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Spain has begun the process of economic recovery

Speech by the President of the Government, José Luis Rodríguez Zapatero, at the presentation ceremony of the President of the Government's 2010 Economic Report

Good afternoon. I would like to start my speech by thanking you all for attending this event. I believe it is important for us to consolidate this experience in which the President of the Government provides an annual assessment of the Report drafted by the Economic Affairs Bureau to you: the leading men and women in the financial world.

I have no doubt that, on this occasion, you will allow me to particularly thank Paul Volcker for his attendance here today. There are few economists in the world with such broad experience in the public management of economic affairs, few people as dedicated to their country and to the international community and, in my opinion, few people as generous as Paul Volcker. And, of course, there are few people in the world who know as much as he does about the behaviour of economic cycles, the periods of growth and the periods of economic crisis.

I have had the great fortune to receive his assessment and advice on this current crisis and I will again have that same opportunity later this afternoon during a lunch with him. Many thanks, Paul, for your visit to Spain and your attendance at this event.

Ladies and gentlemen,

For the fourth consecutive year, I am here to publicly present the President of the Government's Economic Report. On three of these occasions, I have already had to do this from within a situation of economic crisis; the worst crisis (I'll save you the standard epithets) for many years in the world economy and in the Spanish economy.

It would be true to say that 2010 was a tough year for the Spanish economy, a difficult year. Even though 2010 saw the transition from recession to recovery and even though the number of job losses has levelled out considerably, we still have an unacceptably high rate of unemployment. Moreover, we have had to implement further austerity measures in addition to those implemented previously; tough measures that have affected many members of the Spanish public. We have also implemented stringent reforms to our economic model.

That said, through fiscal consolidation and the reforms (and this, in economic terms, would be the most positive assessment that can be made of last year), we are not only providing an updated response to the latest profiles of the crisis but, and above all, we are trying to sow the future for new growth in Spain, we are trying to prepare the way back to job creation while guaranteeing the sustainability of our Welfare State.

First and foremost, this is what I want to highlight from 2010 and this is the task that - the Government, of course, and, I would hope, the country as a whole - we are going to carry over into 2011, with greater conviction and determination, if that's possible.

A brief summary of the global economy and the global reaction to the crisis, a summary of the events of this last year in the world of economic affairs, must begin by stressing that the global economy has been able to finally recover the levels of activity seen before the crisis - the most serious global economic crisis in eighty years.

So, recovery at a global level; although we are talking about slow and unequal recovery, especially in the Eurozone where pre-crisis levels of activity will not be obtained until 2012 and pre-crisis levels of employment may take even longer to return, according to the forecasts offered by the International Monetary Fund.

As you are all aware, besides being of an intense nature, the crisis in Europe has proved to be highly complex and unpredictable. Initially, in the autumn of 2008, we needed to contribute towards coordinating actions under international economic policy in order to avoid a complete collapse of the financial system by supporting it with decisive intervention from our Governments. Secondly, now in 2009, action plans were implemented, mainly through fiscal and monetary policies, to combat falling activity and employment levels. And thirdly, 2010 will be remembered for the events associated with sovereign debt in the Eurozone and the reaction with extraordinary measures to guarantee the stability of public finances within the European Union.

The crisis has also brought a significant challenge for the actors on the stage of international governance. Even though there is still a certain lack of perspective for making a final judgement and even though we cannot ignore the relative frustration that may have been felt at times due to the expectations for a faster response to the situation, it is absolutely clear that progress has been made on more internationally coordinated action when comparing it with past crises of a global scale. These coordinated actions, fostered above all by the G-20, have avoided the consequences of the recession being much worse, perhaps uncontrollable.

In particular, I would like to emphasise the new steps that have been taken in Europe, within the framework of economic integration in the region, in reaction to the threats that arose regarding the stability of the Eurozone.

At the beginning of the first half of 2010, Spain undertook its rotating Presidency of the European Union with the priority of fostering greater coordination of economic policies. And the truth is that the European Union per se has made great progress this year in its response to the crisis:

* Progress has been made by strengthening a new framework of financial regulation and by its decision to reinforce the Stability and Growth Pact, complementing it with macroeconomic supervision of Member States in order to avoid a widening of the imbalances between them;
* Progress has been made by also adopting a common Strategy for Growth and Employment for 2020; and
* Progress has been made, undoubtedly, by approving the establishment of a Permanent Mechanism for crisis resolution that, from 2013, will replace the current temporary instrument that was implemented in 2010 in response to the sovereign debt crisis in Greece.

