Reforms in Spain

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- The Spanish economy’s recovery gains pace
- Assessment of current economic conditions
- The economic recovery has been in line with the stylised facts from previous cycles, and this time without a currency depreciation, so competitiveness gains are not merely temporary
- Which reforms has Spain implemented?
1.- Improving sustainability of public finances
2.- Improving competitiveness (labor market, tax system)
3.- The reestructuring of the banking system
- We need to do more…because:
1.- The real-estate cycle is different this time
2.- Deleverage is much needed in terms of stocks
- Potential growth is endogenous to structural reforms
- GDP growth target: at least 2,5% until 2025
- What else can be done?
1.- A smart fiscal consolidation
2.- A more efficient, growth enhancing tax system
3.- Help firms hire, invest and export
4.- Improve our competitiveness
5.- Improvements in the labour reform
6.- Keep improving the labour market
7.- Europe has also to help

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Reforms in Spain

  1. 1. Reforms in Spain Jorge Sicilia, Chief Economist, BBVA Group June 2014
  2. 2. Reforms in Spain, June 2014 The Spanish economy’s recovery gains pace Spain: GDP growth and MICA-BBVA forecasts (% QoQ) Source: BBVA Research based on INE The economy has grown for three consecutive quarters, and more strongly in 1Q14 (0.4% QoQ) … The economy has grown for three consecutive quarters, and more strongly in 1Q14 (0.4% QoQ) … … thanks to better fundamentals, a lower need for fiscal adjustment, reduction of some uncertainties and import substitutions … thanks to better fundamentals, a lower need for fiscal adjustment, reduction of some uncertainties and import substitutions If the favourable start to 2Q13 were to consolidate in the next few months, growth could accelerate again If the favourable start to 2Q13 were to consolidate in the next few months, growth could accelerate again Page 2 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14(f) CI at 60% CI at 40% CI at 20% GDP (% QoQ)
  3. 3. Reforms in Spain, June 2014 1. Exports will continue to expand: above 6% y/y in 2014 and 2015 Assessment of current economic conditions 3. More certainty and fewer financial tensions: 10y risk premium below 120bp 2. An increase in savings and financial wealth (+25% from 2H2012) 4. More dynamic investment in machinery and equipment: above 6% y/y in 4Q2014 Page 3 5. Improvement in new lending flows: growth above 6% y/y in Mar. 2014 for SME 6. A smaller fiscal effort needed in 2014: 0.5 pp in 2014 (2pp in 2013 and 5pp in 2012) and smaller fiscal multiplier than the one assumed by IMF 7. Net job-creation started sooner than expected: +2.4% saar in 1Q2014, above 2% accumulated in 2014 and 2015 and social security flat rate
  4. 4. Reforms in Spain, June 2014 The economic recovery has been in line with the stylised facts from previous cycles,… Export growthExport growth Investment in machinery and equipmentInvestment in machinery and equipment Gross operating surplusGross operating surplus New credit operations (flow)New credit operations (flow) Employment growthEmployment growth GDP growthGDP growth Growth in stock of credit Declining Variables that precede the cycle . = . Lagging variables Page 4
  5. 5. Reforms in Spain, June 2014 ..., and this time without a currency depreciation, so competitiveness gains are not merely temporary Spain: Export growth, exchange rate movement and ULC (% change over the next 14 quarters after exports reached lowest level) Source: BBVA Research based on Consensus Forecast Inc. -20 -10 0 10 20 30 40 50 1994 2009 Total Export Growth Currency depreciation (-) / appreciation (+) vs. dollar REER based on ULC Page 5
