Ambassador: Don’t underestimate Spain’s financial system

Rafael Dezcallar de Mazarredo.JPG

Due to its strict supervision mechanisms, Spain's financial system is ''much more solid'' than many others and there are absolutely no plans to ask the EU for help, Rafael Dezcallar de Mazarredo, Spanish ambassador to Berlin, told EURACTIV Germany in a recent interview.

Rafael Dezcallar de Mazarredo is Spain's ambassador to Germany. He was previously political director at the Spanish Ministry of Foreign Affairs.

He was speaking to Elisa Oddone and Daniel Tost.

To read a shortened version of this interview, please click here.

What are your conclusions concerning the Spanish Presidency of the Council of the European Union? What was achieved and what still has to be done?

I think it was a particularly complex presidency because it was a transition presidency. [Council President Herman] Van Rompuy and [High Representative for Foreign Affairs Catherine] Ashton were only nominated on 30 November. There was not much time to prepare for this presidency. Spain, of course, had two scenarios and two preparations: one with the Treaty of Lisbon, one without the Treaty of Lisbon. So we were in fact ready for this.

From the beginning, we wanted to implement the Lisbon Treaty. Spain was the first country to approve it by referendum. We were politically committed to Lisbon. That means we welcomed the new institutions and new mechanisms and wanted to strengthen them.

Van Rompuy and Ashton are the public faces of the European Union. They needed to strengthen their political position and leeway. Here, Spain has tried to help. Of course this means that the presidency, politically, takes a much less visible role. But this is what we wanted with Lisbon and for us this has been no problem.

At the same time, Spain has helped the new European institutions because in the beginning they did not have their staff completely in place. They needed our support.

In the future, the presidency will not be as it was in the past. This is my fourth presidency as a diplomat. It is completely different to previous presidencies. But I think it is good for Europe because we need standing mechanisms. We have to strengthen the new institutions. The rotating presidency has less visibility but it still plays an important role.

The presidency presides over two very important councils: one is COREPER, the Committee of Permanent Representatives; the other is the General Affairs Council, which is very important because it prepares the European Council and then enforces the decisions of the European Council. It also coordinates the other formations of the Council of Ministers – for instance transportation, health and development.

At the same time, there are many issues which are negotiated in the European Union – for instance the SWIFT treaty, the system of financial supervision, the European External Action Service. This means negotiations between the member states, the Commission and the Parliament. The presidency must conduct those negotiations, so it is still active on issues of political substance, but is perhaps less visible on issues of political protagonism.

You are often asked about Spain in context of the so-called PIIGS countries (Portugal, Italy, Ireland, Greece and Spain). What differentiates Spain from the other countries? What difficulties is it facing at the moment?

First I would like to say that I reject the term you mentioned. This is a typical case of prejudice and stereotype. Not all countries in the Mediterranean have the same situation. One of the elements associated with that term is a permanent structural budget deficit: spending more than you have up until 2007. Spain had a budget surplus for many years. We do not have a structural budget deficit problem.

Another element is huge state debt. Spain has a lower state debt than Germany. [It is] lower than France [and] lower than Italy.

Spain has structural problems coming from an excessive reliance on the real estate sector. This has created many difficulties, for instance an excessive demand for workers. That was possible for some time but is not sustainable. Then the real estate bubble burst and we had high levels of unemployment.

The second problem caused by excessive growth of the real estate sector concerns the environment. Many areas of the Spanish coast are not better off after so much construction.

The third problem is the strain on the state budget. The unemployed workers receive unemployment benefits. So we have a structural problem there, derived from a model of growth. Spain needs to change its model of growth. This is already taking place.

But I would like to put this problem into perspective: first of all, through what I said about the state deficit and public debt; secondly, Spain has been transformed as an economy in the last twenty years. We have doubled our GDP in the last twenty years, which is remarkable for a country of our size. We are now the ninth-largest economy in the world, the sixth-largest foreign investor in the world and Madrid is the eighth-largest capital market in the world. We are a huge economy.

Spain has been receiving cohesion funds and we are very grateful to the European Union and Germany for the support. The point is that we have used those funds well and, as a result, we will stop receiving them in two years and will become a net contributor to the EU.

The size of the Spanish market for German exports today is six times bigger than the cohesion funds that Spain receives. Our market for German exports has been larger than the cohesion funds since 1999. This has not only been a success story for Spain, but also for the EU, because we will have one more country that is a net contributor. Also for Germany, which has found a huge market for exports in Spain. Spain is now responsible for 12% of Germany's trade surplus.

