Financing growth and the sustainability of the recovery

Summary:

On 1 December 2021, the Rafael del Pino Foundation organised the dialogue "Financing growth and the sustainability of the recovery", with the participation of José Carlos García de Quevedo, President of the ICO; Íñigo Fernández de Mesa, President of the Institute of Economic Studies and Vice-President of the CEOE; José María Serrano San, Professor of Economics at the University of Zaragoza and member of the Royal Academy of Moral and Political Sciences, and Ricardo Martínez Rico, President of Equipo Económico.

José María Serrano San: The 2008 crisis and the current one are two different crises. The first was an economic crisis and the second is a health crisis that has befallen the economy. They are very different in terms of the starting point. In 2008 we had many imbalances: an external imbalance, an imbalance in the financial system. The Spanish economy was now in a much better situation from the perspective of the external sector, with a few years of generating financing capacity, and it had cleaned up its financial system and its business structure. But the situation of the public sector was very negative, with a very large structural deficit. In reality, the crisis of 2020 highlighted the defects that the Spanish economy had previously had. That is what makes it weigh more heavily on Spain than on other Eurozone economies.

Ricardo Martínez Rico: In 2008 the fundamental imbalance was the external imbalance, of about 10%. In 2019-20 we were recovering, although we had not yet recovered the 2008 level of employment. But the imbalance is that of the public accounts, with high indebtedness, 100%. Part of this indebtedness was due to the accumulated bills and the clean-up that had to be done with autonomous regions and local corporations, and, on the other hand, with the suppliers' fund to overcome the company's liquidity problem, which was an extraordinary measure that became permanent. This has led us to this level of indebtedness.

José Carlos García de Quevedo: The adjustments made by the private sector and the measures adopted for COVID make the current situation different from the previous one. In that case, the EU was slower to intervene. With the health crisis, however, there is coordination at many levels, with an immediate response in monetary policy, in vaccination and with the Next Generation EU Recovery Fund. Public-private collaboration allows for much faster implementation of liquidity lines. The external sector now contributes to growth. Measures to maintain the business fabric have allowed a clear start to economic recovery. There have been no difficulties in financing and access to capital markets, nor have there been financial restrictions on the productive fabric, and the liquidity lines have made it possible to maintain the chain of payments to suppliers.

Íñigo Fernández de Mesa: The starting point in 2011 has nothing to do with today. But there is an absolutely different element, which is Europe. In 2011, the ECB did not buy a Treasury bond, the market had to be convinced, the labour market had to be reformed and a series of reforms had to be carried out very quickly, which meant that the markets regained confidence in Spain in a very short space of time. The situation is different now. Europe is buying Treasury bonds very intensively. But now neither the markets, nor Europe, are pressing for reforms. We have a very high structural deficit and very low growth, so reforms are needed, given that the fiscal and monetary stimulus will not last forever.

José María Serrano San: The fact that the inflation target is 2% on average over the medium term means that the ECB has more room for manoeuvre. There is no longer the pressure from Germany that there was in the past. It is true that the ECB did not buy bonds happily, as it does now, but it should not be forgotten that the change in policy in Spain was made possible by the two large ECB auctions, in which Spain took a large part of the money, which made it possible to finance the supplier payment plan.

Ricardo Martínez Rico: The financing of supplier payments was possible thanks to the programme launched by Draghi in December and February. At that time, the debate in the financial system was about reputation. Spanish banks did not want to take part in the first auction because of their reputation. In the second auction, they went hand in hand with the ICO. With the 20 billion they obtained, they were able to think about the plan. Now, the ECB intervenes directly and the banks play their role, but at that time those channels were interrupted. This programme, instead of giving us credit, pays outstanding bills. Yesterday the government passed a new law for business growth and one initiative they have incorporated is that companies that do not pay suppliers on time will be penalised. It is a small reform that helps financing, which is the bottleneck of the Spanish economy.

