2  BIS central bankers’ speeches  The adaptation of the Spanish economy to the euro was incomplete Turning now to the Spanish economy, our adaptation to the new rules of play derived from, or imposed by, monetary union has been insufficient and belated. Our membership of the euro area compelled us to desist from long-established practices among economic agents who regarded exchange rate devaluation as the “normal” means of resolving the problems of competitiveness caused by inflation and did not consider fiscal discipline as vital for maintaining economic growth. True, in the years before we joined the euro area, we took steps to adjust economic policy rules to a low-inflation environment and set in train some reforms so it would function more flexibly. Two factors were particularly important in achieving this goal. First, the anchoring of inflation expectations, which required fulfilment of the price stability convergence criteria. And second, in the area of budgetary policy, the enactment in 2011 of an initial Stability Law laying the foundations for preventing excessive budget deficits. The transition to Monetary Union was also easier because the peseta/euro conversion rate agreed in 1999 was quite competitive as a result of the devaluations which had taken place between 1992 and 1995 during the functioning of the European Monetary System. However, those devaluations were a clear sign of the difficulties awaiting countries that make exchange rate commitments if these are not accompanied by price and cost discipline.
It would therefore reduce the likelihood of sharper adjustments ultimately taking place in the housing market, the influence of which on the overall working of the economy cannot be understated. For a sounder functioning of the complex markets for land and housing, at least two groups of measures would be required. On one hand, those aimed at influencing the determinants of house prices and, in particular, the regulations and practices restricting the supply of land. And on the other, those intended to correct the distortions behind the marked bias in the Spanish market towards owner-occupied as opposed to rented housing. With regard to the financial system, the year 2002 was, once again, a particularly complicated one. Adding to the usual effects any economic slowdown and correction of excesses built up in upturns will involve were other factors, including most notably corporate and accounting shortcomings of a structural nature, which have undermined the very institutional foundations of markets. This crisis of confidence was exceptional due above all to the doubts cast on elements as fundamental as the recording of transactions at listed companies, the veracity of information provided to investors, conflicts of interest within companies and between these and their main financial agents or auditors, and the most elementary mechanisms of corporate governance. Within this complex picture, two positive features should be underscored.