"The future will be decided by the next labor reform"

José Manuel González-Páramo is well acquainted with the inner workings of economic power. He was a member of the board of the Bank of Spain, between 1998 and mid-2006, when he joined the executive committee of the European Central Bank (ECB) on the recommendation of the Spanish government, then run by the center-right Popular Party (PP). Many people believe that he will be part of the economic team advising PP leader Mariano Rajoy, who is widely expected to win the November 20 general elections on the back of widespread discontent over the Socialists' handling of the economic crisis. He does not deny it.

Question. Is Mario Draghi's appointment to the ECB presidency and his decision to lower interest rates a correction of his predecessor's policies?

"The markets won't wait for 17 parliaments to take substantial steps"

"The rigidity of the labor market was Spain's old problem that got worse"

Answer. Continuity is what must be expected of Draghi, as he said. The bank's mandate remains the same. Lowering the rates was not Draghi's decision, but a unanimous decision by the entire board.

Q. Is it not contradictory to lower the rates because a mild recession is on the way, yet at the same time demand bank recapitalization (that is to say, less credit) and government austerity (that is to say, less growth)?

A. No. The epicenter of the tension continues to lie in sovereign debt and its connection with the weakness of the banking system. Lack of trust is reflected in bank financing. We need to ask governments and banks to live up to their responsibilities - banks by recapitalizing and governments by implementing austerity plans and structural reforms. Europe must convince the world that it has the potential for growth, and risk premiums will go down.

Q. Will excessive austerity bring about a relapse into recession?

A. We are witnessing measures that aim to limit the increase of public debt. There is leeway in the structural reforms, budgetary control and improved governance. We have a single currency, but we are still lacking the kind of governance that would strengthen the euro.

Q. Why have the European Union and the ECB been unable to solve the crisis?

A. We have reacted excessively slowly to the pressure from the markets. The gravity of the situation was acknowledged in May 2010. There has been progress on the monetary front but very little in terms of integrating fiscal policies. Seventeen parliaments must intervene in order to take substantial steps, and the markets are not willing to wait that long. There has been progress, but slower than what the markets were expecting. The EU needs to make a leap of such magnitude that its democratic legitimacy will probably require a change to the Treaty.

Q. The PP talks about flexibilizing the labor market further. The Socialists defend bonuses for hiring people. Which labor reform does the ECB like best?

A. Labor reform is necessary, and even the government admits that. I am not familiar with the parties' proposals, but the basic problems are the centralization of labor negotiations and how little sectorial conditions reflect on salary negotiation. This is the cause of a lot of unemployment. Salary adjustment to the CPI is a disaster, because it holds back labor reforms.

Q. Is the welfare state at risk?

A. With a 22-percent jobless rate, there is no doubt about it. Social achievements are financed by contributions from everyone. That is why the labor reform is so important, because that is the basis of the state's revenues. Unemployment is an expense and it prevents pensions from being financed because working life is so short. Almost everything in the future will have to do with the labor reform.

Q. How is Spain seen from the outside with regard to its battle against the crisis?

A. Spain tackled the crisis late. It took longer than other European countries to adopt measures. Perhaps it was calm because there was a surplus and the sovereign debt was not under pressure, as it was in May 2010. By then, housing prices had already gone down and the rigidity of the labor market was an old problem that got worse. Proof of it is the fact that Spain grew above 4 percent for many years yet barely managed to get unemployment below 10 percent.

Q. Is Spanish banking in a worse position than others?

A. If we want the markets to trust Spanish lenders, who are facing the real-estate bubble, high jobless rates and sovereign debt ups and downs, there is no other way but to have enough capital as a cushion.

Q. Is the Bank of Spain more demanding than other supervisors?

A. It is objectively demonstrable that the Bank of Spain is more conservative and stricter than the rest. It expects more capital per risk unit.

Q. Earlier you said that the government acted late. Did the Bank of Spain act late, too?

A. After the event it's always easy to say whether you went fast or not. Let us not forget that powers over the financial system do not only depend on the central bank, especially with regard to the savings banks. The supervisor wanted to act faster but it couldn't because it was not autonomous in its decision-making.