This is an edited transcript of an interview with Luis de Guindos, Spain’s economy and competitiveness minister.- How are you going to achieve growth and job creation at the same time as austerity?
- First, the reduction of the public deficit, which is unavoidable. You have seen that the first reaction of the Spanish government to the fact that the deficit outcome [for 2011] was about 8 per cent [of GDP] … the first reaction of the government was obviously to apply an adjustment programme of €15bn [$19bn], or about 1.5 per cent of Spanish GDP, to send a very clear message of the government’s commitment to budget consolidation, austerity and so on. As you know this is divided between €9bn of spending cuts and €6bn in personal income tax rises ... Evidently increasing income taxes for a centre-right party is a painful measure, but obviously essential. Spain could not come out within two or three weeks with a [deficit] figure of about 8 per cent, without a significant budgetary adjustment. So there is a real commitment. From there, the budgetary policy that we have to deal with this is Spain’s budgetary stability programme which we have to present in the months ahead in agreement with Brussels. From March, from the budgetary stability programme, we set out the path of the public deficit, and [in] March we present our national budget. This €15bn of adjustment already allows the next budget to converge with the numbers to which we committed ourselves, to converge towards the 4.4 per cent [of GDP deficit target for 2012] ... There, and this is especially important, a particularly intense effort will be demanded, in terms of budgetary adjustment, of the autonomous regions. And following the amendment to the constitution, on the issue of budgetary balance, the organic law will establish strict instruments of control over the budgets of the autonomous regions, which form an important part of the overshoot we had last year.
- This law is separate from the budget law in March?
- Yes, the organic law on budgetary balance. What’s important is that there will be additional instruments of control and budgetary adjustment for the finances of the autonomous regions … The liquidity difficulties are truly an opportunity to impose hard conditions and measures in terms of reining in the deficits of the autonomous regions.
- Is the 4.4 per cent of GDP target [for the 2012 deficit] still valid?
- The Spanish government maintains its budgetary commitments. Obviously we’ll have to see – it’s an important issue, we have already taken 1.5 percentage points of measures – but there are still differences and we’ll have to see how it’s distributed between the different administrations. But our commitment stays.
- Are there talks with the IMF or the EU on changing that given the size of the adjustment needed?
- Any modification of the budgetary objectives … must be discussed at the level of the European Union, never at the level of Spain, so we will join the general trend. What is important is that in addition to the very notable budgetary adjustment of the central government, the autonomous regions will have to make a very big adjustment and with the new organic law I mentioned there will be very intense and strict control from the Spanish treasury and the Spanish budget ministry.
- Some people won’t like it.
- It will fundamentally be to their benefit.
- But I must emphasise again, that it’s a huge adjustment required, perhaps €40bn, especially when GDP is expected to fall?
- It is an important issue, obviously, but the initial idea of the Spanish government is to fulfil its commitment. For that we are fully aware that you must take important measures from the point of view of structural reforms, and furthermore very quickly, and we have a demanding agenda both as regards timing and content.
- Where will the growth come from, where will employment come from? Is labour the priority?
- Labour reform and the financial sector, the banking industry. So the central point of the labour reform has to be modification of the system of collective bargaining in Spain. In Spain, the way companies adjust to a fall in demand is always through layoffs, essentially of those on temporary contracts, who are mainly young people, which explains why there is almost 50 per cent unemployment among the young. There is a problem from the point of view of the capacity of Spanish companies to deal with a fall in demand. In Spain, the fall in GDP during the crisis was average, but no other country, not even those bailed out, suffered such a deterioration of the labour market. Yes, it has a lot to do with construction, where adjustment has already happened, but also with the ability of companies to adapt to conditions. Firing people is the only way out. The modification would be to give much more emphasis to company wage agreements, in each company. Now in Spain what you have is sectoral wage bargaining agreements.
- It’s a bit like the UK in the 1960s?