  6. 6. Reforms in Spain, June 2014 Spain: Public deficit, excluding aid to the financial sector (%GDP) Source: BBVA Research based on MINHAP Which reforms has Spain implemented? 1. Improving sustainability of public finances A sizeable fiscal adjustment (7,5% of GDP in measures between 2012-13) and an improvement in institutions has been undertaken to regain confidence,… A sizeable fiscal adjustment (7,5% of GDP in measures between 2012-13) and an improvement in institutions has been undertaken to regain confidence,… … priority to interest payments (Constitution), the Budget Stability Law, and a fiscal authority that will evaluate fiscal policy show a strong institutional improvement … … priority to interest payments (Constitution), the Budget Stability Law, and a fiscal authority that will evaluate fiscal policy show a strong institutional improvement … … that adds to revenue (VAT, Income tax) and expenditure measures (freeze in hiring, Christmas pay to public workers, co-payments in public services). … that adds to revenue (VAT, Income tax) and expenditure measures (freeze in hiring, Christmas pay to public workers, co-payments in public services). Page 6 9.1 3.1 5.3 6.8 1.8 2.0 6.6 -0,4 0.3 5.8 -0,9 0.2 5.1 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 Deficit2011 Pasivefiscalpolicy Fiscaleffort Deficit2012 Pasivefiscalpolicy Fiscaleffort Deficit2013 Pasivefiscalpolicy Fiscaleffort Deficit2014 Pasivefiscalpolicy Fiscaleffort Deficit2015 2012 2013 2014 2015
  7. 7. Reforms in Spain, June 2014 The Sustainability Factor and the Pension Revaluation Index guarantee the long- term budget equilibrium of the public system Distinguishes between the debates on sustainability and sufficiency. All solutions are possible, except for paying current pensions through a structural deficit Distinguishes between the debates on sustainability and sufficiency. All solutions are possible, except for paying current pensions through a structural deficit Aligns the interests of pensioners and the rest of society towards (1) a more efficient system; and (2) reforms that increase employment and productivity Aligns the interests of pensioners and the rest of society towards (1) a more efficient system; and (2) reforms that increase employment and productivity These add to other measures taken previously as (for example) the increase in the retirement age to 67 These add to other measures taken previously as (for example) the increase in the retirement age to 67 Page 7 Which reforms has Spain implemented? 1. Improving sustainability of public finances
  8. 8. Reforms in Spain, June 2014 Page 8 Which reforms has Spain implemented? 2. Improving competitiveness (labor market) Spain: real wages, employment and GDP (cumulative % change, SWDA data, %) Source: BBVA Research -6 -4 -2 0 2 4 Real rem. per employee LFS employment (swda) GDP Real rem. per employee LFS employment (swda) GDP 4Q08-3Q09 1Q12-4Q12 Labour market reform and the 2nd Agreement on Employment and Collective Bargaining have prevented greater job destruction Labour market reform and the 2nd Agreement on Employment and Collective Bargaining have prevented greater job destruction The existence of better employment institutions at the onset of the crisis might have prevented the destruction of around one million jobs The existence of better employment institutions at the onset of the crisis might have prevented the destruction of around one million jobs Without the wage moderation of 2012, an additional 220K jobs would have been lost Without the wage moderation of 2012, an additional 220K jobs would have been lost
  9. 9. Reforms in Spain, June 2014 Spain: potential effects after a year of the flat contribution to Social Security paid for indefinite contracts Source: BBVA Research) Despite some weaknesses (it is not permanent and savings to the employer increase in step with the contribution base) … Despite some weaknesses (it is not permanent and savings to the employer increase in step with the contribution base) … … we forecast a positive effect on employment (0.6 - 0.7%) and on GDP (0.2 – 0.3%), with a net fiscal cost of 0.12% of GDP … we forecast a positive effect on employment (0.6 - 0.7%) and on GDP (0.2 – 0.3%), with a net fiscal cost of 0.12% of GDP 1.0 0.8 0.6 % 0.4 0.2 0.0 Employment GDP Page 9 Which reforms has Spain implemented? 2. Improving competitiveness (tax system)
