The adjustment of the external imbalance in the Spanish economy

There are several facets to the highly complex economic crisis that Spain has been undergoing in recent years. And it is in the external sector that many of the features characterising this crisis and the requirements for overcoming it can be found. Many reports have analysed how the long expansionary phase from the mid-1990s until 2007 led to a growing loss of competitiveness of Spanish production, a high external deficit and high indebtedness vis-à-vis the rest of the world. Although some of these developments have begun to be corrected, the deterioration of expectations triggered by the crisis has affected perceptions about the sustainability of the external position, acting as a drag on the adjustment phase and increasing the Spanish economy’s vulnerability. In particular, the deepening of the sovereign debt crisis has made external financing one of the crucial problems of the Spanish economy in the current situation. The deterioration of confidence – possibly both in the economic outlook for Spain and in the current institutional framework of the euro area – has stemmed the flows of external refinancing of the economy, resulting in high net outflows in recent months that have had to be covered by credit institutions increasingly resorting to the Eurosystem for financing. In the European arena, from 2012 the framework for coordination of the EU’s economic policies has been strengthened considerably through the macroeconomic imbalance procedure, whereby not only fiscal policy is subject to close surveillance by the European authorities, but also national macroeconomic policy as a whole, in order to detect the existence of imbalances in areas such as private debt or the external sector, to propose solutions and monitor that they are implemented [see Matea (2012)]. Thus, on 14 February the European Commission published the first Alert Mechanism Report, in which Spain was included among the countries in which, due to the severity of the imbalances that had built up, a subsequent in-depth analysis should be performed. On 30 May, the European Commission published this exhaustive examination of Spain (an In-Depth Review) which concludes that the imbalances of the Spanish economy are very serious and need to be addressed urgently. The imbalances were not described as excessive in any country – which would have meant that the corrective part of the procedure would have started – however, Spain and Cyprus were assessed to have the most severe macroeconomic imbalances. This means that Spain’s economic imbalances will continue to be closely monitored by the European authorities. The external imbalance will occupy a key place in this procedure and, consequently, changes in the current account balance, the performance of exports, the competitiveness trajectory of national production and the correction of high indebtedness vis-à-vis the rest of the world will be meticulously examined. The crucial role that improved competitiveness should play in Spain’s economic policy strategy has been analysed in depth in Chapter 2 of the Banco de España’s Annual Report, 2011, whereas developments in the current, capital and financial account balances have been described in detail in the Balances of Payments report which is published annually. This article reviews progress in the correction of the external imbalances throughout the adjustment phase which began in 2008. Firstly, the decline in the external deficit since 2008 is analysed, seeking to identify the determinants of that improvement and the products and areas in which Spanish production has been more competitive. Secondly, the external financing of the Spanish economy during that period is examined and, finally, to conclude, the ways of pressing ahead with the correction of the external imbalances and consolidating the sustainability of Spain’s external position are discussed.