- It’s a legacy of Francoism and the single trade union, it’s corporatism … If you have to have sectoral agreements, what ought to be possible is that companies can detach [descolgarse] themselves, that they can set their own conditions, that they have a way out, if they think that the working hours, salary conditions and so on are not suitable for them. In Spain, there have been cases where companies have suffered a 50 per cent fall in demand for their products and the agreement has imposed on them a salary increase of CPI [inflation] plus 2 per cent. The only alternative that companies had was to lay people off. This is what needs to be changed.
- And financial reform? Spanish bankers are talking of having to add 20 per cent to provisions for bad property assets.
- Let’s see, Spanish banks, with the injection of liquidity from the ECB with full allotment for three years and so on, liquidity has ceased to be a big problem ... So the issue is the problem of valuation of assets, toxic assets, of real estate exposure. I think the government will demand – there are three priorities. First, you must proceed with the clean-up [of balance sheets] and do so in a clear and very conclusive way, especially with the most problematic asset which is land. Two, this must be accompanied by a new round of consolidation, above all in the cajas de ahorros [savings banks]. This process of consolidation allows you to rationalise, reduce capacity, make efficiency synergies, etc. Three, it’s about minimising the cost impact on the Spanish treasury. We cannot contaminate the sovereign risk with the banking risk.
- But it’s already contaminated in both directions.
- But this is a priority issue … When you look at the figures for a clean up, above all using international standards, the additional provisions are about €50bn for Spain … Total problematic real estate assets according to the Bank of Spain are about €170bn, of which 30 per cent have been provisioned already. If you take international valuations as in the case of Ireland, at the most you are talking about the need for €50bn of extra provisions [by banks in Spain]. In the great majority of cases, they can provide it themselves from their profits … and it could be done not in one year but over several years … This €50bn is about 4 per cent of Spanish GDP. This is not Ireland. It’s a completely different order of magnitude. We have a property problem in Spain, but it’s manageable ... It’s manageable for institutions with a new round of consolidation because remember that for Santander, the big banks, it’s obviously doable, but it’s not distributed evenly [among the different banks] – so you need an extra round of consolidation … Transparency and the clean up of the balance sheets is vital.
- What message are you sending out in your international meetings?
- I have it very clear that in the Spanish economy we have profound imbalances. We have a public deficit that is close to 8 per cent of GDP, we have liquidity difficulties in the regional governments, we have a labour market that is the worst performing in our market all over Europe and the OECD, we have the necessity to introduce further transparency and clean up in our banking industry. I acknowledge the imbalances. But simultaneously the bright side, the silver lining as it were, is that you have the potential there, if you implement rapidly, swiftly and decisively a labour market reform, a banking industry restructuring and you put in order your public finances and show that you are going to put in place a serious government, I think the perception for Spain will be modified, and I think that markets discriminate at the end of the day.
- I’m sorry to keep emphasising this but I still wonder how you will combine growth with austerity.
- I think we have to stress the importance of these reforms and their potential. I think these reforms might produce in terms of confidence and very rapidly positive effects on the Spanish economy, and afterwards this commitment with austerity creates also confidence in the marketplace. We cannot afford to go to the markets and say that, well, Spain is not going to be an orthodox campaign in terms of fiscal policies and in terms of reforms. This is something that would be extremely detrimental to the perception of the Spanish economy and extremely detrimental to the single currency. So it’s not only a national commitment, it’s also our main contribution to the future of the single currency.
- Do the Germans appreciate this? All five big European economies now have centre-right governments.
- You have seen the statements from Germany. We are going to be very co-operative and very loyal members of the eurozone and we will try to do our best … I think that the single currency – reining in public deficits is important but I also think we will have to put much more stress and much more attention on structural reforms.
- Specifically how will you implement these controls on the regional government budgets?
- It’s going to be in the law, but for instance you will have a priori controls. Before approving the budget ministers they will need the green light from the central government.
- Madrid targets regions in austerity drive.
