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Euro area
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The Euro area: where is the road map?
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The European Union's institutional design does not seem to be enough to tackle the crisis.
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After the first six months of the year, it's time to think about the current situation of the economy and its prospects for the second half of the year. There are two main lines along which the euro area's activity is running. Firstly, the consensus that its institutional design is not enough to tackle the challenges posed by the current crisis. The absence of the instruments required to stop the problems often leads to new instruments being proposed. Over the last few months, the need for further fiscal union, as well as the possibility of a banking union with a single supervisor for all the financial systems of the euro area member states are two of the proposals receiving most attention.
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In any case, these proposals are still at a very early stage and, for the moment, they just raise further questions: Is there enough consensus to carry them out? How long would it take to implement them? Would it be enough?
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Within this context, the risk premia of some countries have increased, particularly in Spain and Italy. Neither the outcome of the Greek elections, which have led to the formation of a tripartite government between the conservatives of the New Democracy, the socialists of the Pasok and the Democratic Left party, all of them pro-euro, combined with the announcement that the European Union might revise the adjustment calendar to grant more time in order to help Greece with its fiscal commitment, have managed to quell the flames of uncertainty.
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Investors remain uneasy.
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On the other hand, the announcement of aid totalling up to 100 billion euros to recapitalize Spanish banks did not manage to calm the uneasy spirits of investors, who are unwilling to acquire public debt from peripheral countries.
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The second broad aspect is the worsening of the economic situation overall. Advance data highlight that, while the economy reported zero growth in gross domestic product (GDP) in the first quarter, its contraction could be substantial in the second quarter. Moreover, advance economic indicators suggest that the second half of the year is unlikely to provide any pleasant surprises.
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Growth in the euro area stalls.
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Economic slowdown is difficult to stabilize within a context of rising uncertainty that hampers aggregate demand. Economic activity slowed down in the first quarter of the year with negative growth of 0.1% year-on-year, as shown by the detailed figures for gross domestic product in the first quarter. Private consumption continues to adjust, shrinking by 0.6% year-on-year. Gross fixed capital formation has also decreased sharply, contracting at a rate of 2.2%, while at the end of last year it was growing at 1.0%. On the other hand, fiscal adjustment continues in the euro area with a slight shrinkage in public consumption of 0.3% year-on-year. Moreover, the cuts in the public expenditure should intensify over the coming quarters.
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The slowdown in global growth is hurting European exports.
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On the other hand, the moderate slowdown in the rest of the world can be seen in the drop in the growth rate for exports (2.9%), while the decline in imports (-0.3%) reflects the euro area's weak aggregate domestic demand. However, we need to point out that these GDP figures hide great geographical differences. For example, while Germany reported year-on-year growth of 1.2%, Italy saw a year-on-year contraction of 1.3%.
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Macroeconomic indicators point to a slowdown in activity.
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Unfortunately, leading economic indicators suggest that the euro area's GDP growth in the second and third quarter will be negative. From the point of view of demand, sales of retail and consumer goods still show a clearly downward trend. In April they fell by 1.0% compared with the previous month, bringing the year-on-year rate of change into the negative zone, reaching -2.5%. This drop is generalized throughout all components of the index, falling more than 2.0% in year-on-year terms, but is particularly sharp in the sale of fuels, down by 9.8%.
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Retail sales intensify their fall.
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This trend in sales of retail and consumer goods is a good indicator of how dynamic the economic situation is. Unlike the GDP figures, here the differences between the figures for retail sales in the different countries that make up the European Union are smaller. A breakdown by country shows an abrupt slowdown in the case of Germany, whose sales of retail and consumer goods in April went from growth of 1.6% the previous month to just 0.6% month-on-month. French households don't provide a very cheerful scenario either, with a sharp month-on-month fall of 1.5%, although Spain beats both countries contracting by 2.4%.
