Competitiveness and growth in EMU: The role of the external sector in the adjustment of the Spanish economy

This paper assesses the relevance of the competitiveness argument in the debate on the current situation of the Spanish economy. We estimate error-correction models for exports and imports. Econometric analyses suggest that external demand and domestic activity are the more important determinants of net exports in the long run. However, where competitiveness is concerned, its impact on export growth in the short run appears to be higher than in the longer term. Moreover, during major downturns, the recovery of the Spanish economy has systematically been led by exports, which, in turn, has been associated with strong and rapid competitiveness gains, brought about by competitive devaluations. Since the exchange-rate instrument is not available anymore at national level, there is a case to assess the respective role of fiscal and structural policies in underpinning the recovery of the Spanish economy at the current juncture. The paper concludes that the room for manoeuvre for fiscal-policy stabilisation is currently very limited. In contrast, reducing the weight of distortionary taxes and/or increasing the weight of productive expenditures in a budget-neutral way would have positive impacts on potential growth. Boosting net-export growth crucially depends on the implementation of a comprehensive reform programme, within the framework of a broad social agreement, aiming at recovering competitiveness throughout enhancing competition, improving the functioning of labour and product markets, including the housing rental market, increasing physical, human and knowledge capital accumulation, promoting wage moderation and avoiding price-wage spirals. A pro-active role of the Spanish government in the social dialogue would provide guidance in the process and promote the agreement