José Carlos García de Quevedo: The ICO's monitoring of the effectiveness of the COVID guarantee programme has been extended to all sectors of activity, which have sufficient liquidity. Since the beginning of this year, with the recovery, companies have been able to pay their suppliers, taking into account the possibility that the pandemic could spread further than expected. Of all the companies that had COVID guarantees that could adhere to the extension of deadlines and grace periods, which is obligatory for the bank, 55% did not do so. In June 2021, the code of good practice was adopted, allowing further extensions of terms and extensions, and terms and grace periods were again extended until June 2022. These measures allow the financial burden on companies to be diluted. This has allowed arrears levels to remain quite reasonable. We have to rely on public-private partnerships for risk analysis. Companies that were in crisis before COVID have not received credit and the banks have carried out this analysis. The idea was to maintain pre-COVID financial conditions to mitigate the impact.

Ricardo Martínez Rico: Thanks to Europe, the handling is being so different that we have a veil over the economy, derived from very intense public spending and a European Central Bank that is buying all the bonds that are being issued. The debate is how you combine the withdrawal of this stimulus with recovery. It is going to be very important that we get back to potential growth.

Íñigo Fernández de Mesa: We are also experiencing historically high price indices, albeit temporary, and we must act prudently. The burden of this crisis is falling fundamentally on companies and we have to be cautious when designing economic policy and not overburden them because they are key to recovery. We have three major reforms that Europe is asking us to carry out. That of pensions, which will not be solved by increasing company contributions; that of the tax system, which will not be solved by overburdening companies, which can no longer cope with the 10% drop in their operating results. These problems can be solved by creating jobs. Labour reform is also fundamental here, because we need a reform that generates employment and facilitates hiring. Europe is asking us for two fundamental things: to improve temporary employment, but without losing focus on employment. And budget reform, the balance must come from the expenditure side, improving its efficiency in order to reduce the public deficit.

José María Serrano San: The COVID crisis has aggravated problems that we already knew existed. In 2019 we already knew that the labour market had to be improved, that the Spanish economy's capacity for growth was minimal. In the case of the labour market, the most important thing is to be aware that the main problem is a very high structural unemployment rate of 15%. Below that, there are starting to be shortages in some jobs. We also need to look at long-term issues such as employability and training of workers and those entering the labour market. There are problems that go beyond the reform of hiring and firing. Dual vocational training is like the milkmaid's tale, which seems to solve everything. I wish it would. The market has a problem in the employability of the unemployed that is difficult and that limits our capacity for growth.

Ricardo Martínez Rico: This is one of the reforms necessary to achieve this rate, but all the reforms that allow us to increase the potential growth of our economy are necessary. Labour, energy, public-private partnerships, attracting foreign investment, there are many reforms. We have extraordinary industries that are very much focused abroad. The mismatch is in the training given to people. Active employment policies are not just spending and there is a lot of room for public-private collaboration, because private companies help companies to find jobs. The COVID crisis has changed the way we think. Four million people have withdrawn from the American labour market for various reasons. We have a major challenge of matching supply and demand. Many young people prefer to telecommute, to have more flexibility.

José Carlos García de Quevedo: This depends a lot on productivity and the growth of the size of Spanish companies, which have very low productivity. All the reforms are interconnected and cannot be tackled separately. This is the approach that is given in the recovery plan. The experience of the crisis has highlighted the imperative need for the digitalisation of business.

Íñigo Fernández de Mesa: In Spain there are 3.4 million companies, of which 1.4 million have no employees. Productivity is low because companies are small. In Spain there are 17 different legislations, which has been hell for companies during the COVID. First of all, we have to defend the big companies, because they are the ones that pull the suppliers, the ones that invest in research. We can't have regulatory ups and downs every month and a half because this is disconcerting for investors and entrepreneurs. These are fundamental issues for, for example, financing the energy transition.

Ricardo Martínez Rico: Our very good companies, when they go abroad, have preferred to invest in places where regulation is more stable. A study by the Bank of Spain links the number of regulations with the quantity and quality of the size of our companies. The more regulation, the smaller the size of the companies. It makes it harder to generate strength.

José Carlos García de Quevedo: Companies always invoke regulatory stability and the fact that there are no regulatory changes, but if we want to change reality, we need to introduce changes in the right direction, such as the law on market unity or the law on administrative simplification of procedures. This could favour entrepreneurship and the uniformity of market unity criteria throughout the country.

José María Serrano San: The problem is also regulatory exuberance, which confuses and makes many companies prefer much more prudent countries in terms of regulation, such as the Anglo-Saxon countries in general.