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This slowdown is likely to continue or, in the best scenario, there will be a certain lethargy in household decisions to consume due to the weakness of the labour market and uncertainty regarding the outcome of the European crisis. In fact, April's unemployment rate in the euro area was 11.0%, having revised the figure for the previous month from 10.9% to 11.0%. This is the highest figure since 1990. In April, the number of unemployed rose by 110,000 people and the total reached 17.4 million unemployed. Differences between countries have widened, ranging from the minimum reported by Austria, with unemployment at 3.9%, to Spain, with a rate of 24.3%.
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The unemployment rate remains at its highest level since 1990.
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Despite the increase in the consumer confidence index for the euro area from -19.9 points in April to -19.3 in May, this is a minimal change and the index is still below its historical average. This level suggests that families will continue to be prudent when taking spending decisions.
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Industrial production falls in April.
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From the point of view of supply, April's industrial production in Germany and Italy fell by 0.7% and 8.8% year-on-year, respectively. In the case of Germany, this is the first drop since 2009. Taking into account the fact that approximately 45% of German exports are for the euro area and that its economy accounts for around 27% of the whole of the euro area, this figure is a further sign of the increasing economic slowdown and points to a clear contraction in Europe's economy in the second quarter. The industrial production index for the whole euro area fell by 0.8% month-on-month and the year-on-year rate worsened compared with the previous month, standing at -2.3%.
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Within this context, entrepreneurs are likely to downgrade their investment decisions again, as shown by the decline in business confidence. Uncertainty regarding Greece and Spain, as well as news of China's slowdown in growth, have hurt both their perception of the current situation and expectations for the coming months. For example, the purchasing managers' index (PMI) for manufacturing in the euro area has fallen to 45.0 points while the PMI for services fell to 46.4 points, in both cases below 50 points, indicating economic contraction.
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In May, inflation decreases by two tenths of a percentage point to 2.4%.
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Within this context of economic weakness, it is normal for May's consumer price index (CPI) in the euro area to show growth of 2.4% year-on-year, two tenths of a percentage point less than the figure posted for the previous month. A breakdown of this figure indicates that the slowdown is due to a halt in rising prices for foods and energy. According to the forecast of the European Central Bank, the CPI will remain above 2% and, given the slowdown in the economy, further pressure on inflation seems unlikely.
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The absence of a route map for the euro area increases uncertainty regarding the economic future.
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In short, a route map would be of great use that could broadly outline the sequence of steps required to achieve the target of overcoming the crisis. The absence of this strategic plan is causing more uncertainty which has a negative effect on the slowdown in the economy in a vicious spiral.
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Germany
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Germany withstands the European recession
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The German economy is likely to slow up noticeably in the second quarter.
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The slowdown in world trade and increasing tension in the euro area have hit the recovery of the German economy over the last few months. Numerous indicators, both real and based on opinion, have worsened. Economic growth is therefore likely to moderate in the second quarter after an expansionary quarter-on-quarter of 0.5% in the period of January-March. For 2012, we forecast an annual increase in GDP of 0.8%, which contrasts with a decline in the euro area.
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Germany's inflation rate falls to below 2% and reinforces consumer confidence.
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Growth in the German economy is supported by domestic demand. Household consumption remains firm due to job creation and the prospect of an increase in disposable income. In fact, in April the level of employment continued to rise and the unemployment rate fell to 5.4%, the lowest figure for the last few decades. Demand for jobs, measured by the BA-X indicator, shows some loss of steam but is still at a high level. Also inflation, which fell below 2% in May for the first time since December 2010, was well received. Consumer confidence therefore improved a little in May and consolidated at a figure slightly above its historical average.
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Retail sales rose by 0.6% in April compared to the previous month in real terms, seasonally adjusted and corrected for calendar effects. However, automobile sales fell by 4.8% in May compared with the same month last year. On the whole, household consumption is expected to continue growing, albeit at a slow pace. With regard to investment, although it is being stimulated by the low interest rates, increasing uncertainty over the last few months is slowing this up. In April, the industrial production of capital goods posted a year-on-year rise of 1.3%, with a slowing trend.
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Higher wage rises in Germany could help to restart European growth.