So if you set these problems in perspective, you can see that what we have done is in fact a growth problem. Perhaps we have grown too fast. We have made some mistakes in the process, particularly considering the real estate bubble.

The European Commission recently issued a statement saying Spain needs to save more despite government efforts. [Spanish Minister of Economy and Finance] Elena Salgado said additional steps would not be taken…

What she said was that we think our plans for 2010 and 2011 are correct. But we are open to reviewing those plans if we are convinced that additional steps are needed. Now we have got this message from the European Commission and it is an important message. What we have to do is speak to the Commission and agree on what additional steps are actually needed, if any.

The important thing is that we have a mechanism in which Spain presents its plans, the Commission responds, we talk and we come to an agreement. This is how it has worked until now. Spain's austerity package has been very serious. We passed a €15 billion package for 2010 and 2011 in May. There was a previous austerity package for €50 billion in March. Now we have to agree with the Commission on what is required.

There was criticism from the opposition, who called the austerity measures 'cosmetic' and 'useless'. What are the government's arguments?

Obviously, the government doesn't agree and we regret that it was not possible to find a common position on such an issue. We hope that in the future, unity on important issues will be possible. The next such case is discussions on labour market reforms. The government will present and submit its proposals for negotiation. And we hope to have a decision soon, which is really supported by different political parties.

Considering the labour market reforms, trade unions announced that a general strike seems inevitable and there is talk that this could lead to the collapse of the government. What is your assessment?

I don't see any reason to think this way. Trade unions called for another strike by civil servants because their salaries were reduced drastically in May. The strike was carried out by only 11% of the civil servants. That was not exactly a success.

Surveys have shown that there is a large consensus that reform of the labour market is truly necessary and essential. Our labour market needs a healthier structure. We need more flexibility, more ability to change conditions.

One firm in Galicia is very productive; another firm in Valencia in the same sector is not so productive. There is no point in making the same conditions for the two firms even if they belong to the same sector of production. But this is what is happening today. We have to reduce the costs of severance, they are very high: 45 days per year – in Germany it's 30 days.

The government has been negotiating with the trade unions and employers' associations for two years. So, after having tried to solve the problem on the basis of agreement with the trade unions, the government has more legitimacy and authority to make its own proposals. I think the people understand this and most of the political parties understand it as well. I hope that the government will be able to find common ground with the political parties and that the project of labour market reform will have enough support.

There were press reports about European Commission President José Manuel Barroso and European Central Bank President Jean-Claude Trichet being worried about Spanish banks and wanting euro partners to intervene. Spanish politicians stated that rumours and speculation of this kind are bad for the Spanish economy. Would you agree?

[German] Chancellor [Angela] Merkel said recently that she is not interested in creating a problem on the basis of rumours and speculation. There is enough speculation on the financial market. We don't deny that Spain has problems that have to be solved. But we absolutely deny that there is any plan for Spain to ask the European Union for help. We are certain we can solve these problems with our own resources.

The Spanish financial system is much more solid than many other system. We have the largest bank in the euro zone. This is the result of a very solid banking and financial sector with very strict supervision measures. We've had some problems with smaller savings banks.

But there is a system of savings banks being taken over by the government, a process of financial reorganisation and then returning them to the market. This has happened many times, two or three times last year. It is under control. There is another process of making the larger savings banks merge with smaller ones.

You mentioned the Spanish system being very independent. When the austerity measures were announced, US President Barack Obama called Prime Minister José Luis Rodriguez Zapatero to praise the Spanish measures. Afterwards, there was criticism in Spain saying there is too much dependence on the US and too much influence by the International Monetary Fund (IMF). What is your position?

With a realistic view of things, no country is totally independent today because we are all interconnected. Obviously, Obama is interested in the need to introduce reforms in the Spanish economy, as Merkel is interested in the problems being solved too. I find that very normal. In the end, Zapatero makes the decisions, not Obama.

I don't think everyone is happy about what has happened in the last few months. Germany probably didn't want to approve some of the recent EU measures in the beginning. Germany was free to decide otherwise, but did not and it did not lose any independence.

Recently, rating agencies have downgraded Spain's credit rating. This was based on the assumption that economic growth would not be very strong because of the savings measures. How is Spain going to get out of this dilemma?

There is a lot of criticism of rating agencies, because their performance has not exactly been spectacular in the last two years. I think there is an interesting discussion in the European Union to find alternatives and try to establish rating agencies that work on a more reliable basis. In the end, these people are making money. It is a business.