José Carlos García de Quevedo: In any case, Spain continues to be an important recipient of foreign investment.

José María Serrano San: Increasing average company size must be an important part of the reform agenda.

Ricardo Martínez Rico: The autonomous communities show a great capacity for spending, and at times when they have a significant revenue-raising capacity, it is difficult for them to balance their accounts. When it comes to reforming regional funding, no autonomous region wants to lose resources. We should reach a model that can allow the autonomous communities to balance their accounts. It has now been added that the State is the main creditor of the Autonomous Regions, with more than 340,000 million euros. The Autonomous Regions are heavily indebted, around 27% of GDP, double what the stability law would allow them. It is a very complex challenge. What does the State do? Add more complexity to companies? Compete in inheritance and patrimony? A large part of the investment that comes to Spain is from Latin America, which chooses its territories according to taxation. Finally, the request by the Autonomous Regions to eliminate this debt generates a moral hazard.

Íñigo Fernández de Mesa: The regional financing system is hyper-complex, but there are two important elements. A certain amount of competition between them is very healthy and a certain amount of fiscal co-responsibility as well. Those with more efficient tax systems collect more and have less underground economy. With the exception of Madrid and the Basque Country, the rest of the Autonomous Regions have the lowest tax efficiency in Europe. Spain is one of the countries with the highest tax burden in Europe. Companies bear almost ten points of GDP more than the European average, and personal taxes are 18% higher in progressive taxes. We must have an efficient tax system that raises revenue and increases the tax base by reducing the black economy.

José María Serrano San: Tax change is one of the pending and necessary reforms, also in indirect taxation. VAT is complex and inefficient, even from the point of view of fairness, and its main shortcoming is the lack of revenue.

José Carlos García de Quevedo: There cannot be tax competition between European countries. Here, VAT is more or less harmonised. In corporate income tax, measures are being taken at the international level to avoid such competition.

Íñigo Fernández de Mesa: Cutting social security contributions increases the financing of the pension system, but then increases expenditure. Many companies pay much more in corporation tax than the minimum rate of 15%. If you eliminate it, you harm companies that invest in R&D.

Ricardo Martínez Rico: The mutualisation of debt opens an extraordinary but complex door for countries to manage. Extraordinary because we already have a European treasury that accesses the markets at an interest rate between the German and French bond, with an extraordinary guarantee. If our traditional bottleneck has been financing, a lot of financing is coming from Europe, but it has to be implemented efficiently, which is not easy. These funds also require conditionality.

José Carlos García de Quevedo: The implementation of the funds will have to be done through public-private partnerships because the private sector will have to make these investments. Changes must be made to the regulations to make the administration and the companies that are going to decide on these investments more flexible.

Íñigo Fernández de Mesa: To say that Europe is mutualising debt is a little optimistic. It is a minimal part. In Spain, the funds are a magnificent opportunity and support very important sectors. It is very important that the money goes to the company, that there is public-private collaboration and that there is spending capacity.

José María Serrano San: This is a radical change from the previous situation. Not even the countries of the South are mentioned now. The funds are well focused on the sectors in which to invest. The question is whether they are going to be able to manage this enormous amount of money in the short time available to manage it. The government will have to rely on large companies, which have the capacity to manage these large funds. This requires qualified personnel to be able to manage all this.

The Rafael del Pino Foundation is not responsible for the comments, opinions or statements made by the people who participate in its activities and which are expressed as a result of their inalienable right to freedom of expression and under their sole responsibility. The contents included in the summary of this conference, written for the Rafael del Pino Foundation by Professor Emilio González, are the result of the debates held at the meeting held for this purpose at the Foundation and are the responsibility of the authors.

The Rafael del Pino Foundation is not responsible for any comments, opinions or statements made by third parties. In this respect, the FRP is not obliged to monitor the views expressed by such third parties who participate in its activities and which are expressed as a result of their inalienable right to freedom of expression and under their own responsibility. The contents included in the summary of this conference, written for the Rafael del Pino Foundation by Professor Emilio J. González, are the result of the discussions that took place during the conference organised for this purpose at the Foundation and are the sole responsibility of its authors.

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