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The foreign sector continues to reflect the competitive strength of Germany's economy, helped by the reforms undertaken over the last few years. In April, goods exports increased by 3.4% year-on-year, compared with a drop of 1.0% for imports. Compared with the previous month, foreign sales fell by 1.7% seasonally adjusted and corrected for calendar effects, while purchases dropped by 4.8%. The trade surplus was therefore 14.4 billion euros for the month, a year-on-year rise of 33.3%. For its part, the current account surplus increased by 49.3% compared to April 2010.
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From the point of view of supply, April saw a contraction in industrial production compared to the preceding month. In the two month period of March-April, secondary sector production rose by 0.4% compared with the same period last year. For their part, new orders dropped by 1.9% in April compared with the previous month, but in March-April they posted an increase of 2.6% on the two previous months, thanks particularly to demand from outside the euro area. Construction in April dropped by 6.0% compared with March, after a strong upswing that month. However, new orders in March recorded a year-on-year rise of 6.0% in real terms. In May, confidence deteriorated both in industry and in construction and services. However, it remained above normal levels in all these sectors.
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On the other hand, in the last few weeks analysts have been suggesting that the German economy should contribute more to restarting European growth which, in turn, will also benefit Germany. Greater wage rises have been proposed, insofar as permitted by increased productivity, to boost demand and thereby raise the sales of products of its trading partners in the euro area.
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France
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Change in direction for French economic policy
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French household consumption looks weak in the first few months of the second quarter but confidence picks up.
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Opinion indicators have tended to worsen over the last few months, affected by uncertainty surrounding the resolution of the euro area crisis, the largest trading partner for the French economy. Business confidence weakened slightly in June, moving further away from its average long-term level. Within this context, after the stagnation of French GDP in the first quarter, in the second we expect a similar situation, at the most with very modest growth. We maintain our forecast of slight expansion for the year as a whole.
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With regard to demand, household consumption looks weak in the first months of the second quarter. The consumption of goods rose by 0.6% in real terms in April compared with the previous month but this was due to energy, as the manufacturing component fell by 1.3% quarter-on-quarter. In May, sales of retail and consumer goods fell by 0.6% compared with the preceding month in constant values, and in the same month vehicle registrations were down 11.0% compared with twelve months before. However, consumer confidence, helped by the gradual drop in inflation, continued to improve in May, albeit below its normal level. On the other hand, investment prospects are not so good, given that the rate of production capacity utilization also continued to fall in the second quarter.
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Demand for French exports is supported particularly by non-European countries.
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Regarding the foreign sector, demand for exports was particularly supported by non-European countries. In the period of February-April, foreign sales of goods rose by 0.3% compared with the three previous months. However, the corresponding rate recorded by imports was 2.5%. Nevertheless, compared with a year ago, exports over the last three months available rose by 5.8% compared with 3.4% for imports.
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The panorama is similar from the point of view of supply. Industrial production increased by 1.5% in April compared with the previous month but the manufacturing component fell by 0.7%. In the period of February-April, manufacturing production also shrank by 0.7% compared with the preceding three months. Industrial orders posted a quarter-on-quarter increase of 1.7% in April thanks mainly to foreign demand, but deteriorated in May. Construction production rose by 2.3% in April compared with March but the sector's confidence continued to decline in June. For their part, new houses started in April recorded a year-on-year drop of 25.0%. The confidence of services worsened in June and widened its differential with its historical average. The outlook for industry and services was only moderately favourable in the short term.
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Credit to non-financial firms continues to decelerate in France.
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Within this context, unemployment continued to rise. The unemployment rate reached 10.2% in April. On the other hand, wage costs in the private non-agricultural sector slowed up, posting a year-on-year rise 2.1% in the first quarter.
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It should be noted that the intensification of the debt crisis for the peripheral countries of the euro area has hardly affected France's sovereign debt recently. At the end of the fourth week of June, the spread between French 10-year sovereign debt and its German equivalent was around 110 basis points, quite a long way below the level at the start of the year and far from the peak of 189 basis points set in November 2011. However, credit to non-financial firms in general continued to slow up and, in April, posted year-on-year growth of 3.2%, 0.7 points less than in March.
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Complicated balance between growth-oriented policies and achieving the target public deficit.