  10. 10. Reforms in Spain, June 2014 GDP impact on 2012 from the Supplier Payment Programme (pp of GDP) Source: BBVA Reaerch based on MINHAP */ Max and Min depend on agents' level of liquidity restriction To improve firm’s liquidity the Government injected 2.5% of GDP (€27Bn) to pay off local and regional government debts with suppliers To improve firm’s liquidity the Government injected 2.5% of GDP (€27Bn) to pay off local and regional government debts with suppliers As suppliers were experiencing liquidity restrictions, the impact on growth was significant As suppliers were experiencing liquidity restrictions, the impact on growth was significant 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 20% 33% 50% Percentage of unpaid invoices discounted Which reforms has Spain implemented? 2. Improving liquidity (suppliers payment programme)
  11. 11. Reforms in Spain, June 2014 Which reforms has Spain implemented? 3. The reestructuring of the banking system Page 11 2008 Creation of FAAF and increased coverage of DGF 2009 Creation of FROB. Injection of 10bn € into savings banks 2010 Reform of legal framework of savings banks 2011 Minimum capital requirement of 8% (general) or 10% Phase 1 of the restructuring Feb-May 2008 New regulation: 80bn € in provisions and capital buffers June-Sep 2012 Financial assistance program, MOU and capital needs by bank Post-MOU Creation of Sareb and transfer of problem assets Post-MOU Liability management exercises (burden sharing) Phase 2 of the restructuring: focus on asset valuation
  12. 12. Reforms in Spain, June 2014 Which reforms has Spain implemented? 3. The reestructuring of the banking system Page 12 Number of Spanish financial entities Source: BBVA Research based on Bank of Spain 81 45 7 41 11 5 Credit cooperatives Savings banks Commercial banks 2007 2014 * (*) 9 of which have already transformed into commercial banks 5,6% 5,9% 5,5% 6,5% 5,7% 7,7% 7,9% 158% 152% 149% 150% 137% 123% 124% 110% 115% 120% 125% 130% 135% 140% 145% 150% 155% 160% 4,0% 4,5% 5,0% 5,5% 6,0% 6,5% 7,0% 7,5% 8,0% 8,5% 2008 2009 2010 2011 2012 2013 feb-14 Shareholders' equity / Total assets Credit to private sector / Deposits from private sector (rhs) Solvency and liquidity of Spanish banks Source: BBVA Research based on Bank of Spain
  13. 13. Reforms in Spain, June 2014 Spain: housing investment, compared with previous recessions (Maximum during expansion = 100) Source: BBVA Research, based on INE data We need to do more…because: The real-estate cycle is different this time 40 50 60 70 80 90 100 110 120 130 140 Q Q+1 Q+2 Q+3 Q+4 Q+5 Q+6 Q+7 Q+8 Q+9 Q+10 Q+11 Q+12 Q+13 Q+14 Q+15 Q+16 Q+17 Q+18 Q+19 Q+20 Q+21 Q+22 Q+23 Q+24 Q+25 Q+26 Q+27 Q+28 Q+29 Q+30 Q+31 Q+32 Mar-80 Sep-90 Dec-06 The recovery of investment in the real-estate sector tends to run ahead of the cycle... The recovery of investment in the real-estate sector tends to run ahead of the cycle... ... however, the current excess of supply will make it unlikely that this time it will accompany the recovery (effect vs. cause) ... however, the current excess of supply will make it unlikely that this time it will accompany the recovery (effect vs. cause) The ambitious reform process must also ensure an efficient redistribution of resources between sectors The ambitious reform process must also ensure an efficient redistribution of resources between sectors Page 13
  14. 14. Reforms in Spain, June 2014 Credit to the private sector (% GDP) Source: ECB and Bank of Spain We need to do more…because: Deleverage is much needed in terms of stocks 8% 10% 6% 7% 7% 6% 30% 63% 60% 28% 38% 40% 40% 52% 46% 11% 41% 22% 33% 48% 39% 0% 20% 40% 60% 80% 100% 120% 140% 160% 180% Dec-00 Dec-08 Dec-13 Dec-00 Dec-08 Dec-13 Spain EMU Consumption Housing Businesses Real estate businesses Rest of businesses % Businesses Private-sector leverage is excessive. Spanish levels are above those of EMU Private-sector leverage is excessive. Spanish levels are above those of EMU Deleveraging will continue in terms of the stock of outstanding credit Deleveraging will continue in terms of the stock of outstanding credit Compared to EMU, the most significant differences are in real estate businesses and mortgages Compared to EMU, the most significant differences are in real estate businesses and mortgages Page 14
