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CNBC Transcript: Interview with Spanish Economy Minister Luis De Guindos

Following are excerpts from the transcript of a CNBC interview by Julia Chatterley and Spanish Economy Minister, Luis De Guindos


JC: So Spain is set to be the fastest growing country of the 4 biggest Eurozone countries this year, is Spain the authentic poster child for the recovery and reform in the Eurozone?

LDG: Well I think that the Spain sets an example for the Eurozone, we have implemented important reforms for instance financial sector in the liberal market, we have reduced our public deficit and now we are outpacing the majority of our peers in the Eurozone, this year the growth rate of Spain is going to exceed 3%, our prediction is that it is going to be 3.3%, employment creation is going to be quite rapid, this year the Spanish economy can create close to 600,000 new jobs and this is something that is outstanding and is remarkable, especially because we have a very high unemployment rate, simultaneously we are a quite competitive economy and the banking industries is in an entirely different situation than it was only 3, 4 years ago so in the turnaround the Spanish economy has been quite remarkable.

JC: I want to pick up on the jobs, because you mentioned it a couple of times there, the PM said when you guys came into power you were losing 1430 jobs a day, now you're gaining 1492. I mean the structural shift is huge, but as you quite rightly said, 21%, more than 50% youth unemployment – it's still a crisis.

LDG: Yes, it's a real problem of the, not only of the Spanish economy, it's a real problem of the Spanish politics and social problems of Spain. We have to reduce much more rapidly the unemployment rate. We have to increase jobs, the commitment is to create about 2 million jobs over the next four years at a pace of 500,000 jobs per year and this is the real challenge of the Spanish economy. But I think that we are in the correct direction, we are not out of the woods, but we have made important progress in the past.

JC: The big criticism of your party heading into this election has been look the quality is not good, you're creating temporary jobs, you're seeing people leave the workforce you're seeing people leave the country and actually what you're talking about here in terms of benefits in jobs actually isn't really there, it's not a strong foundation, would you disagree with that?

LDG: Well I think not when you were in the situation when the Spanish economy was only 3, 4 years ago with an unemployment rate that was close to 27% of the labour force well the main objective and the main target was to create jobs, and we have started to do that and we have started to see that the quality of the jobs that have been created by the Spanish economy recently over the last few quarters, you know half have better quality than in the past, so I think that this is a normal process, this is the cycle of the liberal market and we have started to see that because of the productivity gains in the Spanish economy wages have started to rise and take into consideration also that inflation rate in Spain is negative so there is gain in power for the Spanish households and for the Spanish employees, but my impression is that over the next quarters we will see that the Spanish economy is going to create a lot of jobs and that the quality of these jobs is on the rise and that the only point is that we have to maintain our competitiveness and our productivity gains that's the real point, and I think that the evolution and the creation of the jobs will go in parallel to these productivity gains and competitiveness gains that the Spanish economy has made in the past.

JC: Because you've also benefited from a weaker Euro, but if I look at your export performance, nearly half of it is low value goods; Fuels, food, which isn't a problem per se, but if we are reforming, if you are focusing on innovation, shouldn't you be seeing a higher proportion of higher value goods? Or is that asking too much (HE INTERRUPTS) too soon?

LDG: But I .. I don't know if you have had the opportunity to look at the breakdown kind of items in Spanish exports? First of all for instance the avg goods and exports of the Spanish economy over the last, over the last few months is €25 billion per month. And there is a lot of value and there is a lot of quality products. There are capital expenditure err goods, there are also services, it's totally right that there are other elements like food. But this is not just food, you know, this is ?? when Spain has the future and we have been gaining a lot of market value, so I think when you analyse the composition of the Spanish exports you will realise that the formation of the Spanish economy also and that we are not only exporting raw materials at all. We are talking about capital goods, we are talking about cars we are talking about manufacturing, manufacturers and I think this is something that is relevant, this is the question, the point, that the Spanish economy is becoming more competitive. We have been gaining market share and becoming more and more competitive. We have been gaining market share on the world markets, not only in the Euro Zone, but outside the Euro Zone and we are able to compete with a lot of countries, not only with low wage countries and less advanced economies, countries, I think that we are doing a good job in that regard.

JC: I read that out of 9 out of 14 quarters that your governments been in power actually wages fell, I mean that squeezed…

LDG: *INTERRUPTS* …we have started to see this year is that wage evolution is positive is growing at the rate of 1% and simultaneously you have to bear in mind that inflation rate is negative so there are improvements in that we have this possible income of the employees of the labour force in Spain, and simultaneously and I think that this is also that something that we have to take into consideration, but you can't realise what you can see is that we have reduced tax wage on wages and this has improved the real disposable income of the Spanish workers.