Following the repeated tensions in the financial markets, the European Council in December conveyed a clear message of unity and confidence regarding the Euro with its determination to promote as many actions as may be necessary, I'll repeat that; as many actions as may be necessary, to guarantee the stability of the Euro.

We will have to make further progress in terms of economic union, especially on strengthening fiscal commitments, and the European Central Bank must play a key role, as it already is, in the stability of the Eurozone and of each one of the countries within the Eurozone, with the same vigour with which each Member State must comply with its own stability commitments.

Spain is on the list of developed countries that are suffering the worst effects, in terms of employment, of the global crisis due to the very sudden onset of adjustments to some of the imbalances generated over the latest long and exaggerated period of growth in our economy. Everyone knows what I mean: the high level of private borrowing; the low level of productivity; and the insufficient level of innovation in spite of public effort over recent years.

There is one piece of highly informative data that stands out from all the rest and which speaks volumes: a residential construction sector that had begun to adjust itself prior to the crisis but that was still extremely oversized, so much so that its crisis has led to more than 60 per cent of the almost two million job losses since the end of 2007 being directly or indirectly related to this sector; more than 60 per cent.

In order to put an end to these imbalances, the Government action in 2010 was focused on the application and development of a global plan of reforms - the so-called Sustainable Economy Strategy - that I presented in December 2009 to the Lower House of Parliament; a Strategy specifically designed to accelerate the transition to a more balanced, more productive growth model associated with greater training, greater flexibility and stability within the framework of labour relations and with the increasing incorporation of innovation into our production processes.

A necessary drive for reform that is being applied (and this should also be made quite clear) to a productive structure that has reinforced its solidity and diversification in many areas over recent years; that has improved its human capital, its technological resources and its infrastructures, and that boasts an increasingly more internationalised business fabric.

We are tackling, and this is how it will be judged when we get a chance to look back, one of the most important processes of economic modernisation since the transition to democracy; one that is supported by the conviction that the prosperity of Spain and the welfare of its citizens will most certainly depend on this process for decades to come.

It is a task that will be and is proving to be arduous, and one that will take time, because we have to leave behind the imbalances accumulated over a period of more than fifteen years of economic expansion. It is a task that other European countries, such as Sweden, Germany and Finland, have already tackled in order to deal with their own growth problems and that has enabled them to handle the crisis much better now. In short, it is an essential task that lies ahead in order for us to have a competitive economy that is capable of sustaining the Welfare State to which the vast majority of Spanish society continues to aspire.

As the Report I am presenting today shows, this process of imbalance correction has already produced certain results.

Besides the reduction in the public deficit, to which I will return in greater detail later, the current account deficit has been halved in little more than two years, the high level of debt in the private sector is falling and hourly productivity has increased by more than 4 per cent, mainly due to re-emerging activity.

This process is not finished and, for that reason, looking ahead, the Government is fully committed to this process of modernisation, committed to fiscal consolidation and the reforms that, alongside the need to preserve social cohesion, will continue to be core areas, the main priorities, of Government action until the end of this Legislature. Allow me, if you will, to now refer to each of those areas while focusing on the next steps that we are going to take.

As regards austerity and fiscal consolidation, the particular intensity of some of the repercussions from the crisis in our country has demanded a proportionate and demanding response from the Government in each of the stages they have appeared.

This led to Spain being a State to implement, in relative terms, one of the most intense fiscal stimulus policies during the first period of the economic crisis in order to offset the consequences of the steep decline of the real estate sector, avoid the collapse of sectors with clear strategic value to us, such as the automotive and tourism sectors, whilst preserving social cohesion as far as possible.

The speed of events may well lead us to forget that less than one year ago, I repeat; less than one year ago, the leading international organisations, such as the OECD in December 2009 and the International Monetary Fund in April 2010, were still insisting on the need to maintain a fiscal policy of expansion until economic recovery had consolidated, I repeat; April 2010.

Spain was also one of the first countries in Europe to begin an essential and rapid process of fiscal consolidation. It should be recognised that we began this process when drafting the 2010 Budgets but it was the sovereign debt crisis in the spring, mainly arising as a result of the bail-out of Greece, that required the process to be accelerated yet further; a decision that, due to its effects on a Budget that already contained a great deal of austerity, has brought about additional efforts and extraordinary efforts for many members of the Spanish public.

