Speech and subsequent Q&A session with President of the Government at conference entitled "Restoring Competitiveness", organised by the Financial Times

Madrid

Ladies and gentlemen, a very good day to you all. Thank you very much for coming and many thanks to the Financial Times for organising these conferences and for inviting me. It is a great honour to be here. Many thanks also to Mr Rachman, the editor of the international section of the paper.

I have been asked to make a speech of some 20 minutes; Now I have heard something about 15 minutes but I will try to keep to these guidelines. I will speak about the Spanish economy and divide my presentation into three sections: first, our position when we came to power and what we have done since then; second, where we are at now and, third, how I see the future.

We came to government in 2011. I took office as President of the Government on 21 December; hence, our first year of government was 2012. The situation back then, I repeat, in 2012, was as follows: according to some, Spain was heading towards bankruptcy and needed to ask for a bailout; according to others, Spain had to exit the Euro and full stop; then there were others who said that the Euro was going to disappear, that there would be two classes of Euro, etc. But I won't go into that.

There was also talk that we wouldn't be able to correct the serious imbalances of the Spanish economy, or hence improve our competitiveness and, consequently, we would not be able to grow or create jobs for a long time.

Probably, those who thought this way had their reasons for doing so: the public deficit was above 9%, the foreign trade deficit and inflation were off the charts; part of our financial system was, as later become clear, bankrupt; the competitiveness differential with the rest of the Economic and Monetary Union was unacceptable; foreign debt was disproportionate; unemployment had been rising for over four years; growth was negative because we had been in recession for a long time, and as if that wasn't enough, the risk premium was in excess of 600 basis points and the yield on the 10-year bond was above 7%.

That is where we were. What did we do about this situation? What we did was approve a five-point programme: our economic policy programme that I announced shortly after the Investiture Debate; secondly, Spanish responsibility; thirdly, European responsibility. And we needed to do two things in Spain: firstly, undertake a fiscal consolidation process and, secondly, a structural reform process.

I will firstly talk about the fiscal consolidation process. With a public deficit in excess of 9%, the country cannot survive, as you can imagine, and, moreover, you run a very serious risk of having funding cut off altogether.

I would like to say that Spanish society has made a tremendous effort and that everyone should acknowledge this. We have reduced the deficit in two years, in 2012 and in 2013, while in recession, because economic growth in 2012 stood at -2.1% and in 2013 at -1.2%. And believe me when I say that that was very tough to do. We closed 2013 with the public deficit at 6.3%, still a very high figure, but almost three points below our starting point, I repeat, and we did this during two years of economic recession. The target for this year is 5.5%, we will meet this and we must continue along this path in the future. And the higher the economic growth, the easier it will be to do away with the public deficit.

I also want to say that, in addition to the ongoing fiscal consolidation process, we carried out a major exercise in transparency, since Spain had a trade deficit that wasn't even a financial debt, but a debt that indeed existed, to which end we placed 105 billion euros in circulation through the Supplier Payment Plan, which served, among other things, to pay suppliers, and through the Regional Liquidity Fund, to pay the outstanding debts of the regional governments.

Hence, firstly, fiscal consolidation. Secondly, structural reforms. That is the major operation that has been carried out in Spain in these years and which means, above all, laying solid foundations for the future of our country. I will remind you of just a few of them - I only have 15 minutes left - first, the Constitutional Law on Budgetary Stability and Financial Sustainability that we passed within a month of coming to power; second, a total overhaul of the Spanish financial system that even obliged us to nationalise three financial institutions; third, the labour reform, which was very important; fourth, the energy reform to remove and avoid a disproportionate increase in the tariff deficit that was leading the system to bankruptcy; fifth, the first reform of the public administration services in 30 years, which is still under way; sixth, the Markey Unity Act, the reform of the Education Act, the Law to De-index the Spanish Economy, various sector laws on agri-food issues, telecommunications, etc. the Entrepreneur Act, the tax reform, which will be approved at the end of this year, the flat-rate National Insurance contribution - 100 euros for permanent employment contracts, etc., etc.

There are many more, but these are the most important. This process of structural reform is undoubtedly what has enabled us to come out of economic recession, but the structural effects that will derive from this raft of structural reforms I have just mentioned on the Spanish economy in the medium and long term, are the most important.

I spoke earlier about a five-point programme; the first two being fiscal consolidation and structural reforms at a Spanish level. The three other points are at a European level, which I will limit myself to simply pointing out.

