The aim is to ensure the Spanish economy continues moving towards the income levels of the core European countries and that it is in a position to become successfully integrated into an increasingly competitive and globalised international environment. To do this, the potential for economic growth must be broadened, reinforcing the significant contribution made by the increase in employment in recent years with the attainment of real productivity gains. Under demand policies, monetary policy may be expected gradually to resume a more neutral stance and somewhat higher interest rates. The mild tightening of monetary conditions will contribute to some extent to containing consumer and residential-investment spending. But it is unlikely, in a setting in  BIS Review 60/2006  7  which cyclical divergences of some intensity persist between the countries comprising the euro area, that this will suffice to promote the necessary adjustment from the domestic standpoint. The contribution of fiscal policy is therefore crucial, and the room for manoeuvre available should be used to reduce the pressure of domestic demand, through the pursuit of more ambitious budgetary targets. In this respect, the sound fiscal figures obtained in 2005 – a surplus of 1.1% of GDP and a fresh cut in the public debt ratio, which has dipped to close to 40% of GDP – should be built on and improved in 2006. Indeed, the figures for the opening months of this year suggest the marked buoyancy of tax revenue will continue, raising the likelihood that public revenue will once again outpace budgetary projections.
Moreover, the ongoing rise in indebtedness levels and the prevalence of debt incurred at variable interest rates entails a greater sensitivity of the Spanish economy to monetary policy decisions, against a background in which the present generosity of monetary conditions may be expected to move to a more normal footing. The influence of interest  6  BIS Review 60/2006  rates on expenditure is undoubtedly sharper in the case of relatively more indebted households, which are in the lower strata of the income distribution. Along these same lines, the strong concentration of household wealth in property and the relative weight of productive activities related to the residential sector are resulting in a greater exposure of the economy as a whole to the changes in property-market activity and prices. Regarding the latter, 2005 appears to have marked the start of a slowdown in house prices, raising (all the more so the more firmly the deceleration becomes entrenched) the likelihood of the current overvaluation of housing being progressively reabsorbed, as in previous booms. Let me remind you, however, that some element of risk is always present in all scenarios involving the absorption of a phase of overvaluation. This is a consideration that all agents should bear in mind when deciding where to place their investments.