Available budget performance data enable forecasts to show that 2010 will have easily met the deficit forecasts of 9.3 per cent, and we will be able to publish the same figures for the General State Administration Services and the Social Security System. Our commitment to reach a 6 per cent deficit in 2011 is unquestionable. This is reflected in the General State Budgets with a reduction in expenditure of 7.9 per cent.

This fiscal consolidation effort is being made whilst trying to maximise the budgetary items that are most decisive to the future growth of productivity in the economy (transport infrastructures, education and Research, Development and Innovation), as well as the policies for social cohesion, which today receive 60 per cent more resources than when I was elected President of the Government.

The adjustments in public spending are being complemented by other adjustments, such as a reduction in the number of executive positions, a restructuring of the public corporate sector that has led to a 25 per cent fall in public companies, and the plan to combat tax fraud that collected ten billion euros in 2010; a record amount that is 23 per cent more than the amount collected in 2009.

Furthermore, the Government has adopted measures to strengthen the credibility and transparency of the public finances of all other Administrations. Some of these measures were the subject of a certain degree of initial incomprehension, but our commitment affects the State as a whole and all the Administrations must therefore come on board. In this regard, I would like to stress the importance of the agreement reached with the autonomous regions regarding the issue of quarterly information on their budgetary status; something that has already begun to be applied with the data corresponding to the third quarter of 2010.

As I have said on several occasions before, austerity and the utmost transparency must be, from now on, an inexcusable feature of the management undertaken by all Public Administrations in our country. The commitment from the Government of Spain is clear and unequivocal: we will correct any deviation that may arise in regard to the fiscal consolidation targets set as soon as we detect even a minimal sign of the risk of such a deviation occurring.

As regards the reforms, I must begin with the financial system. As you are aware, the period of institutional integration among the Savings Banks concluded, as planned, at the end of 2010. The processes of operational restructuring and integration of activities are now under way, which must be carried our rapidly and efficiently. All this is being done under the watchful eye of the Bank of Spain.

The new entities are going to be, because they must be, viable, managed under professional criteria and capable of obtaining finance on a regular basis.

I am aware, in spite of the overall solidity of our credit entities in the face of the crisis and the positive results obtained from the stress tests in July, that doubts exist over their vulnerability to any adverse developments in the economy and, in particular, to the consequences of the crisis in the real estate market. I am aware of that, as I am also fully aware that those doubts have a negative effect on their options for obtaining external financing and, therefore, on their ability to channel such financing to companies and families.

We are therefore pushed towards one objective, an important objective: for all these entities to improve their capital structure and their quality as soon as possible in order for the flow of credit and the stability of the Savings Banks in general to be normalised.

In this regard, transparency continues to be a crucial factor for this entire process to be undertaken rigorously and to encourage confidence from the financial markets, thus enabling a return to the normal participation of all our institutions in their access to financing. Over the course of this month, detailed information will be published regarding the level of exposure of the new entities resulting from the integration of Savings Bank and other entities in their credit portfolios and, particularly, to the real estate sector. Similarly, the Banks will do the same alongside the presentation of their annual accounts.

Within the context of Europe, Spain will continue to push for the performance of new stress tests on the banking sector and for them to be carried out as soon as possible and with a greater degree of coverage and transparency than last year.

In any event, I would like to remind you that the Government is implementing the FROB as a mechanism for capitalisation and restructuring in light of unexpected situations. Support from this mechanism will always be provided under rigorous market conditions and will be of a temporary nature until such time as the entities once again gain regular access to financing.

And until the financial sector returns to normal, the Government will continue to strengthen extraordinary measures for access to credit organised through the Official Credit Institute. In 2010, the mediation lines offered by the ICO have mobilised close to 19.6 billion euros, a record amount representing an increase of 30 per cent on the previous year and doubling the levels of activity seen before the crisis.

As regards the labour reform and the reform of the pension system in the first half of 2011, I repeat; the first half of 2011, we are going to conclude the reforms launched in 2010; reforms that will be undertaken exactly as planned and according to the timeline we have made public, and reforms that we need in order to improve levels of productivity and to project confidence in the Spanish economy.

Besides our reform of the financial system, we must also complete our labour reform and our reform of the pension system.