Luis de Guindos, Spain’s economy minister, was one of four cabinet members who had the unpleasant task last week of telling Spaniards that the new government was immediately raising taxes, despite earlier promises that there were no such plans.
Mr de Guindos, a 51-year-old economist who headed Lehman Brothers in Spain and Portugal until the investment bank collapsed in 2008, looked as though he was sucking lemons when the surprise move to raise an extra €6bn in taxes was announced on Friday.
Now he sees an opportunity. Spain’s autonomous regional governments accounted for most of the €22bn overshoot in the 2011 public sector budget deficit and Madrid is therefore blaming them for the emergency tax increases. The central government is now ready to pounce with legal measures to curb the regions’ spending after years of lax oversight.
A new law in March “will establish strict instruments of control over the budgets of the autonomous regions”, Mr de Guindos said on Wednesday in an interview with the FT, his first for the international media since taking over the economy and competitiveness portfolio two weeks ago.
“You will have a priori controls. Before approving the budget, ministers will need the green light from the central government,” he said.
Cash shortages in some of the 17 regions, especially Catalonia and Valencia, have made them more vulnerable than ever to the centralising instincts of the Popular party government. Valencia, officials say, was able to repay €123m owed to Deutsche Bank in the past few days only thanks to central government help.
“The liquidity difficulties are truly an opportunity to impose hard conditions and measures in terms of reining in the deficits of the autonomous regions,” said Mr de Guindos.
A new financial straitjacket imposed by the centre will certainly be resisted by the independence-minded leaders of Catalonia, an economy the size of Portugal. But these measures are only one part of an economic reform agenda that Mr de Guindos has described as “aggressive” and that the new government wants to enact in its first 100 days.
Under Mariano Rajoy, the Popular party prime minister who ousted the Socialists in the November general election, the government says it is maintaining Spain’s commitment to cut its budget deficit to 4.4 per cent of gross domestic product this year, as agreed with the European Union.
Economists say the target will be difficult to reach given that the 2011 deficit is now expected to reach 8.2 per cent of GDP, instead of the targeted 6 per cent, and that GDP itself is expected to shrink this year. Austerity measures, including the €6bn of tax rises and €8.9bn of public spending cuts announced last week, will further limit the prospects for growth.
But Mr de Guindos hopes that a planned reform of the banking system, at least, will not require further funds from the Treasury.
Instead of creating a state-funded “bad bank” to absorb the devalued land and property assets of the country’s lenders, he expects commercial banks and cajas, or savings banks, to find an extra €50bn of provisions, so that the foreclosed land and buildings on their books can be valued at a more realistic level. Banks have already provisioned 30 per cent of the €170bn of property assets concerned, but some land holdings, for example, are in fact unsaleable and worthless.
For big, profitable banks such as Santander, this will mean using profits and reserves to boost provisions, making it harder to meet the new capital targets set by the European Banking Authority. But the weaker cajas that remain after previous restructurings are likely to be taken over by stronger institutions.
The hardest question for Mr de Guindos to answer is how the government can promote growth and create jobs in the midst of a severe austerity programme. Seasonally adjusted nemployment is at 5.4m, or nearly 23 per cent of the workforce.
One answer is labour reform. The idea is that individual companies, which previously had to fire staff if they wanted to adjust to falling demand, will no longer be obliged to stick to inflexible collective bargaining agreements that dated back to the Franco era and set wage levels across entire industrial sectors.
“In Spain, the fall in GDP during the crisis was average, but no other country, not even those bailed out, suffered such a deterioration of the labour market,” said Mr de Guindos. “Yes, it has a lot to do with construction, where adjustment has already happened, but also with the ability of companies to adapt to conditions.”
He said he expected the reforms and the austerity measures to boost confidence about Spain in the markets.
“We cannot afford to go to the market and say that Spain is not going to have an orthodox campaign in terms of fiscal policies, and in terms of reforms. This is something that would be extremely detrimental to the perception of the Spanish economy and extremely detrimental to the single currency.”
Victor Mallet, Financial Times