First, EU-wide reforms. We need a more developed internal market; some things have been done, but there is still a lot to do. Second, more European integration; many things have been done, above all following the European Council in June 2012 when we spoke about banking union, fiscal union, more economic and political union; today banking union is a reality, but we need to carry on with the process. And finally, monetary policy; we need to adapt it to the specific time in which we live, have lived or are going to live. I feel I should say that the European Central Bank, within the powers available to it, and respecting its independence, has done some interesting things.

So, ladies and gentlemen, that is the first part of my speech: how we were and what we have done. In summary: how were we? In a very bad state. What did we do? Implement a process of fiscal consolidation, structural reforms and work at an EU level to improve things.

And now moving on to the second part of my speech. How do we stand after implementing everything that I have just mentioned? We are better off than in 2012 and 2013, but worse off than we will be in 2015 and the following years.

I will give you a brief explanation of how we are better off than in 2012 and 2013. We are better off because no-one is now talking about bailing out the Spanish economy. Nobody is talking about leaving the Euro. We have managed to correct a good portion of our imbalances, we have established sound bases for the future, we have corrected out competitiveness differential with Europe, and fortunately, no-one is now talking about the risk premium because it stands at less than one-fifth of the level it was at less than two years ago. And, moreover, and more importantly, we are growing. The last four quarters have all seen economic growth: 0.1% in 3Q 2013, 0.2% in 4Q 2013, 0.4% in 1Q 2014 and 0.6% in 2Q 2014, and all of this following a very long period of recession in our country.

And more importantly still: on 30 September this year, just a few days ago, there were 356,258 more National Insurance contributors in Spain than in September last year. This is change and I will pause here briefly: following 68 consecutive months, I repeat, 68 months, in other words, almost six years in which in each month of each year there were fewer National Insurance contributors than in the corresponding month the previous year, in February 2014 the turnaround took place and there were more National Insurance contributors than in February 2013. That has continued each month to date and will continue in the future.

Finally, the latest Labour Force Survey published, corresponding to the second quarter, showed an increase in the number of people in work in Spain, in year-on-year terms, of almost 200,000 people, something not seen in our country in recent memory.

And if we talk about the Unemployment Office figures, I should remind you that there are presently fewer people registered than in December 2011.

So, ladies and gentlemen, that is the change. The change is that we are now seeing net employment in Spain; but, of course, this is still not sufficient and hence what we must do now is persevere and continue working. And on that note I will move on to the third part of my speech. What are we going to do in the future and how do I see the future of the Spanish economy?

We must persevere with the five points I mentioned in the first part of my speech. We must continue with fiscal consolidation; I repeat, this year we must reduce it to 5.5% and we must continue next year, in 2015, and in 2016 and in the future.

Secondly, we must continue with the structural reforms. The most important of these at this time are the reform of the public administration services, which will take time, on which certain decisions have already been taken; the market unity reform; worker training - a very important decision - and the tax reform. The tax reform means reducing Personal Income Tax for all Spanish taxpayers as well as a five-point reduction in Corporate Income Tax, in addition to other regulations which I will not go into because we are short of time.

In Europe, we must continue working on the three points I referred to earlier. First, market unity, with the single energy market being a major priority, with interconnections with France; the single digital market of services and financial services. Second, integration; we have made significant progress, as I mentioned earlier, on banking union, but I believe we must make more progress and now start to speak seriously about fiscal union in the near future. And finally, it is important that the liquidity conditions are better in our country and in the European Union as a whole.

How will things go if we continue to persevere? Spain will continue to enjoy economic growth. I repeat that we have grown in each of the last four quarters: the third and fourth quarters of last year and the first and second quarters of this year, we will see growth again this quarter and the government forecasts that this year, in 2014, economic growth will amount to 1.3%. Let me remind you that we posted economic growth of -1.2% in 2013 and of -2.1% in 2012. The coming year, the growth forecast for Spain, according to the government, which coincides in many cases with many reputable analysts at home and abroad, is for Spain to enjoy economic growth of 2%.

The foreign trade sector will remain positive this year. I should say that imports are on the rise because domestic demand has improved, but our competitiveness allows us to continue with a positive foreign trade sector.

In order to maintain this situation in the future, the euro exchange rate, petrol prices and the situation in the rest of the EU Member States will be crucially important. Just remember that more than half of Spanish exports are to the rest of Europe, although this figures has dropped on the levels of two or three years ago; but our leading customer and supplier is France, followed by Germany and then, with very similar figures, the United Kingdom, Italy and Portugal. Hence, to a great extent, the situation in these countries directly affects the Spanish economy as a whole.

In terms of domestic consumption, it is on the rise and will continue in this vein in the future, together with the consumer confidence indicators, and in recent months we have seen certain positive figures even for retail trade, automobile sales, tourism, etc.

