“Now we are not in a crisis. We resisted better than expected.”

Dominic Raphael (Sao Paulo, Brazil, 1962) Responsible for Economic Analysis at BBVA Research and Professor of Economic Analysis at the University of Valencia. Considered one of the best macroeconomists in the country, Doménech was a member of the group that crafted the 2013 pension reform. He is the author of In Search of Prosperity, along with colleague Javier de Andrés. The challenges of Hispanic society in the global economy of the twenty-first century’ (Deusto, 2015).

“What do you need to know when you are facing a crisis?”

– First thing: What are the reasons that led to the outbreak of the crisis? A good diagnosis of the causes is essential, how it can affect us and how long it can last, what are the appropriate measures to mitigate its impact and speed up recovery.

“What kind of crisis do we have?”

We are not in a crisis now. On the contrary, the data suggests that, in general, European economies are holding up better than expected a few months ago, so the biases in the outlook are to the upside. This bias is greater in Spain, and we at BBVA Research are revising our forecasts. However, there are a number of important risks and challenges. One of them is to control inflation, to reduce it in the coming quarters to levels in line with the goals of the European Central Bank, so as not to endanger future economic growth and avoid more evils.

Are we doing the right thing to reduce inflation?

– From the point of view of monetary policy, the Federal Reserve and the European Central Bank are doing the right thing. However, fiscal policy is not in line with monetary policy and continues to expand excessively, making it difficult for central banks to act.

Whose main responsibility is to rein in inflation? From the European Central Bank or from governments?

The European Central Bank has a clear mandate to ensure price stability. For their part, governments must ensure long-term budget stability, with enough room for maneuver to be able to implement expansionary policies in times of recession. Policy coordination should ensure consistency between the two.

Why weren’t liquidity injections by central banks inflationary so far?

There were structural factors that increased deflationary pressures. Among these factors are globalization, abundance of productive resources at low cost (for example, energy or labor in developing economies), and excess of saving over investment, especially in developed economies. We must remember that the years leading up to the pandemic were years of secular stagnation.

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Are interest rate increases over?

– In the US, the Federal Reserve is likely to hit the interest rates it needs to control inflation. In the Eurozone, we expect additional increases and that prices will remain elevated for longer.

Will we see negative interest rates again in the near future?

– It must be remembered that most central banks, such as the Federal Reserve or the Bank of England, have avoided entering the field of negative rates. Economists are divided on whether we will return to a world of deflationary pressures or whether inflation will be higher in this decade than in the last, which I think may be the more likely scenario. As far as possible, I think we will try to avoid a return to the situation of negative interest rates, which continues to be an anomaly that generates changes in the decisions of economic agents.

Was the ECB wrong with its loose monetary policy of “whatever it takes”?

“He was not wrong. Quite the contrary. It was one of the great successes of the European Central Bank. In 2012 it was absolutely necessary to remove any kind of doubt about the existence of the eurozone and the periphery of countries.

– In Spain, there are people who say that we entered the eurozone so that the central banks stop financing the government deficit, and what we see is exactly that: the European Central Bank financing the government deficit. what do you think?

We have lived through extraordinary times as a result of a global pandemic, when everything necessary to protect the productive fabric, businesses, workers and homes had to be done through public policies. This does not prevent us from now returning to the path of budget stability. Both can and should be done.

What is the fiscal policy that should be developed under these circumstances?

– Once the epidemic and the risks of crisis as a result of the war in Ukraine and the energy crisis are overcome, it is necessary to implement the fiscal consolidation policy.

– Is there room to cut public spending?

Instead of cutting public spending, it is more appropriate to reduce the ratio of public spending to GDP, with higher potential growth. So there is also scope for improving the efficiency of public spending. Indices of spending efficiency for Spain published by institutions such as the World Bank place us in the middle position within the EU with a wide margin of improvement compared to European economies with more efficient public sectors. We must take advantage of the opportunities presented by digital disruption to improve the efficiency of our public services and policies.

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– The Bank of Spain’s annual report put on the table the fifteen-year stagnation of Spain’s GDP.

The growth we achieved from 2013 to 2019 allowed us to restore per capita GDP levels before the Great Recession and the sovereign debt crisis. Later, the epidemic was a very big setback. Only this year will we be in a position to win back that lost ground again. I am concerned that since the Great Recession 15 years ago, our economy’s potential growth trajectory is much lower than it was in previous decades.

Spain boom

Our potential growth trajectory is much lower than in previous decades.

What do we need to do to restore the growth trajectory?

– Basically, solving the structural problems of our labor market and accelerating productivity growth. The 2021 labor reform made it possible to reduce the rate of temporary employment in the private sector, but many other labor market problems still need to be resolved. Our unemployment rate still stands at 12.6%, twice the unemployment rate in the Eurozone. Our employment rate is the fourth lowest in the European Union, ahead only of Greece, Italy and Croatia. Productivity per hour worked has grown very slowly in the past three years and was barely half a point higher in the first quarter than it was before the pandemic.

Many have hailed the European Commission’s debt issuance to fund the Recovery and Resilience Facility as a “Hamiltonian moment”. Do you see it that way? What’s next?

– It was a preliminary Hamiltonian moment. We are a long way from owning a European treasury and federal budget like the United States, and to do so we must cede more sovereignty to European democratically elected institutions. But I do not see enough consensus among Member States on this.

– There are those who assert that the European Central Bank, by assuming standards on climate change, is losing its effectiveness in achieving its main goal, which is monetary policy. what do you think?

– It all depends on the level of participation. The ECB should be involved for two reasons. The first is that their policies cannot be a liability for climate change. In principle, the goal of price stability is not incompatible with the energy transition. On the contrary, it is a method of reducing the uncertainty, in this case regarding the development of inflation, which may be affected in the short and medium term by the said transition. The second is that climate change poses a risk to financial stability, which the European Central Bank must avoid. The challenge is to find the right place for regulation and policies that do not jeopardize the ECB’s mandate. If it’s done well, I don’t see a contradiction.

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– In Spain, those in power support the hypothesis that the economic model has changed and that this explains some discrepancies between the statistics and the official optimism.

Changes in the economic model take time and end up being supported by data. At the moment, there is no improvement in Spain’s convergence trajectory with respect to the more advanced economies.

Will the electoral progress have an impact on the economy?

– This very progress greatly shortens the electoral calendar and, in this sense, reduces uncertainty.

What do you think about reforming the pension system?

What the pension reform does is a reflection of the political balance that occurred at this time and that what it has done is to rebalance a system that suffers from deficits and will continue to increase. In this reform it was decided to rebalance with more income. Politically, it’s an option like any other, what happens is I think it has a cost that hasn’t been clarified and that is financing the deficit with public taxes, which obviously means increased fiscal pressure. And secondly, that the protection mechanism states that if we need more income and there is no adjustment on the expenditure side, it will come through social contributions. This brings us to a country that is already among the countries with the highest prices, and has to increase them even more. Contributions are not a problem if the system is entirely contributory and people know that every euro they contribute will be one extra euro of their future pension. With the implementation of the reform, this principle was broken. The system will become less contributing as the years go by. This means that the contributions will not be seen as deferred salary and will be seen as a tax on work and this has a cost to a country that is already suffering from high unemployment.

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