Figures of Spanish unemployment are overwhelming and the country is more indebted than last year, but the labour market reform has removed inefficiencies and the deficit will go on reducing. The financial system was a ticking “time bomb” and now it has been “set up”. Considering that Italy’s situation can somehow ease Spain’s is “too optimistic”, though.
Is the rising Italian risk premium more political than economic? What are the Italian economy’s strengths and weaknesses?
I do not think that risk premium is more political in Italy than in Spain. It is just that its problem is bigger due to last electoral results, which have led the country to a situation of ungovernable nature, so that the risk premium, as a consequence, has reacted negatively. This worries us because it would make impossible, for instance, to sign a memorandum of understanding in the case Italy needed activate the European Central Bank’s Outright Market Transaction [to purchase short-term Italian bonds]. But it is very unlikely, the instability is considered to be the main weakness by markets. The major advantage of Italy is that the government started reforms some time ago, and keeps the deficit under control.
Whatever happens in Italy, will be Spanish economy left in a more comfortable situation in comparison to Italy’s, or is it a very optimistic view?
It is very optimistic, indeed. Spain is still searching for its business model. It is true that Spain progressed better than Italy during the previous years of the current crisis, but also that the cause of our growth, the real state boom, was the root of many of the difficulties we are suffering now, and Italy did not have this problem. It is true, as well, that both countries need to find a different way to grow. Italy has an industrial sector that Spain has not, so that it will be more difficult for us to start growing. And of course, we cannot ignore that Italy’s unemployment rate is some 11% compared to 26% in Spain, and the public deficit stands at 3% against the Spanish 6,7%.
France seems to be in the last years losing its position as a core economy. Did Hollande’s proposals fail?
France is entering into negative GDP growth and that can be considered a fail of Hollande’s term in office, yes.The truth is that France has been losing competitiveness and its private sector is becoming gradually poorer against a growing public sector, which has been Hollande’s bet, and apparently, it is not working. The labour market has registered over 10% of unemployment, a record not seen since 1999, because they have the same problem that Spain: high salary costs and a rigid jobs market which slows down mobility and new hiring.
Which would be the best option to give rescued Ireland and Portugal access to the primary market?
We will have to watch the market to see investors’ reaction. It would be a key to choose a moment that coincides with a scenario of maximum calm. If Portugal and Ireland could manage on their own again, periphery countries, including Spain, will be able to regain investor confidence.
Was it a good choice for Spain to avoid a Greek or Portuguese-style bailout?
Yes, it was. To accept a rescue would have conditioned the Spanish government’s decision making. Tax hikes would have probably been much higher than the one imposed in 2012. We have to remember that the Troika is a creditor to the country receiving cash, so that it will make all efforts necessary for this country to repay the debt–in my view, the negative impact of those tax increases has not been fairly distributed. Furthermore, the stigma of being a rescued country would have postponed the way out of the crisis.
Minister De Guindos recently said that the risk premium could fall to 200 basis points in the second quarter of the year. Some analysts think that it would stabilise at 250 bp, others say that Spain will be forced to accept a rescue after a rating cut…
I do not see any sign at this very moment that makes me think there is a fair possibility of a rescue. The economy is not better than last year, but it is in better conditions to start a recovery. I mean, the truth is that the number of unemployed go on increasing, but the labour reform has slightly relaxed a rigid and inefficient market. Spain’s deficit is bigger, but it would go on reducing as the economy grow. The financial system was a ticking time bomb but now it is reorganised. I think it is a mistake to analyse just the data and nothing else. On the other hand, I find hard to believe that we’ll have a risk premium of 200 bp by June; I think it will be around 300 bp.
In 2012, the Spanish public deficit was 6.7% of GDP.
This figure is very surprising, but not impossible. However, the logical thing is that we see some revision upwards in the next months.
What do you think about the European Central Bank’s decision to maintain interest rate as well as not to offer further refinancing loans to banks?
It is a nonsense to think that the ECB must reduce rates or take non conventional measures. The eurozone’s situation does not require that, and we all know that the the ECB does never exceed monetary policies that are too expansive. Also, European banks are beginning to repay back to the ECB previous short-term loans, so that a new round of credits does not make sense.
At the other side of the Atlantic, the Dow Jones reached high record levels after five years of crisis. Is it a solid rally with the fiscal cliff and the “sequester” still unresolved?
About 80% of these increases are due to the Fed’s monetary policy. It is also important to bear in mind that companies’ results have closed a positive term. However, the market is ignoring the effect of the “sequester”, which could cost half a point this year to the United States’ GDP, as well as the impact of the budgetary adjustment, that will bring again a debate about the debt ceiling. The last time we saw these negotiations was in summer of 2011, and as a consequence, the US lost its AAA rating by Standard&Poor’s. We will now have to keep an eye over the S&P 500, which is only 1.5% behind to reach record highs, and is the index that investors are really interested in.