Spain gets good marks from Trichet, but ECB chief urges yet more work

Outgoing European Central Bank (ECB) President Jean-Claude Trichet welcomes the reform drive undertaken by the government of Prime Minister José Luis Rodríguez Zapatero, but warns that Spain still has a long road ahead of it to restore confidence.

"Spain had done a lot, and still has work ahead of it," Trichet said in a recent interview with EL PAÍS, published last Sunday.

Trichet pointed to progress made by Spain in the three key areas: fiscal policy, the financial sector and structural reforms.

The Zapatero government has embarked on a belt-tightening drive aimed at trimming the budget deficit from 9.2 percent last year to 6 percent this year before bringing it back within European Union ceiling of 3 percent of GDP. It has also pushed through reforms to the labor market and the state pension system, besides instigating broad consolidation in the savings bank sector, tightening minimum solvency requirements.

"I'd say that this is appreciated by external observers who believe that the country is going in the right direction," the ECB chief said. "But this is no time for complacency. On the fiscal side the government has been convincing, That being said, measures have to be followed up, and the deficit target of 3 percent in 2013 is essential for credibility."

Trichet also noted an "enormous difference of perception" in the financial sector with respect to a few months previously, but said more needed to be done. "As regards the savings bank challenge, a lot of hard work has already been done and should continue to be very actively performed."

The ECB chief also highlighted the need to push ahead with labor reform, which employers and a number of experts claim has fallen short of the mark in Spain.

But he also had a warning for countries such as Spain where the indexation of wages to inflation is still common practice. "If unit labor costs are not in line with the evolution of the euro area as a whole, a loss of competitiveness of the economy will be unavoidable, with the consequences in terms of growth and job creation," he said.

Trichet also was upbeat about the possibility of Spain drawing a line under the euro crisis. "Spain in the past has shown a remarkable capacity for innovation, for creativity, growth and job creation. It is a very dynamic country. That makes me optimistic, provided Spain continues to implement very accurately and convincingly its program."

The ECB chief also rigorously defended the creation of the single currency bloc, highlighting the key achievement in ensuring price stability. But he acknowledged the Stability and Growth Pact needed to be strengthened to ensure greater surveillance of fiscal policy. He was equally confident that the euro would survive the current crisis and ruled out the idea that any of the current members could exit the bloc as an "absurd hypothesis."

"If, in 1998, we had been told that for the 12 first years of the euro, we would have a single currency that keeps its value remarkably, with average inflation below 2 percent, a better result than in any member state in the past 50 years, many people would probably have said that it was too good to be true."