JC: You mentioned the deflation there, how much of that is a problem to the psyche of the Spanish people?

LDG: In Spain we don't have this sort of deflation. The core inflation is slightly positive, the headline is negative. But simultaneously deflation is characterised by a process, what's this process? Where you know we have a drop in domestic demand and this is not only in Spain. In Spain domestic demand is growing quite rapidly, consumption from households is on the rise. Capex is also on the rise so there is no sign of deflation in the Spanish economy. I think that the process of negative inflation is the consequence of the revolution of commodity prices, esp oil prices. As for organically, well the process of, well the consequence of that we have been gaining competitiveness over the last 2-3 years and this is something that is positive. Now the competitive position of the Spanish economy is comparable to the situation that we had when we joined the Euro in 96, we have recovered, we have regained, all the competitiveness that we have lost in the past. And I think this is the real element to be had, the recovery of the Spanish economy

JC: That makes you an example for other Eurozone nations that have drastically lost competitiveness and still have.

LDG: Well I think that Spain sets an example for the Eurozone in several areas, firstly because we have a very profound and deep banking crisis as you know, there were a lot of doubts about the health of our banks and now the Spanish banking industry the banking sector in Spain is perceived as a healthy solvent restructured industry, and now nobody puts in question the solvency of the Spanish banks, and there is one very important element, you know it's not impossible, it's not possible to have a recovery of the economy, of the real economy without healthy banking industry, this is one of the lessons of Spain, and simultaneously, but I think that this is important that we are making compatible the process of the leveraging that I need, that is necessary for the Spanish economy, with flows of new credit that actually on the rise, now for instance the credit granted to households, to small and medium corporations is growing at a rate of more than 10%, and this is compatible with the leveraging of the Spanish economy, why? Because you know the bulk of the leverage and the debt in the Spanish economy was concentrated and the construction and real estate industries, these industries have started to shrink, they are leveraging and simultaneously the banking industry in Spain has able to grant, create for the rest of the economy.

JC: Lets shift this then to the rest of the Euro zone because you've mentioned some crucial issues, the banking sector, weaknesses, deleveraging, the dis-inflation, inflationary trends. Just how crucial is at this moment, further stimulus by Mario Draghi?

LDG: Well I think the ECB is making a very good job. I think it's in full respect of its mandate. The inflation rate in Euro is very low. We have to raise the inflation rate to a level, to a target that is close, but below 2%. And the ECB, I do not comment, collaborate on Monetary policy, but I feel this is the general perception of Mario Draghi and the board of governors of the ECB, they are doing a good job and in full respect of its mandate and that is to try to put the inflation rate below 2%

JC: So if they do decide to expand QE you will welcome it?

LDG: Well I think that it has decision that it has to be taken by the board of the ECB, but I think that they have been quite crystal, they have increased our clear respect to their targets and respect to the willingness and the differences that they're going to use.

JC: And their intentions?

LDG: And their intentions for sure. I do not elaborate much on Monetary policy because I think they are doing a very good job and they know perfectly what kind of instruments they have to use.

JC: Are you worried that the expectations are too high though, even now if we look at equity markets, if we look at bound markets, there is a lot of expectation of further stimulus baked into the cake, does that concern you?

LDG: No not at all because I think that I am totally sure that the ECB is right in the approach and you know they will do whatever it takes in order to raise the inflation rate. Inflation rates expectations in Europe are very low, especially if you look at the expectations over the next 6 months, 12 months and I think that the ECB has taken some external measures that the QE program is an open ended program so I am sure that they will take the correct decisions.

JC: And a weaker Euro I guess, always welcome.

LDG: Welcome, but this is not the reason why the Spanish economy is competitive. It is a helping hand. But the real reason of the competitiveness of the Spanish economy is the labour unit costs. We are outpacing and outperforming our peers. And this is the main source of the competitiveness of the Spanish economy now. IN the end we were able to have a current account surplus when the exchange rate of the Euro was 140 vis a vis the dollar now it is 1.05 well you know we are more competitive because of the depreciation of the nominal exchange rate but in the ?? in the case of the Spanish economy has worked and has delivered a competitive push to the Spanish economy and to the Spanish, the different Spanish industries.

JC: When you look at Spain and you look at the Euro zone, do you think that the Euro zone is the biggest risk to the ongoing recovery – or do you see it from outside, whether it be EMs or China? What's the biggest….

