The influence of central banks on economic prospects has become so relevant that for several months most news and analysis have revolved around decisions designed by the Federal Reserve and expectations created by the European Central Bank. Questions have been raised as to whether the normalization of interest rates began to be implemented in the eurozone at the right time or whether it should have started a few months earlier, as suggested by most German experts. However, despite these and other legitimate concerns, no one doubts that the monetary policy approach implemented by the ECB, modeled after that outlined by the FED and the Bank of Japan, has borne fruit.
The ECB’s unconventional and ultra-expansionary monetary policy eliminated, first of all, a complex deflationary process that was dangerously looming over the eurozone and from which Japan taught us how difficult it is to escape, especially in aging societies with a greater propensity to save than to consume, as is now the case in Europe. Second, it has standardized financial conditions among eurozone countries, laying the foundations for a more favorable evolution of credit flows, thus contributing to greater economic growth. All eurozone countries are experiencing economic growth close to their potential, such that average eurozone growth will stand at 2.1% in 2017 and slightly below 2% in 2018, according to projections estimated by the consensus of economists of the European Banking Federation (EBF).
Now, why has Spain been able to capitalize on this monetary expansion earlier and more intensively than other eurozone countries? Although multiple factors influence this, there is no doubt that labor reform, the restructuring of the financial sector, and the reduction of accumulated private sector debt are the ingredients that explain why Spain has grown more than twice as much as the eurozone since 2014.
On the one hand, labor flexibility has led to competitiveness gains that have driven Spanish exports to grow solidly above 5% and more intensively than world trade is doing, thus gaining market share and expanding the portfolio of products and services demanded from abroad. This has shaped a sustained growth model based on external demand that is driving private investment in a manner compatible with the deleveraging process, strong job creation, and consequently, solid growth in household private consumption.
On the other hand, the reform of the Spanish financial sector in 2012 has resulted in a more capitalized, efficient, and healthy banking system, capable of soundly withstanding the multiple challenges it has faced: from increasingly demanding and restrictive regulation, which often acted in the opposite direction to the objective pursued by monetary policy, to the entry of new competitors who, through digitalization, impose a new way of understanding and approaching customers.
A stable banking sector that, together with the aforementioned reforms in the fiscal and labor spheres, has served to facilitate the transmission mechanism of monetary policy, which in Spain appears to have been more effective than in other countries. This seems to be the case if we consider that credit flow has grown strongly in our country since the beginning of the recovery. In mortgages, average growth over the last four years has been 10% and in consumer credit 18%. New lending to companies with turnover of less than one million euros has grown 6% during this period, a higher rate than the nominal growth of the Spanish economy in these years. Therefore, according to ECB surveys, for Spanish companies neither access to credit nor credit conditions are a source of concern at this time.
In short, as the Bank of Spain points out, the contribution of expansionary monetary policy has contributed 50% to the increase in nominal GDP in Spain since 2014, although this is not achieved by chance. It should be remembered that favorable monetary conditions began in Spain at a time when the country had laid the foundations to capitalize on the advantages of a more flexible labor market and a stronger and more solvent banking sector that was able to enhance and make more effective the monetary expansion implemented by the ECB.
Juan Carlos Delrieu, Director of Strategy and Economic Analysis
