Testimony by Mr Miguel Fernández Ordóñez, Governor of the Bank of Spain, before the Parliamentary Budget Committee in relation to the draft State Budget for 2011, Madrid, 5 October 2010.
Ladies and gentlemen,
I appear before this Committee in connection with Parliament’s discussion of the State Budget for 2011. In my view, this Budget will be crucial for Spain’s economic future and it will be subject, more than on any other occasion, to in-depth analysis and close scrutiny not only by Spanish society as a whole but also by the main supranational agencies, by our European partners and by the international financial markets on which Spanish households, firms and governments obtain the funds they need to finance much of their activity.
As is known, Spanish budgetary policy responded most forcefully to the global economic and financial crisis, in step with the support programmes for the financial sector, coordinated at European level, and with the firm, resolute action by the European Central Bank, which drastically cut its interest rates and implemented a wide range of conventional and non-conventional measures to prevent liquidity tensions from ultimately shutting down the European financial system.
The fiscal policy response undoubtedly contributed to softening the adverse effects of the crisis on the Spanish economy. Set against this, however, the surplus on public finances rapidly turned into a burgeoning deficit and public debt moved into an accelerating dynamic which, had it not departed from relatively comfortable levels, would have also placed the debt ratio at excessively high levels.
Such was the position of our public finances when the Greek fiscal crisis, which first became discernible in late 2009 and ultimately burst onto the scene in spring this year, shifted the focus of international economic and financial attention onto the situation of public finances in a broad set of countries.
Investors rapidly took stock of the potential problems of unsustainability implicit in Greek deficit and debt dynamics and they began to closely examine the possible existence of similar risks in other Member States. The upshot was that the instability on sovereign risk markets spread to the European economies evidencing the greatest vulnerabilities, whether because of the speed of the recent deterioration in their public finances or because of the scale of the macroeconomic imbalances that had built up before the crisis.
I honestly believe that the financial tensions in recent months in Europe, in general, and in our country, in particular, were largely due to an overreaction by the financial markets, which were unable to appreciate the strengths of our economy and of our public finances.
But I likewise believe it would be a serious error to attribute the bouts of exceptional tension witnessed during these months solely to the gregarious behaviour of the financial markets. Indeed, the tensions were amplified by the weaknesses of European institutional arrangements and by the prevailing doubts over the willingness and ability of national governments to tackle the structural and budget deficit problems of their economies.
Evidently, the Greek crisis has highlighted the incapacity of the Stability and Growth Pact and, more generally, of the European economic governance framework to prevent the excessive build-up of imbalances and to pursue timely corrective action.
As you know, the European authorities have reacted to this need by initiating a deep-seated review of European governance mechanisms, some of the results of which are already coming to light. It can thus be said that as a result of this crisis, economic policies and, in particular, the fiscal policy of the EU Member States, will be subject henceforth to closer and more detailed control by the European institutions so as to anticipate and forestall inconsistencies and imbalances. Any build-up of the latter will ultimately entail major costs not only for the countries concerned, but also for the European single currency project.
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