Luis M Linde: The international economic environment and Spain’s economy Testimony by Mr Luis M Linde, Governor of the Bank of Spain, before the Parliamentary Budget Committee in connection with the draft State Budget for 2013, Madrid, 4 October 2012. *  *  *  Ladies and gentlemen, The appearance by the Governor of the Banco de España before this Committee at the start of the annual debate on the State Budget is a tradition I am most pleased to embrace. I shall try to be as clear and direct as possible on those issues I consider most important. The Draft State Budget Law for 2013 is being presented against a background of singular difficulty for the Spanish economy. I intend, first, to discuss the international economic context, in particular in the euro area; second, to look at recent developments in the Spanish economy, with particular reference to competitiveness and fiscal consolidation; and finally, to analyse the key features of the draft Law. Without overstaying my welcome, I shall, before ending my address, briefly discuss the clean-up and restructuring programme for our banking system which, as you know, took a significant step forward on 28 September with the publication of the evaluations of the whole of the Spanish banking system. If you wish, we can go into greater detail on this matter in the round of questions, given its importance for restoring confidence in our economy, in activity and in employment, and, in short, for the implementation of the Budget for 2013.
A second informative feature is the similar evolution of the dollar in both episodes. It is natural to expect that a hiking cycle in the United States would strengthen the US Dollar relative to other currencies. This is indeed what happened in the 1994 cycle, with the US Dollar Broad appreciating about 7% in 2 years and almost 30% in 4 years. In contrast, the dollar weakened about 5% in the  4 It was not until the Asian crisis in 1998 when the consequences of balance of payment pressures where directly felt across the developing world. 5 Hereafter, all panels in figure 2 are centered around the month in which the hiking cycle started, labeled month 0. These correspond to February 1994, June 2004 and December 2015. 6 In this case, after a very sharp increase during 1994, the yield on the 10‐year US government bond fell significantly during 1995 to levels similar to those observed before the hiking cycle. 2          first 12 months in the 2004‐2006 cycle, at the very same time that the Federal Reserve had increased short term rates by 200 basis points. Because periods of dollar strength have tended to coincide with periods of weaker commodities, it is not surprising to see that commodities had a flat/declining trend in the second half of the 1990s. Indeed, high world interest rates, high credit spreads and low commodity prices all contributed to a weakening of emerging market economies.