The external sector, key to the recovery

  Throughout the boom years that preceded the current economic crisis, the Spanish economy witnessed an extraordinary increase in its current account deficit. As from the end of the 1990s, the surplus gave way to increasing deficits, reaching a peak of 10% of gross domestic product (GDP) in 2007. Spain thereby became the second country in the world with the greatest external imbalance in absolute terms, only exceeded by the United States. The economic recession has given rise to an abrupt and substantial correction in this deficit. Last year it fell to 3.5% of GDP and this year we expect it to be close to 2%. What has changed?

  Firstly, the slump in imports. The extreme weakness of domestic demand, both for consumption and particularly for investment, has brought about almost a complete halt in the purchase of goods from abroad. Secondly, we should also note the good performance by exports. This is due both to the improved real exchange rate, a relevant indicator of trends in external competitiveness, and the efforts being made by firms to diversify towards more dynamic markets with great economic potential. The real exchange rate grew by 5% between 2008 and 2011 but still has a long way to go before the current weaknesses can be corrected. Lastly, the improved surplus in the services balance has also contributed to the compensation provided by the external sector, both by exporting tourism services and also corporate services.

  Maintaining this push from exports will be key to exiting the crisis. Within a context of macroeconomic adjustments and the deleveraging of households and firms, good performance on the part of exports of goods and services is crucial for growth in GDP and employment. To do so, exports need to grow at approximately 7% annually. As Spain can't resort to exchange rate, monetary or trade policies, it is vital to encourage the structural reforms required to improve competitiveness via flexibility, innovation and human capital.

  This is a difficult but attainable feat. We must not forget that, to date, Spanish exports have performed better in world trade as a whole than the euro area on average. However, Spain's share is still very small considering the size of its economy, so the potential level is significantly higher than the current figure.

  It is also fundamental to improve the external sector in order to break the vicious circle that has emerged between liquidity problems and doubts regarding the country's solvency. Successive current deficits have been financed via growing external debt. At the end of 2011, this debt totalled the equivalent of 221% of GDP. The net debt, i.e. deducting foreign assets, was 92% of GDP. This is one of the highest debtor positions in the world in terms of GDP, only surpassed in the euro area by Ireland and Portugal. Containing the current deficit has helped to stabilize the net debt over the last few years but, in order to reduce it, substantial surpluses will be required in the trade of goods and services over the coming years. Only in this way will we be able to reduce the debt, contain the cost of financing it and recoup the confidence lost among international investors.

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