1) Professor, what do you consider the most effective measures that should be implemented by the Spanish government in the existing European debt crunch?
In the current financial environment it is difficult to avoid the contagion of the debt problems of other euro countries. Obviously, the new government should undertake a deep reform of labour markets and collective bargaining; it should also complete the reorganization of the financial system; and, most importantly, it should reduce the frictions in labour and good markets to generate economic growth and reduce unemployment, which is our basic economic problem. However, it would be too optimistic to think that dealing with this policies will isolate the Spanish economy from the contagion coming from other European countries. The level of private debt is too high to be isolated from what is happening in the debt markets around the world. Although I do not think that Spain is in a critical condition as other countries that needed a bail-out in the past, if the risk premium is maintained for a long period of time as high as in the last auction, then the Spanish debt will not be sustainable and we could see a bail-out. In any case, in the contemporary situation the debt projection is still clearly sustainable.
2) To your opinion, what are the prospects that the budget targets and GDP forecasts for the next year will be achieved?
At this points it is unlikely that the Spanish economy grows in 2012 at the speed projected by the government just a few months ago. In fact, the updated projections of forecaster is a -0.5% in 2012. The Spanish government is still claiming that the budget target of 2011 will be achieved although most forecast point to close to 7% of deficit to GDP ratio (target 6%). Even the EU projects a ratio of 6.6%. For 2012 and 2013 the projected budget targets are also difficult to achieve without further reduction in public expenditure.