  15. 15. Reforms in Spain, June 2014 Potential growth is endogenous to structural reforms 1. Deleveraging and improvement in the finances of the Spanish economy: finalising the restructuring of the financial sector (improve profitability) and attracting foreign direct investment to promote employment 1. Deleveraging and improvement in the finances of the Spanish economy: finalising the restructuring of the financial sector (improve profitability) and attracting foreign direct investment to promote employment 3. Reforms to improve competitiveness further (keeping internal devaluation), increase the international attraction of Spain in terms of physical, human and technological capital 3. Reforms to improve competitiveness further (keeping internal devaluation), increase the international attraction of Spain in terms of physical, human and technological capital 4. To continue with the reforms that reduce the duality in the labour market, improve intermediation process efficiency, promote wage flexibility and increase employability -> more jobs and with better quality 4. To continue with the reforms that reduce the duality in the labour market, improve intermediation process efficiency, promote wage flexibility and increase employability -> more jobs and with better quality 2. Public-sector reform, fiscal consolidation through growth and long-term sustainability of public finances, with an efficient tax system that create incentives to job-creation -> Report of the Experts Committee 2. Public-sector reform, fiscal consolidation through growth and long-term sustainability of public finances, with an efficient tax system that create incentives to job-creation -> Report of the Experts Committee Page 15 Structural reforms biased to employment growth
  16. 16. Reforms in Spain, June 2014 Labor market problems go far beyond the high U rate -> the more urgent challenge for Spain -> smart fiscal consolidation, welfare state, deleveraging, inequality Labor market problems go far beyond the high U rate -> the more urgent challenge for Spain -> smart fiscal consolidation, welfare state, deleveraging, inequality Two-hand approach: wage flexibility (vs wage moderation) to increase employment (composition effects on W) and more product markets competition Two-hand approach: wage flexibility (vs wage moderation) to increase employment (composition effects on W) and more product markets competition Collective bargaining at firm level (wages flexibility), smart severance payment system, fiscal devaluation, more and better active and passive LM policies Collective bargaining at firm level (wages flexibility), smart severance payment system, fiscal devaluation, more and better active and passive LM policies GDP growth target: at least 2,5% until 2025 Employment in Spain, the US and EU8 Source: Andrés and Doménech (2012) 80 85 90 95 100 105 Pico 2 4 6 8 10 12 14 16 18 años Nivel de empleo al principio de la crisis =100 España, 2007-2025 UE8, 2007-2011 USA, 2007-2014 USA, 1929-1940 EU8: Sweden, UK, Denmark, Finland, Germany, Netherlands, Austria and Belgium. +2% acc. in 2014-5 years Peak Employmentlevelatthebeginningofthecrisis=100 Page 16
  17. 17. Reforms in Spain, June 2014 What else can be done? 1. A smart fiscal consolidation Spain: unemployment rate and public budget balance Source: BBVA Research based on Stability Programme 2014-17 * Unemployment rate based on Fuente (2012): “Series enlazadas de los principales agregados nacionales de la EPA, 1964-2009” A smart fiscal consolidation (timely, targeted and permanent) based on the reduction of the unemployment rate (also structural) A smart fiscal consolidation (timely, targeted and permanent) based on the reduction of the unemployment rate (also structural) Size and composition of public spending, and higher efficiency of public administrations Size and composition of public spending, and higher efficiency of public administrations A more efficient tax structure: direct vs. indirect taxation -> more savings, more investment and more jobs A more efficient tax structure: direct vs. indirect taxation -> more savings, more investment and more jobs Generalgovernmentnetlending(%ofGDP) Unemployment rate (%)* Page 17
