A crucial four months

With the end of the summer interlude, Spain's economy is now facing some decisive months. The latest data from the last few weeks have been broadly encouraging, both business and employment indicators. This positive assessment continues even when the figures are seasonally adjusted. The economy seems to be stabilising, with the decline in its main component, private consumption, easing off, now almost entirely counteracted by the boost from components that should become the driving force for the revival, namely the foreign sector and investment in production equipment.

A similar trend in the rest of the euro area, and especially in Germany and France which are already seeing positive quarter-on-quarter growth figures, could serve as additional support for this tentative start to a recovery.

Such stabilisation is due to the success of the economic policies applied. Firstly, the European Central Bank's lax liquidity policy and explicit support for the irreversibility of the euro. And secondly, but by no means less importantly, the market's perception that the euro area's adjustment policies are starting to succeed. Correction of intra-euro area payment imbalances is occurring surprisingly quickly and the fiscal and banking imbalances are finally being credibly dealt with in most countries. The adjustment policies have been and continue to be tough but European democracies, albeit with visible difficulties, seem to have been able to accomplish this huge effort while maintaining institutional and social equilibrium.

It is important to bear in mind, however, that Spain's macroeconomic situation is still very fragile and could go awry due to several external factors over which the country has little control. From the conflict in Syria, with potentially adverse effects on oil markets, to developments in the emerging countries which, as has become evident over the last few weeks, are extremely sensitive to the US Fed's policy to withdraw its stimuli. Moreover, we cannot rule out surprises within the euro area in the process of institutional improvements to Economic and Monetary Union, or in one of the countries that have been bailed out.

In any case, the main risks hovering over the process of rebalancing and relaunching our economy come from within. And we can, and must, act on these with all speed, irrespective of international events.

The first risk lies in not reaching the targets set for budgetary adjustment and the data published to date show that this process will be particularly demanding during the last few months of the year. It is vital to achieve these targets as, in the area of fiscal consolidation, Spain still has to regain a lot of the credibility it lost. The relaxation in the deficit reduction targets should not be accompanied by significant deviations from the agreed goals.

The second risk is of complacency in reform policy. If anything, the drive to reform must intensify. Although this must act on numerous fronts, two are particularly significant: the labour and fiscal areas, associated in turn with the reform of public administrations and the pension system. Labour reform is crucial for the simple reason that, even if the economy starts to post positive growth figures, Spain will still have an unacceptably high unemployment rate.

Fiscal reform is also critical because one of the many lessons that can be learned from the crisis is that Spain's taxation system was not consistent with the requirements of its economy and society. And, in fact, we have dedicated the main body of this latest edition of the Monthly Report (the Dossier) to taxation.

Jordi Gual

Chief Economist

31 August 2013