Given the scale of the challenges facing us, it is vital that the economic policy response be sufficiently ambitious and resolute, so as to speed the adjustment of the accumulated imbalances and to lay the foundations for a more stable and flexible economy. This would not only be to the benefit of the Spanish economy; it is also essential for the very stability of the common European project. On this economic policy response will hinge the strength of the recovery, which in Spain’s case has hitherto been very incipient and very reliant on temporary stimuli, that will tend to peter out in the short run. Even without the high degree of uncertainty surrounding us in recent weeks, the recovery would only be gradual and would take some time to attain a pace of expansion sufficient to generate employment, which underscores the need to act decisively to avoid prolonged low growth. BIS Review 92/2010  1  The Annual Report of the Banco de España addresses the current situation of and outlook for the Spanish economy in great detail. Accordingly, given the limited time for my testimony, I shall focus on three issues that are essential in my view in order to be able to exit the current situation and bring about a rapid return to sustained growth: fiscal consolidation; the steps that must be taken to set in place an efficient labour market that rapidly promotes job creation; and, lastly, the restructuring of the financial system, where substantial progress has been made in recent weeks.
After a prolonged period of growth, this segment had reached a size which, given the evolving demand for banking services, entailed a clear excess of capacity. From an individual standpoint, the prolongation of the crisis affected the capacity of institutions to generate profits for the following reasons: an increase in non-earning assets (doubtful loans and repossessed real estate assets), the narrowing of margins due to a fall in income associated with rising non-earning assets and to a higher cost of funds, the decrease in business volume, etc. Moreover, the high growth of previous years, due particularly to increased business with the real estate sector, had raised the dependence on wholesale debt markets, exposing savings banks to the liquidity risk associated with adverse developments in those markets. Compounding this is the intrinsic limitation of savings banks when it comes to raising core capital, a limitation which is important because the trend in both the markets and the prudential financial regulation currently under international revision is clearly towards stepping up requirements in this area. Given the need to downsize this sector and the conviction that the productive structure of many credit institutions had to be rationalised to hold efficiency at adequate levels in a sector characterised by growing competition, the time was ripe for the creation of the FROB, under whose auspices many savings banks have arranged their mergers or institutional protection systems (hereafter referred to by the Spanish acronym “SIP”).