  18. 18. Reforms in Spain, June 2014 Spain: public revenues, expenditures and budget balance in per capita terms Source: BBVA Research based on Stability Programme 2014-17 * GDP in 2013 1023 bn of euros. Population 2013: 47,129,783. Public spending and net lending do not include banking restructuring costs. Smart fiscal consolidation: avoid restrictive fiscal policies (e.g., increased tax rates or spending cuts w/o higher efficiency) Smart fiscal consolidation: avoid restrictive fiscal policies (e.g., increased tax rates or spending cuts w/o higher efficiency) Maintain real public expenditures in per capita terms at the 2007 levels (changing composition and increasing efficiency) … Maintain real public expenditures in per capita terms at the 2007 levels (changing composition and increasing efficiency) … … and increase revenues through a more efficient tax structure that increases employment, growth and tax bases … and increase revenues through a more efficient tax structure that increases employment, growth and tax bases Expendituresandrevenues(eurosof2013) Generalgovernmentnetlending(eurosof2013)Budget balance (right) Total revenues Non-interest spending Total expenditures Page 18 What else can be done? 1. A smart fiscal consolidation
  19. 19. Reforms in Spain, June 2014 EU15: Unemployment rate and social security contributions over indirect taxes Source: BBVA Research based on Boscá, Doménech and Ferri (2013) BE DK DEIE EL ES FR IT LUNL AT PT FI SE UK 4 7 10 13 16 19 0,5 0,7 0,9 1,1 1,3 1,5 1,7 Tasadedesempleomedia(%),2007-ene.2014 Contribuciones seguridad social/Imposición indirecta 2011 More employment, GDP and private consumption -> more public revenues More employment, GDP and private consumption -> more public revenues Improvement if international competitiveness -> improvement of the current account balance Improvement if international competitiveness -> improvement of the current account balance Less inequality and less hysteresis in unemployment (temporary zero social contribution rate below a certain wage level?) Less inequality and less hysteresis in unemployment (temporary zero social contribution rate below a certain wage level?) Averageunemploymentrate(%),2007–jan.2014 Social security contributions / indirect taxes, 2011 Page 19 What else can be done? 2. A more efficient, growth enhancing tax system
  20. 20. Reforms in Spain, June 2014 BE DK DE IE EL ES FR IT LU NL AT PT FI SE UK -0,17 -0,13 -0,09 -0,05 -0,01 0,03 0,07 0,11 0,5 0,7 0,9 1,1 1,3 1,5 1,7 1,9 BalanzaporcuentacorrientesobrePIB,2007 Contribuciones seguridad social/Imposición indirecta 2007 BE DK DE IE EL ES FR IT LU NL AT PT FI SE UK y = 0,0795x + 0,2144 R² = 0,8017 0,23 0,25 0,27 0,29 0,31 0,33 0,35 0,5 0,7 0,9 1,1 1,3 1,5 1,7 CoeficientedeGinidelarentadisponibledelos hogares,2010 Contribuciones seguridad social/Imposición indirecta, 2011 EU15: Inequality and social security contributions over indirect taxes Source: BBVA Research based on Boscá, Doménech and Ferri (2013) http://goo.gl/OaQIIQ EU15: current account balance and social security contributions over indirect taxes Source: BBVA Research based on Boscá, Doménech and Ferri (2013) http://goo.gl/OaQIIQ Social security contributions / indirect taxes, 2011 Social security contributions / indirect taxes, 2011 Ginicoefficientofhouseholdsdisposableincome,2010 Currentaccountbalance(%GDP),2007 Page 20 What else can be done? 2. A more efficient, growth enhancing tax system