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The large parliamentary majority achieved by the government in the legislative elections reinforces the economic policy announced, emphasizing reorientation towards growth. However, there is the problem of balancing this with meeting the target public deficit of 3.0% in 2013 and 0% in 2017. A new financing policy has been proposed for the economy to boost growth, based on three main factors: the creation of a public investment bank, as well as reforming regulated savings and the banking system. But on the other hand, entrepreneurs have shown their concern that the tax hikes planned and possible restrictions on companies might jeopardize investment.
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Italy
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Exports slow up the drop in activity in Italy
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Detailed figures from Italy's national accounts system for the first quarter confirmed a quarter-on-quarter drop of 0.8%, although the year-on-year rate of change was revised downwards by one tenth of a percentage point to -1.4%. Domestic demand contributed -1.7 percentage points to the quarter-on-quarter change in GDP. Within this, investment was responsible for -0.7 points and household consumption -0.6 points. However, public consumption contributed 0.1 points. Nevertheless, the greatest contribution came from foreign demand, totalling 0.9 points.
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Economic indicators are worse and we revise slightly downwards our forecast for Italian GDP in 2012 to -1.8%.
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Over the last few months there has been a generalized deterioration in the economic indicators. The economic climate worsened in May, down to its lowest level since April 2009. The recession is therefore expected to continue. Given this situation, we have revised our forecast slightly downwards for the change in GDP for 2012, to -1.8%.
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With regard to the trend in domestic demand, household consumption continues to appear weak. Automobile sales fell by 14.3% in May compared with the same month the year before. Moreover, consumer confidence continued to fall in June, setting a new record low for the last few decades. This deviation can be explained by concerns regarding how the labour market is performing. In April, employment fell by 0.1% compared with the previous month, seasonally adjusted, and the unemployment rate continued to rise to 10.2%. In line with this, wages paid per hour worked are tending to slow up and their year-on-year change stood at 1.4% in April. The outlook for investment isn't favourable in the short term either, as company confidence is going through a slump.
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Italy's sub-balance of goods posts a surplus in April.
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Within this environment, the foreign sector is taking on the role of saviour but structural problems for the Italian economy's competitiveness are limiting its capacity to boost the economy. In April, the deficit of the current account balance of payments totalled 1.14 billion euros, down 76.5% compared to twelve months before. It should be noted that the sub-balance of goods posted a surplus of 596 million euros, compared with a deficit of 2,066 in April 2011.
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On the other hand, towards the middle of June the yield on ten-year government bonds returned to above 6% and the spread with German bonds increased, due to contagion from Greece and Spain. However, EU measures reduced tension and, by the end of the fourth week of June, the risk premium stood at 411 basis points, far from the record of 550 reached in November 2011. It's important for public debt yield not to rocket as the burden due to interest payments could be unsustainable.
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New package of economic policy measures to achieve the budget targets and bring about growth.
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To help achieve the budget targets and boost economic growth, with the aim of gaining market confidence, the government presided over by Mario Monti approved a new package of measures on 15 June. The following were among their decisions: company and real estate privatization, tax deductions for firms that require highly qualified workers, facilities to boost construction, relaxation of the law on creditors' meetings, facilities to finance infrastructures, reinforcement of the energy sector, greater transparency of public expenditure and making judicial procedures more agile.
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United Kingdom
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The UK: purchases of financial assets by the central bank?
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The deterioration of the United Kingdom's economy is confirmed.
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The publication of the breakdown for gross domestic product of the first quarter of the year led to doubts regarding the recovery of economic activity in the United Kingdom. GDP was revised downwards by one tenth of a percentage point to -0.3% quarter-on-quarter, leaving the year-on-year growth rate at -0.1%. The breakdown for this figure indicates that private consumption is slowing down from 0.4% quarter-on-quarter in the previous quarter to 0.1%. The surprise was caused by the rise in public expenditure, at 1.6% quarter-on-quarter. This situation should be reversed over the coming quarters due to the austerity policies implemented by the government.
