Reforms in Spain

Reforms in Spain

Jorge Sicilia, Chief Economist, BBVA Group

June 2014

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)


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


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


..., 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


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

Deficit 2011

Pasive fiscal policy

Fiscal effort

Deficit 2012


Fiscal effort

Deficit 2013


Fiscal effort

Deficit 2014


Fiscal effort

Deficit 2015

2012 2013 2014 2015


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 solutionsare possible, except for paying current pensions through a structural deficit

Distinguishes between the debates on sustainability and sufficiency. All solutionsare 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 productivityAligns 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


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 lostWithout the wage moderation of 2012, an additional 220K jobs would have been lost


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)


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)


Which reforms has Spain implemented? 3. The reestructuring of the banking system

Page 11

2008Creation of FAAF and increased coverage of DGF

2009Creation of FROB. Injection of 10bn €into savings banks

2010Reform of legal framework of savings banks

2011Minimum capital requirement of 8% (general) or 10%

Phase 1 of the restructuring

Feb-May 2008New regulation: 80bn € in provisions and capital buffers

June-Sep 2012Financial assistance program, MOU and capital needs by bank

Post-MOUCreation of Sareb and transfer of problem assets

Post-MOULiability management exercises (burden sharing)

Phase 2 of the restructuring: focus on asset valuation


Which reforms has Spain implemented?3. The reestructuring of the banking system

Page 12

Number of Spanish financial entitiesSource: BBVA Research based on Bank of Spain

81

45

7

41

115

Creditcooperatives

Savings banks Commercialbanks

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 banksSource: BBVA Research based on Bank of Spain


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

QQ+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


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


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


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 EU8Source: Andrés and Doménech (2012)

80

85

90

95

100

105

Pico 2 4 6 8 10 12 14 16 18

años

Niv

eld

ee

mp

leo

alp

rin

cip

iod

ela

cri

sis

=1

00

España,2007-2025UE8,2007-2011 USA,2007-2014

USA,1929-1940

EU8: Sweden, UK, Denmark, Finland, Germany, Netherlands, Austria and Belgium.

+2% acc. in 2014-5

years

Peak

Employment level at the beginning of the crisis = 100

Page 16


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

General government net lending (% of GDP)

Unemployment rate (%)*

Page 17


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 E

xpenditures and revenues (euros of 2013)

General government net lending (euros of 2013)

Budget balance

(right)

Total revenues

Non-interest spending

Total expenditures

Page 18

What else can be done?1. A smart fiscal consolidation


EU15: Unemployment rate and social security contributions over indirect taxesSource: BBVA Research based on Boscá, Doménech and Ferri (2013)

BE

DK

DEIE

EL

ES

FRIT

LUNLAT

PT

FI SEUK

4

7

10

13

16

19

0,5 0,7 0,9 1,1 1,3 1,5 1,7

Ta

sa d

e d

ese

mp

leo

me

dia

(%

), 2

00

7 -

en

e.

20

14

Contribuciones seguridad social/Imposición indirecta 2011

More employment, GDP and private consumption -> more public revenuesMore 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?)

Average unemployment rate (%), 2007 –jan.2014

Social security contributions / indirect taxes, 2011

Page 19

What else can be done?2. A more efficient, growth enhancing tax system


BEDK

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

Ba

lan

za p

or

cue

nta

co

rrie

nte

so

bre

PIB

, 2

00

7

Contribuciones seguridad social/Imposición indirecta

2007

BE

DK

DE

IE

ELES

FRIT

LU

NLAT

PT

FISE

UK

y = 0,0795x + 0,2144

R² = 0,80170,23

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

Co

efi

cie

nte

de

Gin

i de

la r

en

ta d

isp

on

ible

de

los

ho

ga

res,

20

10

Contribuciones seguridad social/Imposición indirecta, 2011

EU15: Inequality and social security contributions over indirect taxesSource: BBVA Research based on Boscá, Doménech and Ferri (2013) http://goo.gl/OaQIIQ

EU15: current account balance and social security contributions over indirect taxesSource: 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

Gini coefficient of households disposable income, 2010

Current account balance (% GDP), 2007

Page 20

What else can be done?2. A more efficient, growth enhancing tax system


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 probabilityand ratings (big data + BoS?) -> ECB liquidity

Debt restructuring and refinancing: government participation, incentives for M&A and analysis of corporates’ default probabilityand 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, OECDSource: Boscá, Doménech, Ferri and Varela (2011)

GDP per hour worked , 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


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

% YoY variation

Data Trend



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 testThe 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



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% higherHad 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-metal minerals

Chemicals

Textile

Food

Paper industry

Rubber & plastics

Basic m

etals

Transport material

Electric equipment

Other manufactured

goods

Avf. effect: 18%



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 Foreignownership

R&D andadoption

K per worker

The most important determinant of internationalisation is a firm’s sizeThe 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 marketKey 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 marketKey to tackle them to improve growth

incentives

Page 25



EU: current account and unit labour costschange 4T08-2T13 Fuente: BBVA Research and Eurostat

BE

CZ

DK

DE

EE

IE

EL

ES

FR

IT

CYLV

LT

LU

HU

MTNL

AT

PL

PT

RO

SI

SK

FI

SE UK

NO

-10

-5

0

5

10

15

20

-20 -10 0 10 20 30

Change in the current account balance over

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



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)


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

Productivity of labour

FTE Jobs

Since 1Q94 = 100 Since 3Q13 = 100 (f)


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


Page 30

Spain should almost double Active LaborMarket Policies in order to converge to the

OECD pattern, …

Spain should almost double Active LaborMarket 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 ALMPSource: BBVA Research based on Andrés and Doménech (2014)

OCDE

AUS

AUT

BEL

CANCHL

CZE

DEU

DNK

Spain

(observed)

EST

FIN

FRA

GBR

GRC

HUN

IRL

ISR

ITA

JPNKOR

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

Expenditure in ALMP in 2010 (% GDP)

Unemployment rate in 2010 (%)

EU

funds?

What else can be done?5. Keep improving the labour market


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 pplower inflation, inflation expectations are

currently less than 1% -> drag for the recovery

If 3 pp of higher unemployment explain 0.4 pplower 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


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



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


Thanks!

Jorge Sicilia,Chief Economist, BBVA GroupJune 2014

Reforms in Spain

Economy & Finance

fiscal policy

fiscal authority

temporary spain

sizeable fiscal adjustment

public deficit

public system

gdp source

public workers