Moreover, the progress made in reducing the level of debt has not been uniform. While general government debt is still close to its recent high levels (on which I will have more to say later), private sector deleveraging has been very significant. 4/8  In any event, the net external debt of the economy as a whole remains very high. Reducing this debt will require running persistent external surpluses, which would be difficult in a setting of contracting international trade or rising interest rates. Insofar as maintaining balanced economic growth is concerned, the low profitability of Spanish deposit institutions is certainly a problem. This phenomenon, also observed in other European banking systems, is related to the pressure that the low interest rate environment exerts on the net interest margin, but also to the still-high level of unproductive assets, limited turnover and the competitive environment, in which a growing number of institutions from outside the financial sector are increasingly active in offering services traditionally provided by banks. Challenges for sustained economic growth in Spain in the long term Taking into account these short and medium-term prospects, I will now refer to the challenges facing the Spanish economy in the longer term. Our report refers to four priorities: combating the effects of population ageing, tackling long-term unemployment, increasing productivity growth and reducing public debt. The consequences of population ageing As in other European countries, we are witnessing a process of strong population ageing, a phenomenon with profound implications in various areas.
At the same time, the financing of this process required huge flows of funds which, given the insufficiency of domestic saving, had to be met by turning to foreign saving, channelled to Spanish households and firms by credit institutions. Behind this whole process lay a real estate sector growing at an excessive pace in terms of both houses built and house prices. The excessive surge in construction was unquestionably fuelled by low interest rates and the practically unlimited supply of financing provided by foreign saving. The sound fiscal performance by the Spanish economy before the crisis, between 2005 and 2007, masked the actual situation of public finances which were distorted by extraordinary revenue of a strictly temporary nature, linked to the exuberant real estate sector. These abundant inflows discouraged the adoption of the necessary public expenditure rationalisation and control measures needed in both central and regional government. BIS central bankers’ speeches  3  In short, the path followed by the Spanish economy in those years brought about substantial macroeconomic imbalances which crystallised in, among other things, a large external deficit and a sudden sharp rise in total external debt, both of which reached highs in 2007–2008. Finally and inevitably a far-reaching adjustment took place, unfortunately amid the turmoil of the international financial crisis.