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One worrying aspect is the drop in gross fixed capital formation of -0.3% quarter-on-quarter. Investment has now been in decline for two consecutive quarters in the United Kingdom. Nonetheless, exports provided a pleasant surprise with an increase of 0.1% quarter-on-quarter, in spite of the strong pound and the decline in growth in the main trading partners of the United Kingdom. However, imports grew by 0.4% quarter-on-quarter.
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Taking a look at the last four quarters, the economy of the United Kingdom has experienced a moderate recession. The fall in GDP reflects not only domestic obstacles (such as fiscal adjustment and the reduction of disposable income for households, among others) but also the impact of the situation in the European Union and the slowdown in the economy at a global level. With regard to the economic sectors, manufacturing and construction are the weakest, while services contributed to growth in the last quarter.
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Some economic indicators provide some hope, such as the sales figures for retail and consumer goods in May which, after a disastrous April, posted growth of 1.4% month-on-month. However, this improvement is unlikely to be sustainable as most leading indicators point in the opposite direction. One good example of this is the purchasing managers' index of manufacturers (PMI) for May, which fell to 45.9 points, below the level of 50 and indicating economic contraction. In fact, if the macroeconomic indicators as a whole maintain their current trend, we would be forced to adjust downwards our growth forecast for GDP for this year, which is currently at 0.6%. Given the seriousness of the economic deterioration, the British government, in combination with the Bank of England, announced plans to create a line of 10 billion pounds sterling to support credit to small and medium-sized firms and households.
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On the other hand, two decisions were taken in the monetary policy meeting of the Bank of England. The first, to keep the official interest rate at 0.5%. Second, five of the nine members voted against a proposal made by the governor of the central bank, Mervyn King, to increase the quantitative easing programme. The minutes recorded that most members believe that more monetary stimulus will be required over the coming months but they also highlighted that they would prefer to wait for the outcome of the legislative elections in France and Greece. All agree that one of the most serious threats to the British economy is the interaction between the uncertainty caused by the European crisis and its impact on the financial markets which, ultimately, could lead to a credit squeeze for firms and families.
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The members of the Monetary Policy Committee will have lots of margin to increase the quantitative easing programme as May's inflation figures reveal that the trend is still downwards. The consumer price index fell by two tenths of a percentage point, totalling 2.8% year-on-year, this being the lowest level in the last two and a half years.
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Emerging Europe
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Emerging Europe: three critical issues halfway through 2012
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In emerging Europe, the contagion of the debt crisis, Hungary's situation and economic slowdown are all of concern.
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With half of 2012 already gone, three issues continue to be fundamental in order to strike some sort of balance in the situation for emerging Europe: the intensity of the financial contagion entailed by the debt crisis, Hungary's situation and the extent of the slowdown in activity.
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Hungary and Romania are most affected by the episodes of financial stress occurring after the first Greek elections.
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Starting with the first of these issues, the trend in risk premia, measured by the value of credit default swaps for three-year sovereign bonds, indicates that the high financial stress caused by the combination of doubts regarding the Greek elections and the uncertainty regarding the situation of Spain and Italy (therefore between the beginning of May and now) has been more appreciable in the case of Hungary and Romania and more moderate in the case of Poland, the Czech Republic and Slovakia. The situation of these last three countries reflects minimal concern in terms of public sector solvency and few direct links (commercial or financial) with Greece. Romania contrasts precisely in this last aspect as the notable importance of Greek banks in its national banking market and close commercial ties are being reflected negatively in the country's risk premium.
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Hungary's negotiations with international bodies may be about to start...
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The case of Hungary is more complex. As is already known, because of relatively high external financing needs for 2012 (albeit far from any immediate inability to meet these needs), last November the government asked the European Union and the International Monetary Fund (IMF) for financial assistance. Moreover, in the longer term, the financial markets were concerned about one of the highest public debt situations in the region (in the order of 80% of GDP).
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...after legal changes related to the central bank and the announcement of new fiscal adjustment measures.
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After requesting multilateral financing, negotiations broke down when, at the end of 2011, the government took everyone by surprise and adopted a new regulation restricting the independence of Hungary's central bank. There were also signs that the budget was not being adjusted so that the European institutions, via an excessive deficit procedure, decided to withdraw part of the cohesion fund as from 1 January 2013.