  21. 21. Reforms in Spain, June 2014 Better product markets regulations and lower red tape costs -> incentives to increase firm size Better product markets regulations and lower red tape costs -> incentives to increase firm size Debt restructuring and refinancing: government participation, incentives for M&A and analysis of corporates’ default probability and ratings (big data + BoS?) -> ECB liquidity Debt restructuring and refinancing: government participation, incentives for M&A and analysis of corporates’ default probability and ratings (big data + BoS?) -> ECB liquidity Avoid procyclical regulation (smart banking recapitalization avoiding the tightening of credit conditions) and improve responsible payment culture Avoid procyclical regulation (smart banking recapitalization avoiding the tightening of credit conditions) and improve responsible payment culture Labor productivity and firm size, OECD Source: Boscá, Doménech, Ferri and Varela (2011) GDPperhourworked,2010 Employment share (%) in firms with less than 20 workers, 2006 Page 21 What else can be done? 3. Help firms hire, invest and export
  22. 22. Reforms in Spain, June 2014 Spain: new credit retail operations (% YoY) Source: BBVA Research based on BoS The Spanish economy is going through an unavoidable process of debt reduction … The Spanish economy is going through an unavoidable process of debt reduction … … which is compatible with credit provision for solvent projects … which is compatible with credit provision for solvent projects A turning point is already visible, together with an improvement in credit flows to households and SMEs, which will be strengthened in 1H14 A turning point is already visible, together with an improvement in credit flows to households and SMEs, which will be strengthened in 1H14 Page 22 -35% -25% -15% -5% 5% 15% 25% Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 %YoYvariation Data Trend What else can be done? 3. Help firms hire, invest and export
  23. 23. Reforms in Spain, June 2014 Complete the restructuring Efficiency Deleveraging of the private sector Quick resolution of intervened institutions, as international experience shows that public banks can be inefficient Above-average efficiency should not lead to complacency: networks should adapt to the new size of the market Compatible with the provision of credit to solvent demand. Recent changes in the insolvency law should ease corporate debt restructuring The restructuring is almost finished, but there are some pending issues: an efficient implementation of current plans is crucial for the success of the restructuring Page 23 AQR / Stress test The exercise is pivotal to eliminate any concern about the solvency of the European banking sector Promote banking disintermediation New legal framework for direct lending, non-bank lending, private equity funds What else can be done? 3. Help firms hire, invest and export
  24. 24. Reforms in Spain, June 2014 Spain: effect on exports of adopting best regulatory practices, large corporations (accumulated variation %, 1992-2008) Source: BBVA Research based on Correa-López & Doménech (2014) Thanks to the process of deregulation in the services sector since 1990, manufacturing exports are 50% higher Thanks to the process of deregulation in the services sector since 1990, manufacturing exports are 50% higher Had international best practices been adopted, exports would have been a further 18% higher Had international best practices been adopted, exports would have been a further 18% higher So, there is still scope for continuing to eliminate obstacles which make it difficult for companies to become more international So, there is still scope for continuing to eliminate obstacles which make it difficult for companies to become more international Page 24 0 5 10 15 20 25 Non-metalminerals Chemicals Textile Food Paperindustry Rubber&plastics Basicmetals Transportmaterial Electricequipment Othermanufactured goods Avf. effect: 18% What else can be done? 3. Help firms hire, invest and export