The Labour Reform Act will be developed over the coming weeks. Its effects will begin to be felt as soon as growth reaches sufficient levels so as to translate into the creation of jobs. However, there are already some signs of what could be considered its expected results, such as the increase taking place in the conversion of part-time contracts into employment stimulation contracts.

We now have a far-reaching work programme on the table for developing and completing the reform of labour relations. The areas in which we are going to work are well-known: active employment policies, redundancy plans, part-time employment companies and collective bargaining. All of these areas are important, some of them are crucial.

By reforming active employment policies, our particular intention is to generate an effort towards worker employability, in other words, towards training policies that increase their capacity to adapt to the new labour offer.

By modifying redundancy plans, we intend to make progress on specifying the economic and productive grounds that justify the suspension or termination of contracts on the one hand and, on the other, encourage the use of adjustment procedures other than dismissals; i.e. the suspension of contracts or agreed reductions in working hours.

By regulating the part-time employment companies and recruitment agencies, we intend to increase the capacity for intermediation between job offer and demand in a global system in which the public employment systems will continue to play an important role.

Generally-speaking, the most important of the reforms that we have planned for the labour market is the one that affects collective bargaining. We have a negotiation structure that has remained basically unchanged for thirty years. It is a very fractured structure in which intermediate level agreements are most commonplace, which, according to all the experts, contributes to the fact that labour market adjustments take place, more often than in other economies, through job losses. This surely goes a long way to explaining why, in the worst moments of the crisis (in 2009), we have seen such shocking situations as the loss of 1,200,000 jobs and a 3.2 per cent rise in income per wage earner while inflation fell by 0.3 per cent.

The Agreement on Employment and Collective Bargaining 2010-2012 by social stakeholders was undoubtedly a positive step forward that brought with it the necessary wage moderation at a decisive time for overcoming the crisis; but it is not enough. We need a profound reform of collective bargaining that can help renew our production system and make progress on its simplification, adapting the levels of negotiation and articulating the procedures that, in accordance with the labour reform, enable greater business flexibility by helping to adapt working conditions to economic trends.

The Government trusts that an agreement can be reached with the social stakeholders but, should the talks conclude without an agreement, the Government will adopt the corresponding measures to tackle the reform of collective bargaining.

In addition, I am sure you are all aware of the Government's commitment to reforming the pension system.

On 29 December, the Toledo Pact Commission finally agreed on its recommendations. The Government will take them into consideration, as it will the position adopted by the social stakeholders with whom the Government is maintaining frank and intense dialogue, for approving the reform we will submit to Parliament on 28 January.

The measures we are proposing for our pension system are absolutely essential for demographic reasons; because of the continued increase in life expectancy and the trends in our population pyramid. One piece of data says it all: whereas there are currently four people of working age per pension, in 2050 there will only be one and a half.

Furthermore, by tackling the reform now it will be possible for the same to be gradual, progressive and flexible because it will take into consideration, for example, the period of time effectively worked before retiring ahead of the new legal age to be set at 67 years. The nature of the work performed will also be taken into consideration.

This reform is necessary for guaranteeing today the medium- and long-term solvency of our public finances. The most solid European countries have already done this, with a common position that is also fixed at the age of 67. And these countries are doing so in spite of the fact that many of them have a Gross Domestic Product and wealth that is greater than our own and in spite of the fact that they have life expectancy levels much lower than we do in Spain.

Given that, as you know, we are holding talks with the social stakeholders and that we will be doing the same with all the political groups over the coming days, you will understand when I do not go into further detail about what the content of the Draft Bill will be that is to be submitted to Parliament in little more than two weeks.

The reform of the financial system, the reform of the labour market and the reform of the pension system, although important, do not represent the entire drive for change that Spain needs and to which we are committed:

* We are going to continue implementing initiatives to improve the competitiveness of the Spanish economy;
* We have improved taxation on small- and medium-sized companies as a way to generate incentive for private investment;
* We are going to develop the Integrated Industrial Policy Plan we have recently approved, with actions that focus on support for internationalisation and the necessary business growth;
* We approved, with consensus from the majority of parliamentary forces, the main aspects of the energy plan for the next ten years and we have adopted a series of measures to finally correct the tariff deficit, with contributions from all the sectors affected and which represents a reduction in the tariff deficit of 4.6 billion euros over the next three years; and
* Over the coming weeks, we will see final approval in Parliament of the Sustainable Economy Act and the Science Act.