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After months without details being given out, over the last few weeks two relevant events have occurred that could pave the way towards financial aid. Firstly, conversations between the central bank and the government have given rise to an amendment of the legislation that will be sent to the Hungarian parliament by early July at the latest. This legislation restores key powers to the central bank regarding monetary policy. Without waiting for this new regulation to be completely adopted, the government will immediately ask the IMF and European institutions for formal negotiations to be restarted.
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Activity still falls in the second quarter, intensifying the recession in Romania, Hungary and the Czech Republic.
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The second relevant change is the announcement of a series of budget measures for 2012 and 2013 that the Commission believes are adequate to ensure public deficit falls to a level lower than 3% of GDP. As a consequence, it has recommended that the excessive deficit procedure be suspended and the fine not be applied. All this explains the prevalent perception among financial investors, namely that, by the end of the summer, Hungary will have received international financial assistance.
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According to this interpretation, it is logical why, from mid-March (when the financial markets ruled out the possibility of negotiations starting up again) and up to 7 May, the Hungarian risk premium fell by almost 100 basis points. Unfortunately, on this date the result of the first Greek elections was announced, starting a period of strong risk aversion. Within this context, the trend in the risk premium indicates that investors include Hungary in the group of weak EU economies. This is due not only to the country's fiscal situation but also to expectations of a double dip recession.
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This last factor leads us to the third issue we mentioned at the beginning of this section. Given the notably uncertain macroeconomic scenario in the euro area, and with business indicators in the Union's main economies clearly deteriorating, the issue of determining the extent of the slowdown in activity in emerging Europe has become particularly difficult. It should be noted that the growth figures for the first quarter place Romania and the Czech Republic in recession (understood as two consecutive quarters with GDP in decline) and Hungary practically in this situation. Only Poland and Slovakia manage to escape this weak scenario.
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The latest activity indicators suggest that the second quarter is unlikely to improve on the first three months of the year. The most inclusive indicator of all, namely that of economic sentiment, worsened in April and May in all the countries we cover here, with the exception of Romania, which posted a moderate improvement. Deterioration is greatest in the case of Hungary and the Czech Republic. All this suggests that, in the second quarter, the Czech Republic will continue in recession while Hungary will enter into the same situation. Romania could be coming out of recession in this second quarter, while Poland and Slovakia will grow in quarter-on-quarter terms but at a low rate. From now on, a gradual improvement should be expected (certainly slow) in all these countries, with the probable exception of Hungary, which should fully experience the effects of its fiscal adjustment underway during the second half of 2012.
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Gains in competitiveness to restart the external engine
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Given the weak domestic demand foreseen for the coming years, all eyes are focused on how Spain's export industry is performing. Its dynamism will determine the economy's ability to recover. Undoubtedly, in an increasingly globalized market, gains in competitiveness will be a key factor in boosting exports. After years of marked deterioration, some progress has recently been seen in this respect. But there is a still a long way to go to improve competitiveness. So how far can these gains in competitiveness boost exports?
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The most frequent competitiveness indicators are usually calculated based on the trends in prices or the cost of labour per unit of output. An increase in these variables above the figure reported for other economies damages a country's ability to export and helps foreign products enter its domestic market. As a consequence, its relevance in terms of international trade can decline in the long term.
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This was the case of Spain's competitiveness from the time it joined the euro area. As can be seen in the left-hand graph below, both the price and cost-based indices coincide in pointing to a clear loss of competitiveness with regard to the rest of the countries in the European Monetary Union (EMU) between 1999 and 2008. However, some differences can be observed between them. In particular, the trend in relative unit labour costs (ULC) is clearly more volatile than that of the price indicators. With regard to the latter, the increase in the price of Spanish goods was 10% higher than the rise for European goods up to 2008. This differential fell to 5% in the case of the price of exported goods, so that the loss of competitiveness among non-tradable goods was greater than among tradable goods during the boom years.