As regards the future, we believe that the tax reform is very important for maintaining consumption, which will leave 9 billion euros in the hands of taxpayers over the next two years, and also the increase in job creation and, albeit to a lesser extent, lower interest rates on mortgages.

In terms of investment and industrial activities, the perspectives are good, financing costs are on the decline, we are maintaining our level of competitiveness and there is greater demand as consumption has risen, thus making Spain a more attractive country for investment, both for national and foreign investors. I should add that foreign investment has risen this year on last year, by two points of GDP or 20 billion euros. Here I am only talking about the private sector, not about the purchase of public debt.

In terms of employment, the situation continues to improve. When we made our employment forecast for this year we spoke about a fall of 0.2% but by the end of the year we will post a rise of 0.7%; I also believe that next year will again be a good year for employment.

In short, the situation continues to be complicated. It is clear that we have come out of the worst times, since this year we will enjoy economic growth for the first time in Spain in many years; I repeat, for the first time in many years. We have gone through the worst economic crisis in the last three generations, we have seen jobs being shed for a long time now and we have suffered negative growth for years but we can now say that for the first time, in 2014, there is economic growth; in 2014 we will see net employment created and in 2015, there will be more economic growth and more net employment.

But we must persevere with the policies that have we have set in motion in recent times. We have had to take tough and difficult decisions, we are all aware of that. The people of Spain have clearly risen to the circumstances, because they have appreciated that certain things needed to be done, and I believe that, despite everything, Spain can now say that it has clearly mapped out a path to economic recovery and that it has known how to maintain the fundamental pillars of the Welfare State.

Thank you very much

Q&A session with the President of the Government

Q.- Thank you very much, President of the Government, for your very interesting and very clear speech on the progress achieved in the Spanish economy. I would like to speak about the economy in a moment's time, but overnight there has been some dramatic and very interesting news regarding Catalonia. Hence, I would like to start by asking you about your reaction to this news that Catalonia will not be proceeding with its plans to hold a referendum.

President of the Government.- Indeed, I believe that this is the most important news to come through last night. This morning, at this time, an appearance has been announced for the President of the Regional Government of Catalonia, Mr Mas, I seem to remember for 10 am, and hence I don't want to jump the gun.

I can say one thing: the fact of not holding a referendum, if that is indeed the case, is excellent news. Spain is a democracy, it is an advanced nation and upholding the law is an obligation that falls on all of us, and more so for those of us who have taken on governmental responsibilities. Hence, if this is confirmed, it will be excellent news.

Aside from that, I believe that we should remember that Spain is the oldest nation in Europe. Spain achieved national unity many centuries ago and there is no older country in Europe than Spain. We have done many things together throughout our history.

Over the last 50 years, Spain has posted the fourth highest increase per capita income in the world; Spain approved its constitution in 1978 at a very difficult time when I should say - I wasn't there in power but cast my vote as a citizen - that the Spanish people and the political class rose to the occasion. This constitution guarantees our rights and our liberties; this constitution is democracy itself; this constitution enabled us to join the EU; this constitution allowed us to experience the most significant years of progress in our history and this constitution established a model of State that is the most decentralised in the world - with the sole exception of certain Canadian provinces - which gave the regional governments more autonomy than ever before.

If we remove pensions, public spending under the government I head up is 20% of total Spanish public spending. The regional governments of Spain represent 38% of public spending.

Aside from that, what do I believe we should do? I always say the same; life is about looking to the future, isn't it? I believe we need to overcome certain things we have gone through in recent times; I believe we need dialogue; I believe that we should talk and of course I want to say that there are many of us that sincerely want to live together, deep down, because we have done many things together and we believe that we can do many more things together in the future, and the bigger you are, the better you can do things because you have more influence and more sway.

Q.- This is very welcome news indeed for you; but of course there were hundreds of thousands of people in Catalonia who were asking for a referendum. You spoke about talking with them, about dialogue. What new offer can you make to Catalonia?

President of the Government.- Look, the only offers I can make are offers regarding the future. What I mean is that until now the only thing offered to the Government of Spain, which was announced, was that an illegal referendum was going to be held. The government cannot operate outside of the law, not even the Spanish Parliament can. This is a very different situation to the one in the United Kingdom. Parliament is sovereign in the United Kingdom, and hence, Parliament can take the decisions it sees fit, and that is what happened. In Spain, Parliament is not sovereign, the Spanish people are, and the Spanish people approved our Constitution and in this Constitution there are certain things that can only be changed if the Spanish people say so. I cannot and neither can the Lower House of Parliament.