  25. 25. Reforms in Spain, June 2014 Spain: what else can be done? 4. Improve our competitiveness Effect on a firm’s exporting probability of an exogenous change in each determinant (%) source: BBVA Research based on ESEE, Fundación SEPI 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 Size Skilled labor Competition Foreign ownership R&D and adoption K per worker The most important determinant of internationalisation is a firm’s size The most important determinant of internationalisation is a firm’s size An increase of 10 workers (on average, from 50 to 60 employees) would raise the firm’s exporting probability by 1.69% An increase of 10 workers (on average, from 50 to 60 employees) would raise the firm’s exporting probability by 1.69% Barriers to a firm’s growth remain in the tax system or in regulation, especially in services or in the labour market Key to tackle them to improve growth incentives Barriers to a firm’s growth remain in the tax system or in regulation, especially in services or in the labour market Key to tackle them to improve growth incentives Page 25
  26. 26. Reforms in Spain, June 2014 Spain: what else can be done? 4. Improve our competitiveness EU: current account and unit labour costs change 4T08-2T13 Fuente: BBVA Research and Eurostat BE CZ DK DE EE IE EL ES FR IT CYLV LT LU HU MT NL AT PL PT RO SI SK FI SE UK NO -10 -5 0 5 10 15 20 -20 -10 0 10 20 30 Changeinthecurrentaccountbalanceover GDP(pp) Change in unit labor costs (%) Productivity gains since the beginning of the crisis have been significant (more than 12%) Productivity gains since the beginning of the crisis have been significant (more than 12%) and generalised, across both non-tradables and… and generalised, across both non-tradables and… … manufactures (growing by well over 20%)… manufactures (growing by well over 20%) Page 26
  27. 27. Reforms in Spain, June 2014 Spain: what else can be done? 4. Improve our competitiveness Spain: FDI (% GDP) Source: BBVA Research based on Banco de España Page 27 0,0 0,5 1,0 1,5 2,0 2,5 3,0 3,5 4,0 4,5 Average 2000-2008 Average 2009-2012 Strategic plan to improve competitiveness, …Strategic plan to improve competitiveness, … …, increase the attraction of Spain to international investors, in terms of physical capital … …, increase the attraction of Spain to international investors, in terms of physical capital … …, human capital and technological capital)…, human capital and technological capital)
  28. 28. Reforms in Spain, June 2014 Spain: what else can be done? 5. Improvements in the labour reform Spain: labour productivity and job creation (Onset of the recovery =100) Soure: BBVA Research 1. Employment response to growth: how will productivity of labour behave in the recovery? 1. Employment response to growth: how will productivity of labour behave in the recovery? 2. Fundamentals do not account for all the growth in private consumption 2. Fundamentals do not account for all the growth in private consumption 3. Export prices have offset the appreciation in the exchange rate. Can exports continue to hold up? 3. Export prices have offset the appreciation in the exchange rate. Can exports continue to hold up? More Employment More productivity Page 28 99 100 101 102 103 104 99 100 101 102 103 104 Productivityoflabour FTE Jobs Since 1Q94 = 100 Since 3Q13 = 100 (f)
  29. 29. Reforms in Spain, June 2014 Temporary Employment Rate (% of workers with a temporary contract) Source: BBVA Research Spain: what else can be done? 5. Keep improving the labour market UEM17 Bel Ger Est Irl Gre Spa Fra Ita Cyp Lux Mal Nl Aus Por Esl Slvk Fin 0 5 10 15 20 25 30 0 5 10 15 20 25 30 2012 2008 Page 29 Promote reforms that make it more attractive to sign open-ended contracts,… Promote reforms that make it more attractive to sign open-ended contracts,… …, improve the efficiency of both active and passive labour market policies… …, improve the efficiency of both active and passive labour market policies… …, and raise the quality of human capital…, and raise the quality of human capital