These important measures are going to be complemented by the conclusion of the reform process in the service sector; the main source of our inflation differential with the European Union and the main source of our problems of competitiveness.

There will be further measures in this area to simplify or reduce unnecessary procedures under the Plan to Reduce Administrative Burdens that estimates say has already saved more than four billion euros per year to date for companies and the public. However, and most importantly, the Council of Ministers will approve the Draft Professional Services Bill in February; a sector with significant export potential and that employs 30 per cent of our graduates from higher education.

Reforms are not easy to adopt because they usually generate short-term discomfort, sacrifice and a need to adapt new guidelines on conduct in the sectors they affect. This is the case for the reform of our professional services, which may encounter resistance but is nonetheless a reform that is just as important as the others because it will be good for the Spanish economy as a whole and for Spanish society if we manage to introduce greater competitiveness and flexibility into such an important sector for us and in which all the experts recognise good potential for growth.

Furthermore, we are also proposing a review of certain other obstacles that still limit the capacity of our economy. We will suggest to the autonomous regions a series of agreed actions in terms of commercial opening hours, in terms of reducing the activities subject to municipal licensing and in terms of incorporating new instruments for coordination between the autonomous regions and Central Government.

We will continue to make attempts at reaching the great possible level of political agreement, and agreement with the social stakeholders, in all these areas pending reform.

I have always believed that the best reforms, those that take effect quickest, are shared reforms. However, there is something worse that a lack of widespread consensus on undertaking and implementing reforms and that is a lack of reforms. Seeing as that would be worse, that will not be the case. The Government will meet its commitment to the reforms, to all the reforms under way and to the other reforms we have announced, including the commitment to make every possible effort to reach agreement before their approval. And I believe that we have proven our capacity for dialogue.

Friends,

In spite of the highly negative impact caused by the global crisis on some sectors of the Spanish economy, our country has begun the process of economic recovery, albeit still rather weak recovery. We expect, when data on our growth in the fourth quarter are released, to have recorded four consecutive quarters of positive year-on-year figures.

Now, in order to achieve a recovery in employment, which is undoubtedly the main goal for Spanish society and the Government, we must strengthen the growth in activity, fully implement the reforms and apply them within a reasonable timeframe.

The Government is convinced that the effort produced by the far-reaching series of reforms that we are in the process of implementing and that I have just described will contribute towards bringing the growth of our country up to the level of its potential and generate average growth of approximately 2 to 2.5 per cent between 2011 and 2015, as per our estimates.

I stress here that, in order to achieve this growth, it is essential that we make the extra efforts required of us over the coming months. And we will:

* On January 28, we are going to approve the proposed reform of the pension system; after trying to reach as widespread consensus as possible, of course;
* We are going to conclude the labour reform, including collective bargaining, if the social stakeholders are unable to reach an agreement;
* We are going to conclude the process of restructuring the Savings Banks, reinforcing their capital structure and adopting all the necessary measures to do so; and
* We are going to continue completing the reforms in the goods and services markets.

Every time I have presented one of these Reports, I have expressed my confidence in the capacity of Spanish society to overcome such an adverse situation as the one we have started to leave behind us now.

My confidence is all the greater today now that I see we have embarked on a clear path towards change and reforms. Throughout our recent history, our country has always reacted well to change. Spain is quite the opposite of a decadent or tired country. Spain is a country with strength; a strength that is difficult to measure in economic terms but a strength whose presence is felt, for example, through the leadership ambition or the export capacity of many of the companies represented here today; a strength that is there, that can be felt and that reveals itself in the desire to return to growth, to move forward, to stand among the best´┐Ż A feature that best characterises the democratic Spain of the last thirty years.

There is a clear desire to grow again, to move forward again and, above all, to create jobs again, and we have a script for achieving that: conclude the reforms and the changes we have planned.

Reforms are a valuable and essential tool, but they are only a tool; a tool to be used for one purpose: to forge economic growth with more productivity, the creation of jobs, the prosperity of our country, the maintenance of all our social progress and of our Welfare State. That is why I am committed to them and that is why I call on all of you who play such an important role in the Spanish economy to provide as much help as you can to the Government, to the social stakeholders and to the political forces in their implementation.

Thank you very much.

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