Hence, if our leaders want to place themselves outside of the law, we are allowing them to tear apart the very essence of our democratic system. Aside from that, things are as they are and we can talk about anything. I can talk about anything, I have always said that. I have never refused to enter into dialogue, but I believe that the most important thing at this time is for us to be able to build a project together.

Spain is the fourth largest economy in the Eurozone, with 46 million inhabitants, and we have done, as I mentioned earlier, many things to improve our future. Spain is a country that has made great progress. What I want is to develop a progressive project, a project of greater European integration and a project that improves our competitiveness, and which definitively pulls us out of the economic crisis. We have to improve many things (research, science, technology, training, etc.) and what we want to become, and we are in a position to do that, because we have done it before, is a great country, but all together.

Q.- I will move on now to talk about the economy. It has clearly returned to growth and that cheers us greatly. For someone from outside Spain, however, it is still very surprising how high the unemployment rate is. How do you see unemployment falling and how do you see the timeline for achieving that?

President of the Government.- In the 2008-2011 legislature, 3.4 million jobs were shed in Spain; that was a truly difficult period. During this same period, in just two years, 70 billion euros were lost in revenue, in other words, seven points of Spanish GDP. And the biggest challenge undoubtedly facing us is unemployment.

I have given you certain figures in my speech, there are currently 356,000 more National Insurance contributors than a year ago. Also the Labour Force Survey (Spanish acronym: EPA), which are the figures published by Eurostat, shows that for every two new jobs created in the European Union, one of these is created in Spain. Logically this is our main priority and our main objective. It has been since we came to power and since I gave my investiture speech.

What are we going to do? Work along all those lines I mentioned earlier. Jobs are not created by a decree-law or by implementing a measure, this is done by economic policy as a whole. For me, having a reasonable public deficit remains a priority; continuing with structural reforms remains a priority, as is doing things at a European level in the most reasonable manner possible. We are going to place great emphasis on training workers, because we believe that this is a key issue. We are going to try to help companies and not long ago we approved a flat-rate National Insurance contribution of 100 euros for those who hire workers under a permanent employment contract.

And I believe that this is working. Now, Spain traditionally, even at the time when six or seven million foreigners came to live in Spain, has always had an unemployment rate of between 8 and 10%.

Q.- You mentioned in your speech that, even as Spain is recovering the rest of Europe is in difficulties. Are you very concerned about this? What is your take on this austerity debate? Do you believe there is too much austerity in Europe?

President of the Government.- Those are two things: if I am concerned about the economic situation in Europe and whether there is too much austerity.

Well, quite frankly, I would love to see my neighbours doing better than me; I can say that with all honesty. The lion's share of our economic relations and of our imports and exports come from Europe as a whole. Before I mentioned France, Germany, and then, much of a muchness, Italy, the United Kingdom and Portugal. I didn't like the latest economic figures to have been published - the official ones are from the second quarter - because Europe posted 0% growth. Spain grew by 0.6% in this quarter, which gives us a base to work from, but it is important to see growth.

You then asked me about the famous debate on austerity. Let me tell you about my experience. I took office, as I said before, on 21 December 2011; the first European Council I attended was in January 2012; when I went there we had a public deficit of 9.2% and I was told we had to reduce that to 4.4% during 2012. In other words, I had to reduce it during the year from 9.2% to 4.4% and, moreover, during an economic recession, because growth for that year stood at -2%.

Let me give you an example: if you go to the doctor's and he says, "you have to lose 15 kilos of weight because, if not, you will have health problems", that is okay, but give me a year to do so, not a week.

I should say that the talks with the European Commission went well, Spain was given certain flexibility in the deficit target, which Spain has complied with. In other words, the issue is that we are going to try to do things but we will do so realistically. You cannot lower it by five points of GDP, because it is impossible.

Hence, I believe that it is indeed necessary to control the deficit; in other words, you cannot live with a 6 or 7% deficit. In the same way as a family cannot live…, a family that earns 1,000 cannot spend 1,200 its whole life, because it goes bankrupt in the end. That is important and that must go hand-in-hand with structural reforms, as I said in my speech.

Now, for example, there is a good initiative - let's see how this pans out in reality - from the new President of the Commission, Mr Juncker, who wants to implement an investment plan of some 300 billion euros. Most welcome! Let's hope this comes through and quickly, but, I repeat, the economy must be the whole of many parts and you need to have healthy public accounts, or at least that is what I think; I believe this is fundamental.

