have been reinforced by the fact that the gradual elimination of the budget deficit has occurred without hardly increasing public spending relative to GDP. Among the causes of the boom, we should also acknowledge the currency devaluations in the early 90s. These took place as a result of the turbulence then prevailing and led to a peseta-euro conversion rate that placed us in a very favourable starting position for the competitiveness of the Spanish economy.