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That's why, given the importance of being able to reflect an economy's real competitiveness more accurately, some studies propose using disaggregate competitiveness measures that take into account the different composition of the goods being traded.(1) Other procedures also help to refine the calculation of competitiveness as they differentiate between the destinations of a country's exports and its rivals in these countries. This is the case of real effective exchange rates that weigh up relative prices, or costs, and exchange rates according to each country's presence in the main export destinations. The trend in these more complex measurements also reveals a loss of competitiveness during a large part of the last decade.
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But, within this context, the relatively favourable trend in Spain's share of exports in world trade as a whole still comes as some surprise. Since Spain joined the European Monetary Union in 1999, its export presence in global trade has fallen by just 2 tenths of a percentage point, down to 1.7%. This contraction, close to 10%, was practically half the one recorded by the export share of the euro area as a whole which, in 2011, stood at 26.3% compared with 32.7% a decade ago. This better performance could be due to the existence of other factors, in addition to price-competitiveness, which also influence a country's export share, such as the quality of its exports, sector specialization or geographical destination.
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(1) See Crespo Rodríguez, A et al. (2011), «Indicadores de actividad: la importancia de la asignación eficiente de los recursos», Bank of Spain, Boletín Económico, December, and De Broeck, M. et al. (2012), «Assessing Competitiveness Using Industry Unit Labor Costs: an Application to Slovakia». IMF Working Paper.
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This result, however, cannot hide the fact that Spain's sales abroad are performing below their potential. One clear example is the low relative weight of our goods exports in relation to GDP, specifically 20.6% in 2011. This figure is the lowest among the four main economies of the euro area, far from the 43.0% in Germany or the 34.0% for the monetary union as a whole.
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Our exports therefore have plenty of room to grow. And improved competitiveness would undoubtedly help to achieve this. Actually, according to the main econometric models, after the trend in world trade, competitiveness is one of the main factors underpinning the performance of Spanish exports.(2) In fact, according to these estimates, a 1% increase in competitiveness compared with industrial countries, measured using the real effective exchange rate based on prices, represents a long-term rise in the level of real exports of between 0.6% and 1.3%. This means, for example, that if the competitiveness index returned to its level before Spain joined the euro area, real exports would increase by between 8.4% and 18.3% compared with the level of 2011. In this case, the relative weight of goods exports would rise to a range of between 22.3% and 24.4% of GDP, a level higher than France's and on a par with Italy's.
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(2) See García C. et al. (2009), «Una actualización de las funciones de exportación e importación de la economía española», Bank of Spain. Documento de trabajo 0905.
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This scenario is based on a 16% improvement in competitiveness compared with 2008's level. But is such a large correction possible? Over the last 50 years, reductions in the competitiveness index of over 15% have been observed. On some occasions preceding the current decline, these decreases were the result of devaluations of the peseta, specifically in 1967, 1979 and 1992. However, these gains in competitiveness were transitory. In the medium term they were wiped out by the high inflation resulting from the currency's loss of value. This phenomenon can be clearly seen during the years after the devaluations of 1967 and 1982. After the devaluation of 1995, however, this effect is not observed. This would be due to inflation being controlled at comfortable levels as a result, largely, of greater fiscal discipline.
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Today, the presence of an independent European monetary authority means that devaluations cannot be used as a means of quickly improving competitiveness. Reductions in the indicator are therefore slower than they used to be. The above graph confirms this. Between 2008 and January 2012, the correction in the effective exchange rate was 5%, far from the falls observed previously. However, the effect of this correction is likely to last longer as it is due to structural factors.
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In short, there is a lot of room for improvement. However, structural reforms have to be undertaken in order to make progress in this direction. The latest reports by the European Commission and the International Monetary Fund place particular emphasis on this aspect. Among the measures they propose, of note are those that increase competition in the markets of goods and services, facilitate the reassignment of resources towards the sectors of tradable goods, boost innovation, help firms to grow and eliminate frictions in the labour market. Undoubtedly this is no easy task but its benefits, by consolidating the export industry as the driving force behind Spain's economy, could be great.
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This box was prepared by Joan Daniel Pina
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European Unit, Research Department, "la Caixa"
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