Has the structural adjusment in Spain set the ground for

long-term growth?From crisis to developmentAthens, 29th of April 2014José Moisés Martín Carretero

Not aimed at promoting growth but at facing macroeconomic imbalances in absence of monetary policy:◦ Reduction of public deficit◦ Internal wage devaluation: labour market reform◦ Fiscal devaluation◦ Financial reform and deleveraging◦ Liberalization of markets

Two phases:◦ Between 2008 and 2010: Keynesian fiscal stimulus and

automatic stabilizers◦ Since 2010: structural adjustment

Main features of Spanish economic adjustment: internal devaluation

As a summary: deleveraging process

Year

200

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-150

-100

-50

0

50

100

150

200

250

300

350

Deleveraging process

Gross Savings

Gross invest-ing

Current Account

Government Balance

Billion E

uro

s

Leverage

Deleverage

GDP and Employment evolution

General evolution of GDP

2007

TI

2007

TII

2007

TIII

2007

TIV

2008

TI

2008

TII

2008

TIII

2008

TIV

2009

TI

2009

TII

2009

TIII

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TIV

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TI

2010

TII

2010

TIII

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TIV

2011

TI

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TII

2011

TIII

2011

TIV

2012

TI

2012

TII

2012

TIII

2012

TIV

2013

TI

2013

TII

2013

TIII

2013

TIV

-6

-4

-2

0

2

4

6

8

10

GDP Evolution during the crisis

% Y

tY c

hange

Contribution to aggregate demand: domestic and external

-10,0 -8,0 -6,0 -4,0 -2,0 0,0 2,0 4,0 6,0

2008

Q1

2008

Q2

2008

Q3

2008

Q4

2009

Q1

2009

Q2

2009

Q3

2009

Q4

2010

Q1

2010

Q2

2010

Q3

2010

Q4

2011

Q1

2011

Q2

2011

Q3

2011

Q4

2012

Q1

2012

Q2

2012

Q3

2012

Q4

2013

Q1

Domestic Demand External Demand GDP

Employment evolution

T1-2

007

T2-2

007

T3-2

007

T4-2

007

T1-2

008

T2-2

008

T3-2

008

T4-2

008

T1-2

009

T2-2

009

T3-2

009

T4-2

009

T1-2

010

T2-2

010

T3-2

010

T4-2

010

T1-2

011

T2-2

011

T3-2

011

T4-2

011

T1-2

012

T2-2

012

T3-2

012

T4-2

012

T1-2

013

T2-2

013

T3-2

013

T4-2

013

-3.50000

-3.00000

-2.50000

-2.00000

-1.50000

-1.00000

-.50000

.00000

.50000

1.00000

1.50000

Evolution of employment

QTQ

Change in %

Unemployment

0

5

10

15

20

25

30

15.000

16.000

17.000

18.000

19.000

20.000

21.000

Employment (thousands) (left axis)

Unemployment rate (right axis)

Evolution of Labour Costs

Year

200

0

Year

200

1

Year

200

2

Year

200

3

Year

200

4

Year

200

5

Year

200

6

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7

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8

Year

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9

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0

Year

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480

85

90

95

100

105

110

115

120

Unit Labour Costs: nominal and real

NominalReal

Ind

ex 2

00

5=

10

0

Public finance evolution

Public finances: public revenues and expenditure

Public finances (II): Debt

Year

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8

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9

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2

Year

201

3000%010%020%030%040%050%060%070%080%090%100%

Public debt

As

% o

f G

DP

Spanish Social Expenditure: quite lower than the EU Average

NSP: a path to social expenditure downshifting

Deleveraging and credit

Slow International deleverage.

Mar

-aa

Aug-a

a

Jan-

aa

Jun-

aa

Nov-a

a

Apr-a

a

Sep-

aa

Feb-

aa

Jul-a

a

Dec-a

a

May

-aa

Oct-a

a

Mar

-aa

Aug-a

a

Jan-

aa

Jun-

aa

Nov-a

a

Apr-a

a

Sep-

aa

Feb-

aa

Jul-a

a

Dec-a

a

May

-aa

Oct-a

a

Mar

-aa

Aug-a

a

Jan-

aa

Jun-

aa

Nov-a

a0

200000

400000

600000

800000

1000000

1200000

1400000

1600000

1800000

2000000

Gross external debt

Million

eu

ros

-8,2%

Total deleverage to come

Jan-

aa

Aug-a

a

Mar

-aa

Oct-a

a

May

-aa

Dec-a

a

Jul-a

a

Feb-

aa

Sep-

aa

Apr-a

a

Nov-a

a

Jun-

aa

Jan-

aa

Aug-a

a

Mar

-aa

Oct-a

a

May

-aa

Dec-a

a

Jul-a

a

Feb-

aa

Sep-

aa0

500000

1000000

1500000

2000000

2500000

3000000

3500000

Total debt (non financial sectors)

Million

Eu

ros

-2,52%

On the other hand: less credit for the economy

Mar

-aa

Oct-a

a

May

-aa

Dec-a

a

Jul-a

a

Feb-

aa

Sep-

aa

Apr-a

a

Nov-a

a

Jun-

aa

Jan-

aa

Aug-a

a

Mar

-aa

Oct-a

a

May

-aa

Dec-a

a

Jul-a

a600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

2,000,000

Bank loans to private sector and households

Million

eu

ros

-23%

International competitiveness and current account balance

Competitiveness gains?