Q.- You now have very good relations with the Commission, but it would seem that France is going to have a confrontation regarding its deficit. Recently in the Financial Times we spoke with the Italian Prime Minister, Mr Renzi, and he said that it would be ridiculous for the Commission to reject France's Budget. What do you believe?

President of the Government.- I am not going to tell the Commission, or France, or Mr Renzi, what they have to do or say. Earlier I told you about my experience, which tells me that when faced with a sensible, reasonable plan which seems possible to meet, and when you can clearly see that there are grounds for this to be fulfilled, you can talk about or reach an understanding, and I am absolutely convinced that this is what will happen. Let's hope this is the case.

Q.- But, how much development do you think needs to take place as regards the budget deficit rules? Or are you okay with the budget deficit rules that are now in place?

President of the Government.- Of course, in Spain, as I have stated, we intend to reach a 5.5% deficit in 2014. I believe that this is a very high figure. We are forced to ask, in this case, for 55 billion euros and, moreover, this then gives rise to increases in the public debt.

In the end, we have seen that the latest problems to arise in Europe have happened to those countries that didn't do things well and we have seen how the markets respond in recent years.

Hence, there is something that never fails in life, which is doing things well. When you do things well, you don't have problems, not even in the tough times, but when you do things badly, perhaps you don't have problems during the boom periods, but, obviously you do in the hard times.

I believe that the Fiscal Compact adopted and signed by all the Member States of the European Union, except, I believe, the United Kingdom and the Czech Republic - this took place at the start of 2012 - set certain rules on the public deficit and the public debt which seemed to me suitable on the basis that there is something which is also very important, which I have been asking for over time, and that is flexibility. Flexibility is also a principle and a value in itself.

Q.- You said in your speech that no-one is now talking as they were when you came to power about the possibility of doing away with the Euro or about Spain having to ask for a bailout. It seems like investors are returning. Can you assure them that the debt crisis has reached its end and that the perspectives regarding doing away with the Euro no longer exist?

President of the Government.- Yes, I am absolutely convinced that the Euro is here to stay and that the Euro is a project which there is now no turning back on. Moreover, I am absolutely convinced that no country is going to leave the Euro, not at all. In other words, this is a fight that many countries have been waging for a long time and it is a fight that has been won.

Just take into account that the European process is not easy. We are now 28 countries, decisions are taken, on many things, unanimously and reaching agreement between all of us is not easy. Europe is not something we built in a day. The Treaty of Rome dates back to 1956, approximately, but before the Treaty of Rome we had the Coal and Steel Treaty, and before that there was talk about European unity. We have been dealing with this for many years and little by little decisions have been taken, perhaps the most important being our currency. We no longer have monetary policy or exchange rate policy; that is a major change. The single market is very developed and now the supervision of financial institutions will not be done by the Bank of Spain, but rather by the European Central Bank.

In other words, this is a process that has taken a long time, and is ongoing, but all the steps taken are steps forward. I am absolutely convinced that the Euro is absolutely irreversible and that, moreover, no-one is going to leave the Euro.

Q.- I wanted to finish with a question on the subject I started with: politics. Certain people see European politics as having been radicalised. In my own country there is a political party that wants to see the United Kingdom leave the European Union. Do you feel that this step towards the independence of Catalonia and the rise in the far left are in response to the economic crisis?

President of the Government.- In reality, the question is very suggestive. Let me tell you something about Europe.

Major countries in the world, major world economies, with wonderful GDP, don't have for example, a public pension system; they don't have, for example, a public health system; perhaps they have something of a public education system. And they have little social care. Europe still amounts to 25% of global GDP. Europe has a welfare system - I am talking about pensions, education, healthcare, etc. - like nowhere else. In order to maintain this model, which I believe deserves to be maintained, because I believe that this is a great achievement, we need to be more competitive and we need to do things well, and we shouldn't let other countries overtake us.

Let me tell you one thing: many people don't know this or they prefer to look the other way, but I obviously feel European, I want to live in Europe and I don't believe there is anything better than Europe at this time. I believe that the traditional European party system is good. Great countries are those that have a party system, with two, three or four parties. Just look at the United States, at Canada, at the United Kingdom, Germany or France. When you don't have a party system, you can find different people coming out on top, to put it this way, as has happened in other parts of the planet.

Hence, the economic crisis has been tough and complex, but I, of course, when I sit down at a European Council with 28 people and these 28 people are the heads of their respective countries, I don't see anyone who seems to me mean-spirited or strange. I am a great believer in the common sense of European citizens, because this is also one of our values, our essences and our ways of being.

Q.- Thank you very much.

President of the Government.- Thank you very much.