Author: COMMISSION STAFF WORKING DOCUMENT, Brussels, 10.4.2013 SWD(2013) 116 final
Viernes 12 de abril de 2013, por Carlos San Juan
Negative feedback loops amongst a protracted economic recession, deleveraging and volatile market financing conditions remain a tangible threat. Private-sector deleveraging is imparting a significant negative impulse to domestic demand and has plunged the economy into a double-dip recession since end-2011, which may extend into 2014. Efforts to stem the rise in general government debt contribute to compress domestic demand. Structural rigidities and tight financing conditions have been hindering a faster and less costly (in terms of output and employment) adjustment of the real economy to post-bubble conditions. In turn, the contracting economy and the associated surge in unemployment are feeding back into a more protracted deleveraging process. Hence, while the adjustment of flow imbalances has advanced in 2012, risks to macroeconomic and financial stability have not yet dissipated.
• Spain has responded to these challenges and to the country-specific recommendations of the Council under the 2012 EU semester2 with efforts to consolidate public finances and reform product and factor markets. A labour market reform was adopted by the government in February 2012 and passed into law in July 2012. A comprehensive reform plan was presented in September 2012, covering further reforms to support employment, ensure public finance sustainability, and strengthen the business environment and competition. While measures have been taken or launched in all these areas, the reform agenda remains incomplete, and even reforms already adopted have not always displayed their full effects due to implementation lags. As a result, the adjustment capacity of the economy remains unsatisfactory, with much of the burden of adjustment falling on employment. • According to the Commission services’ 2013 winter forecast, the unemployment rate is projected to rise further to 27% in 2013 (from 25% in 2012). The share of long-term unemployment is increasing, and with it the probability of hysteresis effects that would lower the growth potential of the economy. Wages have only belatedly and gradually started to respond to the slack in the labour market, partly in reaction to the 2012 reform of the labour market.
EXECUTIVE SUMMARY AND CONCLUSIONS
The reduction in disposable income, rising unemployment and falling house prices (down 31% in nominal terms from their peak) are weakening household capacity to repay debt.
While their net wealth diminishes (housing being the bulk of it), more and more households are affected by unemployment. The fall in house prices accelerated in 2012 on the back of a large stock of unsold houses and falling demand. Residential investment and construction activity also fell further. The adjustment in the housing market is not completed, and further drops in both prices and investment are likely to allow a narrowing of the gap between supply and demand.
• The private sector faces strong pressures to deleverage. The non-financial private sector debt-to-GDP ratio remains elevated, having declined by only around 15 pps. from the 2010 peak of 227%.
The reduction in debt has been faster for non-financial corporation than in the household sector, due to different debt characteristics (in particular the long maturity of mortgages), a stronger fall in non-financial corporation borrowing and larger debt write-downs on non-financial corporation loans. Non-performing loans have increased and are expected to rise further due to the extended economic downturn.
• Net external debt and the (negative) net international investment position remain close to historical peaks. Net external liabilities have stabilised at above 90% of GDP since 2009. The vulnerabilities associated with very high net external liabilities culminated in 2012, when a loss of market confidence on Spanish assets led to large private capital outflows, which were partly offset by official capital inflows. In spite of the recent easing, financial market confidence remains highly sensitive to economic and policy developments.
• Both cyclical and non-cyclical factors have contributed to the sizeable improvement in the current account balance from a deficit close to 10% of GDP in 2007 to a deficit of slightly less than 1% of GDP in 2012. This improvement has been driven by solid export growth and a sharp fall in imports, which can be related to some recovery in cost competitiveness and to shifts in demand composition, possibly of a lasting nature. Nonprice competitiveness factors and the duality of the economic structure (with export companies being typically larger and more productive) have supported the robust export market shares performance of Spain. At the same time, the sharp fall in imports mostly related to the slump in domestic demand suggests that a considerable part of the current account reversal is cyclical. While around half of the losses in cost competitiveness during the boom period have been reversed so far, part of this improvement is related to the impact of labour shedding on apparent labour productivity. Moreover, the decrease in unit labour costs (ULC) has not fed convincingly into final prices. Further competitiveness gains will be needed to underpin the dynamism of exports and import substitution, and thereby bring about a significant reduction of net external liabilities over time.
• High and fast rising general government debt has been the flip side of the ongoing adjustments in the private sector. The general government budget deficit has fallen from the 2009 peak of 11.2% of GDP but remains high at 6.7% of GDP in 2012 (excluding bank recapitalisation costs). In spite of a substantial fiscal effort, a faster reduction in headline balances was hindered by the recessionary environment and shifts in tax revenue elasticitites. General government debt, which has also been affected by the cost of bank recapitalisations, reached 84% of GDP in 2012 and is set to record further substantial increases in the coming years. The unwinding of macroeconomic imbalances will only have run its full course once the fall-out on the general government sector has also been re-absorbed.
The scale and interrelated nature of the policy challenges stemming from these imbalances require a comprehensive and ambitious policy response.
Notwithstanding the measures already adopted or proposed by the government, and whose positive effects depend on their swift and full implementation, a number of elements can be considered:
• The rebalancing of the economy and international competitiveness would be helped by greater flexibility in the reallocation of resources. This would be fostered by measures to strengthen competition in product and services markets (including network industries), improve the business environment, support the growth and internationalisation of firms. A review of the growth-friendliness of the tax system could also be considered.
• The adjustment capacity of the economy, the absorption of the large number of unemployed workers and competitiveness rest decisively on a well-functioning labour market. To this end, it would be useful to:
(i) undertake a comprehensive review of the impact of the 2012 labour market reform against its stated objectives (greater efficiency and reduced labour market duality, higher internal flexibility, a wage bargaining process that ensures a better alignment of wages to economic conditions, greater employability of young workers and greater use of permanent contracts) with a view to ensure its effectiveness and
(ii) to enhance active labour market policies (ALMP), public employment services and vocational training, so as to improve employability and raise the quality and effectiveness of training and job matching.
• The stability of the financial system and its capacity to finance the real economy rely on the swift completion of the recapitalisation and restructuring of the banking sector and the strengthening of the regulatory and supervisory frameworks foreseen in the context of the financial sector programme. Increasing the availability of non-bank financing sources and targeted measures for SMEs would also help to alleviate financing constraints on growth and the reallocation of resources. Measures to foster a larger and more efficient rental market could help stabilise the housing sector and promote geographical mobility of workers.
• Ensuring the long-term sustainability of public finances will require continuous efforts in the years to come. The credibility of the fiscal adjustment would be reinforced by basing consolidation on structural measures (including to ensure the sustainability of the social security system) as required by the recommendations under the Stability and Growth Pact, and by further action to reinforce the medium-term orientation and institutional framework of public finances.