But it remains to be seen how wages will react in the face of more buoyant domestic demand. Throughout 2006 the stance of demand-side policies was consistent with the pick-up in private agents’ spending. However, in the monetary policy realm, the strength of the recovery warranted a gradual adjustment in monetary conditions by the European Central Bank. Following the rise in official interest rates in December 2005, the ECB continued in 2006 progressively to withdraw the stimulus provided in recent years in the light of the observed risks to price stability in the medium term. Turning to budgetary policies, the improvement in the business cycle contributed decisively to tax revenue growing substantially above forecast in 2006 and to the euro area budget deficit declining by almost 1 pp. Given the persistence of high deficits in many countries, it is of paramount importance to harness the opportunity provided by the current boom to complete the ongoing restructuring of public finances and to push through measures to boost productivity and employment generation. Precisely in this latter area, the year 2006 saw progress – albeit uneven across countries and economic policy areas – in the application of the structural reform agenda. Undoubtedly, the favourable performance in 2006 in terms of employment and growth in activity is largely the result of the course of the business cycle.
Some of these liberalising measures are detailed in the National Reform Programme so that, irrespective of the need to design other new measures, it would be advisable to apply this Programme more resolutely. Also, advantage should be taken of the transposition of the Services Directive to define a more straightforward and competitive regulatory framework for these activities. Education, innovation, market liberalisation and, broadly, all reforms geared to increasing productivity are of the utmost importance looking ahead to the long term. In recent years the welfare of Spanish citizens has been increasing thanks to better use of the labour factor. This is worth celebrating since for a long time the Spanish economy’s main problem was in fact a persistently high unemployment rate. But as we draw closer to success in this area (the long-term unemployment rate is now around 2%), it will be more difficult to obtain additional welfare gains as a result of increases in the employment rate. Before it is too late, we should realise that productivity is the main source of welfare in the long run, and the policies that promote this are therefore decisive for shaping the future of the Spanish economy. The financial system The behaviour of Spanish households and corporations in 2006 once again posed fresh challenges to the financial system. Given that public and private investment continued to increase, the net borrowing of the economy rose from 6.5% to 7.8% of GDP.