  30. 30. Reforms in Spain, June 2014 Page 30 Spain should almost double Active Labor Market Policies in order to converge to the OECD pattern, … Spain should almost double Active Labor Market Policies in order to converge to the OECD pattern, … … with the help of additional European funds (x4 + conditional on results), … … with the help of additional European funds (x4 + conditional on results), … … increasing efficiency (employment activation policies, public-private partnership, continuous evaluation, dual vocational training, etc. ) … increasing efficiency (employment activation policies, public-private partnership, continuous evaluation, dual vocational training, etc. ) Unemployment rate and expenditure in ALMP Source: BBVA Research based on Andrés and Doménech (2014) OCDE AUS AUT BEL CAN CHL CZE DEU DNK Spain (observed) EST FIN FRA GBR GRC HUN IRL ISR ITA JPN KOR LUX MEX NLD NOR NZL POL PRT SVK SVN SWE USA Spain (OECD pattern ) 0,0 0,2 0,4 0,6 0,8 1,0 1,2 1,4 1,6 1,8 2,0 0 5 10 15 20 ExpenditureinALMPin2010(%GDP) Unemployment rate in 2010 (%) EU funds? What else can be done? 5. Keep improving the labour market
  31. 31. Reforms in Spain, June 2014 Eurozone: unemployment rate and inflation Source: Eurostat and BBVA Research The regression coefficient of the inflation rate on the unemployment rate is equal to 0.125, statistically significant and robust to the exclusion of Cyprus, Greece and Spain. Page 31 If 3 pp of higher unemployment explain 0.4 pp lower inflation, inflation expectations are currently less than 1% -> drag for the recovery If 3 pp of higher unemployment explain 0.4 pp lower inflation, inflation expectations are currently less than 1% -> drag for the recovery Inflation expectations in swaps and trimmed mean inflation (optimal selection for inflation forecasts for the next 2/3y) slightly below 1% Inflation expectations in swaps and trimmed mean inflation (optimal selection for inflation forecasts for the next 2/3y) slightly below 1% Inflation above 1% in 2015 in our base scenario and the probability of deflation is low (<10%), but adverse shocks could increase this probability Inflation above 1% in 2015 in our base scenario and the probability of deflation is low (<10%), but adverse shocks could increase this probability What else can be done? 6. Europe has also to help
  32. 32. Reforms in Spain, June 2014 Spain: trend inflation (trimmed mean inflation, % y/y) Source BBVA Research based on INE -2 -1 0 1 2 3 4 5 6 feb-04 ago-04 feb-05 ago-05 feb-06 ago-06 feb-07 ago-07 feb-08 ago-08 feb-09 ago-09 feb-10 ago-10 feb-11 ago-11 feb-12 ago-12 feb-13 ago-13 feb-14 90CI 80CI 60CI 40CI 20CI Optimum trim Headline (official) Core (official) Page 32 Exchange rate appreciation -> costs in terms of external debt reduction Exchange rate appreciation -> costs in terms of external debt reduction Additional efforts in terms of internal devaluation and the reallocation of factors across sectors Additional efforts in terms of internal devaluation and the reallocation of factors across sectors Additional efforts in terms of the deleveraging process of the private and public sectors Additional efforts in terms of the deleveraging process of the private and public sectors What else can be done? 6. Europe has also to help
  33. 33. Reforms in Spain, June 2014 Page 33 Financial fragmentation still highFinancial fragmentation still high To reduce financial fragmentation the European banking union is crucial, as well as … To reduce financial fragmentation the European banking union is crucial, as well as … … measures to lower funding costs while banks absorb non-profitable loans, changing the composition of balance sheets with new credit … measures to lower funding costs while banks absorb non-profitable loans, changing the composition of balance sheets with new credit Interest rates on new bank lending (to non-financial corporations, less than 1 million €, less than 1 year, %) Source: ECB 2,00 2,50 3,00 3,50 4,00 4,50 5,00 5,50 6,00 6,50 7,00 Oct.2008 Feb.2009 Jun.2009 Oct.2009 Feb.2010 Jun.2010 Oct.2010 Feb.2011 Jun.2011 Oct.2011 Feb.2012 Jun.2012 Oct.2012 Feb.2013 Jun.2013 Oct.2013 Feb.2014 Euro Area Germany Spain Italy France What else can be done? 6. Europe has also to help
  34. 34. Thanks! Jorge Sicilia, Chief Economist, BBVA Group June 2014

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