Tuesday, July 5

Economic Policy for Recovery in Times of Uncertainty

Following the global economic crisis caused by the COVID-19 pandemic, the economy is recovering, thanks to the advance of vaccination and the extraordinary support of economic policies. This recovery is also taking place in Spain, especially with regard to employment that has already reached its pre-pandemic level. Regarding economic activity, the recovery is slower than in other neighboring countries. Furthermore, it is incomplete: the gap between the current level of GDP compared to the one before the pandemic is 6.6 pp in Spain (0.5 pp in the euro area), largely due to our greater dependence on the sector. tourism and the greater weakness of consumption and investment. By population groups, the crisis still disproportionately affects certain groups of workers; in particular, the youngest and those with temporary contracts and low incomes.

The expectation is that the recovery continues in the coming quartersAlthough its scope and speed are subject to various sources of uncertainty related, firstly, to the evolution of the pandemic, as highlighted by the recent evolution of infections in some countries and the appearance of new variants of the virus. The uncertainty also extends to household consumption (in particular, at the rate at which the significant savings accumulated by families during the crisis will be used), toa recovery of foreign tourism, the use and effectiveness of funds from the European NGEU program (including the final configuration of the main reforms associated with it), the possible scars of the crisis on the business fabric, as well as the persistence of bottlenecks and the current episode of high inflation.

In relation to inflation, the phenomena underlying the recent upturn are fundamentally external to the Spanish economy and of a temporary nature. The first of them has to do with the base effects derived from the decline in the prices of some goods and services in 2020 due to the pandemic. Second, energy prices – especially gas and electricity – have seen very significant rises. Third, certain bottlenecks have emerged that obstruct the functioning of value chains and have made transportation more expensive. It is true, however, that in the coming months we will still see high inflation rates, that the phenomenon is showing a longer duration than expected and that the longer that duration, the greater the probability that it will gain persistence. In any case, its future evolution will depend not only on the dynamics of external shocks, but also on the reaction of national agents.

In this environment, the premature withdrawal of support measures would lead to losses that exceed the possible costs of maintaining them until the recovery shows sufficient strength. In parallel, rIt is crucial to identify possible changes and structural damage of this crisis, so that economic policy facilitates the adaptation of companies and workers to the new reality after the pandemic. And, likewise, it is done It is necessary to face decisively the structural challenges of our economy.

In the case of fiscal policy, it is necessary to maintain an expansive tone, but with a focus on the sectors and agents most affected, and on medium and long-term growth considerations; Among other reasons, to avoid that an excessively generalized fiscal impulse could translate into an increase in bottlenecks and, therefore, in greater inflationary pressures. Furthermore, the measures must be temporary, so as not to further increase the structural deficit. And, once the pandemic is over, it will be necessary to rebuild fiscal margins and reduce public debt, through a multi-year gradual strategy. The design of this plan must be anticipated, with a view to its implementation once the recovery is strong.

In the case of monetary policy, in the Governing Council of the ECB we are determined to continue providing the necessary monetary stimulus so that, in the medium term, inflation reaches the 2% target on a long-term basis, without reacting prematurely to transitory shocks.

Companies and workers, for their part, must internalize the fundamentally external and temporary nature of some of the main factors behind the current rise in prices and seek an equitable distribution of the reduction in income of the national economy compared to the rest of the world that cause price increases in goods and services that our economy does not produce, but needs. Otherwise, a price and cost feedback could be encouraged, with adverse effects on competitiveness, economic activity and collective well-being.

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Although the current situation is far from the one that characterized the oil price crisis in the 1970s, the lessons learned then should not be ignored. The likelihood of a scenario like this is very small, but it should serve as a reminder that we must be careful in striking the necessary balance between providing patient support for recovery while preserving the ability to respond. act swiftly and decisively if this proves necessary.

Looking at the longer term, I don’t want to fail to mention the structural challenges that the Spanish economy was already facing before the pandemic and that now take on special relevance. Among them, it should be noted, in addition to the inadequate functioning of our labor market, llow productivity, the fight against climate change, population aging or growing inequality. Others have emerged or have intensified because of the pandemic, such as those derived from digitization. All these challenges can only be tackled with a determined agenda of structural reforms – supported by the efficient use of European funds and supported by sound evidence-based policies – which have broad political and social support.


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