Having said that, I must remind you that there are three major rating agencies: two of them have given Spain the second best rating, one of them gives Spain the best rating. Spain had an 'AAA' rating from all three until eight months ago. It still has an 'AAA' from Moody's and two 'AA+' from Standard & Poor's and Fitch.

When there is speculation, rumours, a lack of rationality about the analysis of the fundamentals of the Spanish economy, this element is never mentioned. In light of this fact, the level of rumours and speculation about the Spanish economy in recent days becomes even more surprising.

What is Spain's position concerning the discussion about 'economic governance'?

We think it is absolutely necessary. This is another very interesting aspect of our presidency. I think this presidency will be remembered as the presidency that has contributed to this debate in the ECOFIN [the EU's Economic & Financial Affairs Council], the presidency in which the first steps towards a necessary and absolutely essential evolution from monetary union to economic union will have been made.

What were the steps? What has been discussed by the Commission: the budget supervision proposals, sanctions for countries that do not respect the message sent by the Commission. This is real coordination, real integration. We are really talking business here.

We are very happy about this process and we believe what we need now is to put these new mechanisms completely in place, to understand what implications they have for our economic decisions and to accompany this process – which is very positive in substance. We are coming from ten years of European stagnation. Europe was sending bad news all the time. Now we are doing something which is really very important for the economic integration of Europe.

However, these substantial steps are still not accompanied by a clear political discourse, a positive political vision – not only of what Europe is avoiding by doing this, but of what it can achieve: much more solid economic performance, a better capacity to compete with other parts of the world, an awareness that our economic interests demand common answers and in the end, something which will have inevitable implications towards political integration.

Do you think the obstacle to achieving an economic union is the fact that countries are afraid of thinking on a European scale?

Of course. These changes have happened because they have been forced by events. Our option now is to get rid of the euro or keep it. If we want to keep it, we have to strengthen the structures and this is what is happening. From monetary union to elements of an economic union. If we have an economic union, I am certain it will lead to more political integration.

Merkel and Sarkozy want 'treaties with teeth'. This would mean that changes would have to be ratified in a long process. What is Spain's position concerning the idea of treaty change?

Frankly, we are not exactly excited about a new process like the ratification of the Lisbon Treaty. I think the decision now should be to try and establish solid mechanisms within existing treaties.

I also think it is essential to accompany this idea with a political vision, one that not only says ''this is necessary because otherwise it will result in a catastrophe," but also that it is necessary because Europe will be stronger. This is what we need to compete in the world today.

The EU-Western Balkans conference recently took place in Sarajevo. It was said that it was a matter of "window cleaning" and it was described as a disappointment. What is Spain's perception?

We disagree. I think it was generally considered to be a good conference. Attendance was very good. The attendance of Serbs and Kosovars was at the highest level. I can tell you, it took a lot of preparation.

The message sent was that of the renewed European commitment to the European perspective for the Balkan countries. Considering what is happening in Europe today – the level of problems we have and the very complicated process of digesting the last enlargement – the message was necessary. It is the only message that can help the countries in the region, particularly Bosnia [and Herzegovina].

This is why the conference was held in Sarajevo, to introduce the reforms needed to succeed. The message was clear and went a little beyond what was expected.

We have unlocked the problem of the ratification of the Stabilisation and Association Process with Serbia. The Serbs now want their candidacy to be discussed by the Commission. That is the next step.

Some countries are prepared for this, like Spain. Others are not. They want to wait and see what happens, for instance with the position of the International Court of Justice [on the status of Kosovo].

Could you elaborate on Spain's position concerning Kosovo?

At the time of the negotiations, I was the political director and directly participated in the negotiations. For Spain, it was not so clear why independence was the only possible solution to the problem. We understood the situation but thought that independence was not the best solution. This is why we took the position we took and this is not only Spain's position but that of many other countries – not only in the European Union.

But of course this is open to debate and other countries don't agree. The question is: what do we do now? Looking back won't help. Now we have Kosovo and we have Serbia.

We will have to collaborate in the European Union to try to coordinate our actions and to help achieve the only possible solution for this problem, which is some kind of understanding between Serbia and Kosovo.

Serbia will never recognise Kosovo, at least not for the time being. But some understanding might be possible. On what basis? There are different formulas, there are different ideas, some are already being discussed.

We need to find this understanding and Spain can help and will help. We have to do it in full coordination with Germany and our other friends because we really want the same thing. We have a disagreement on independence. But in the global picture, we are in full agreement. We want stability for the Balkans, we want a European perspective for all the Balkan countries and we want it to stop being a region in which problems occur.

What do you think the International Court of Justice will decide?

I am no prophet. We will have to wait and see.

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