The correction of this imbalance is particularly pressing in that the reliance on external saving has become a major factor of vulnerability of the Spanish economy during the crisis. The increased dependence on external financing in the pre-crisis period is the consequence of the sizeable accumulation of debt by households and firms, which also led to the Spanish banking system becoming oversized. The need to correct these imbalances poses an added difficulty to recovery in the economy, given that it restricts the headroom available to raise investment and consumption through resort to external financing. It is also crucial to continue with the restructuring of the banking system. Hence, when solvent demand recovers, it may be serviced by a normal flow of financing which, both in Spain and in the rest of continental Europe, is routed essentially through credit institutions. But households and firms still have a relatively lengthy process of debt reduction ahead of them. Accordingly, in the short term, the recovery in growth cannot be credit-led as in the past. Along these lines, credit to the non-financial private sector in 2011 fell by around 4%, although there were significant differences from sector to sector. In the case of households the pace of debt reduction was somewhat slower, whereas in that of firms the reduction in credit was more marked in those sectors, such as construction and real estate development, that had become oversized to a greater extent before the crisis.
These were geared to confirming the expansionary stance of monetary policy, to restoring the functioning of its transmission mechanism and to breaking the feedback loop between banking system risks and sovereign risk. In addition, significant non-conventional measures were approved. These included most notably the lengthening of the horizon for liquidity loans to a term of three years, in two special auctions held in December 2011 and February 2012. The three-pronged measures adopted – spanning domestic economic policies, European governance reform and, most notably, ECB action – proved essential in containing the heightening tensions, which might have led to a systemic crisis of unforeseeable  BIS central bankers’ speeches  1  consequences. That said, these measures were not a conclusive solution; they simply helped gain valuable time so that governments could continue moving to resolve the challenges outstanding and so that the measures adopted might begin to bear fruit. To definitively resolve the European sovereign crisis will require major progress in various fields. In the short term, the ongoing reform of governance must be completed and put into practice, including the full start-up of the European Stability Mechanism. A suitable balance must also be struck between two complementary objectives: fiscal consolidation and economic growth. Here, the “fiscal package” agreed at the end of 2011 must be supplemented with a new “growth package”. Looking more into the medium term, profound reflection is needed on the euro area we want in 10 years’ time.