Jan-

aa

Oct-a

a

Jul-a

a

Apr-a

a

Jan-

aa

Oct-a

a

Jul-a

a

Apr-a

a

Jan-

aa

Oct-a

a

Jul-a

a

Apr-a

a

Jan-

aa

Oct-a

a

Jul-a

a

Apr-a

a

Jan-

aa

Oct-a

a

Jul-a

a80.000

85.000

90.000

95.000

100.000

105.000

Export prices competitiveness index (the higher, the worse)

EU28OECD

Ind

ex 2

00

6=

10

0 Competitiveness

improvement

Competitiveness

worsening

No change

Balance of current account: not a miracle

2000

DIC

2001

JUN

2001

DIC

2002

JUN

2002

DIC

2003

JUN

2003

DIC

2004

JUN

2004

DIC

2005

JUN

2005

DIC

2006

JUN

2006

DIC

2007

JUN

2007

DIC

2008

JUN

2008

DIC

2009

JUN

2009

DIC

2010

JUN

2010

DIC

2011

JUN

2011

DIC

2012

JUN

2012

DIC

0

20000000

40000000

60000000

80000000

100000000

120000000

140000000

Evolution of current account balance

Euro

thousands

Exports in

the same tendency

Imports increasedImports frozen

Exports: no change of share of world trade

Year 2000

Year 2001

Year 2002

Year 2003

Year 2004

Year 2005

Year 2006

Year 2007

Year 2008

Year 2009

Year 2010

Year 2011

Year 2012

Year 2013

1.5

1.6

1.7

1.8

1.9

2

2.1

2.2

Spanish Exports as share of world trade

% o

f to

tal

wo

rld

tra

de

on

go

od

s

FO

B

Imports: increasing share of internal demand: there is no import substitution

Imports as % of national demand

% o

f nati

onal dem

and

Social impact

Social Impact: decreasing household revenues

Increasing inequality

Increase of risk of exclusion

Children and young people, most vulnerable group

Long term growth prospects

Capital and investment Innovation Human Capital Total factor productivity

Factor to assess long term growth prospects

Investment

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315%

17%

19%

21%

23%

25%

27%

29%

31%

33%

Gross investment as % of GDP%

of

GD

P

Research and innovation

Year 2000

Year 2001

Year 2002

Year 2003

Year 2004

Year 2005

Year 2006

Year 2007

Year 2008

Year 2009

Year 2010

Year 2011

Year 2012

0.8

0.9

1

1.1

1.2

1.3

1.4

1.5

R+D expenditure as % of GDP

% o

f G

DP

Human capital: increasing structural unemployment

Year

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0

Year

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2

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3

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6

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8

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9

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0

Year

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1

Year

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2

Year

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30

5

10

15

20

25

NAWRU (non accelerating wage rate of unemployment)

% R

ate

of

Un

em

plo

ym

en

t

Human capital

2005

2006

2007

2008

2009

2010

2011

2012

2013

10

12

14

16

18

20

22

24

Young People not in employment nor any education and training

European Union (28 countries)Spain

% o

f p

eop

le 1

5-2

9 y

ears

old

Total factor productivity

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0

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295.5

9696.5

9797.5

9898.5

9999.5100

100.5

Total Factor Productivity Growth

Ind

ex 2

00

0=

10

0

Deceleration of potential output growth

Average 2000-2007

Average 2008-2012

Average 2013-2016

Average 2017-2021

-002%

000%

002%

004%

Annual potential growth average

Europe 2020 Target Last data

Employment rate 75% 59,3%

R+D Investment 2% of GDP 1,3% of GDP

Greenhouse emissions

-20% from 1990 +21% from 1990

Renewable energy 20% of total energy 16,05%

Energy efficiency 20% -

School early leaving 10% 24,9%

30-34 years old with tertiary qualifications

44% 40,6%

Poverty and social exclussion

-1,5 million people in poverty.

growing

Europe 2020 goals: a lot of room for improvement

Internal devaluation has led to a wage reduction and worsening income distribution. Internal demand has been strongly depressed.

In spite of efforts, Public deficit and debt still being far away from Stability Pact target.

Deleveraging of economy is being too slow due to the low inflation.

International competitiveness gain is almost purely cyclical.

Decrease of household disponsable income, and higher inequality of income, led to an increase of poverty and social exclusion.

Conclusions and recommendations (I)

Due to those reasons, foundations for long-term growth are weak:

◦ Financial impediments for a higher level of investment.

◦ Lack of investment in R+D◦ Long term unemployment to become structural. ◦ “Lost generation” of young people ◦ Weak social cohesion and political mistrust.

Conclusions and recommendations (II)

Conditions to increase growth and social development: ◦ ECB should act more agressively in order to tackle

low inflation, euro appreciation and debt burden: QE.◦ Growth friendly tax reform.◦ Public expenditure to be focused on child poverty.◦ Increase the quantity and effectiveness of R+D

investment. Reform of universities.◦ Bold policies towards qualification of not-qualified

workers and unemployed. ◦ Bring people back to the employment as soon as

possible. Specially those in long term unemployment.

Conclusions and recommendations (III)

Thank you very much