LDG: There are a lot of geopolitical risks kicking you know around the world, so we know we'll have to face up, to uncertainties, that is the reality of the world that we have and what we have to face up to. So now, I think that we have dealt with the problem of risk – I think that is on track and I hope that it will continue on track and I think that we have taken important measures. For eg, the situation of the banking union, for instance the situation of you know the back stop. And I think that we also have to continue taking measures for instance, in respect to the capital markets union. I think that the neutralisation of risk at the Euro area is low and I think that we have to make progress in that regard. When I talk about the neutralisation of risk I refer to risk sharing but also to have in place more the risk instruments in order to avoid the more hassle situation, so this is the combination of elements that we have to do. But I think there is only a way forward, further intervention and cooperation in economic policy and to have it in place an institutional framework that has democratically and the capability to deliver decisions to the member countries.

JC: You're going to have to call it something other than neutralisation to get it past the Germans.

LDG: Well I think that the point of the Germans is clear I think that neutralisation is not rejectable per say what we need, what we need...

JC: Just the idea of it…

LDG: Well neutralisation when I refer to neutralisation it's because when you look other monitory diligence if you want to have this monitory diligence working properly you need neutralisation of risks in order to avoid the impact of asymmetric shocks in certain parts of the monitory, but I think that simultaneously what we need to have is a level playing field in terms of generating these risks.

JC: I mean there have been so many fractures and fault lines in the EU and EZ just in the last year you mentioned Greece and the back and forth over that, what about now, the refugee crisis because that's been incredibly divisive for Europe.

LDG: Well in spain we have a lot of experience in respect to this kind of Migration. We were able to accommodate almost 15% of the total Spanish population. We receieved in a period of 3-4 years, almost 7 mn immigrants in Spain and we were able to accommodate them. And I think that we have experience in that regard. I think that we are having a humanitarian crisis now, that we have to confront to find a solution. I think that this is … a problem that will, you know in the short term should be perfectly handled in terms of the solutions to the different flows of migrants. But to be honest I think it is an opportunity for the European economy. This is new blood, this is a real opportunity. You can improve. If we are able to accommodate properly, these migration flows and these migration influx – we will be able to improve the potential growth and enhance, enhance the potential growth of the European economy. So it is something in the short term it is a humanitarian problem, a humanitarian problem that we have to solve but in the medium term I think there are opportunities for everybody.

JC: In Spain you also have the example of Senegal, of Morocco what 10-12 years ago. Actually going there and to actually fund the prevention of refugees coming across the water, I mean that is a perfect translation of what's happening in Turkey.

LDG: That's totally totally totally right. You have to address the problem at the source of the problem. So then this is the main solution. Well because we are always going to have immigration flows from underdeveloped countries to advanced economies, but the point is to try to bridge the gap between these two parts of the world.

JC: Do you agree with the coordination then with Turkey and some of the concessions that Europe has to make to Turkey in order to solve this problem because already we're getting criticism in Europe, we're hearing criticism that this is a country that has questionable human rights behaviour, autocratic behaviour from the leader, is it right that Europe has this relationship?

LDG: Well it has been a decision taken by the heads and by the Prime Minister and the heads of governments and the Prime Ministers and I think that this is the correct decision, now Turkey is very important and is a very well run country in order to try to fix the problem in place, a very important role, and this goes beyond of kinds of characteristics of Turkey, and I think that Turkey is going to be a ?? extremely important and I think that the agreement that we reached last weekend is the correct one.

JC: The game also changed in some ways in light of the Paris Attacks. I mentioned the security element here too. I mean there's been criticism of Europe, the information sharing. As an economy minister how focused do we need to be on extra funding for security and does that support need to be there?

LDG: Well security is going to be a priority and this is a reality. But I think that we can make compatible both targets. We have to spend more on security and I think that is going to be something that is going to be tangible. Over the next focus of the next years. Whilst also simultaneously fiscal consolidation. The spend on security should not be a sort of pretext to reduce or reign-in the efforts in terms of fiscal consolidation. We have to make compatible both and I think that's perfectly feasible to make them compatible.

JC: Cause that's the risk though?

LDG: Well there are always risks in this life. And there are a lot of geopolitical risks as I have said around the world. But I think that we have to bear in mind that to have fiscal discipline is something that's very important because perhaps now while interest rates are very low everybody's quite reassured about monetary policies but this is not going to be there forever. (Julia: hmm) So we have to take into consideration that you know some cheatery, some cheaters who come back to the markets in the future. We have to be ready we are not going to have the low Interest Rate Environment forever.

JC: The PM said though, if you look back over history the greatest achievement was avoiding a full bailout of Spain, would you agree with that?

LDG: Yes, absolutely.

JC: How close did it come?

LDG: It was very close, we were on the verge of collapse. You know the situation was very difficult. We had a lot of difficulties to find the Spanish, the Spanish the Spanish Treasury. Well, you can look at the evolution of the yields spreads. Where I think the yields that we had was close to 650 basis points in June/July. And now I see that the yield spread is 100 basis points. Well I think everybody has made good job.

JC: Is that your personal decision? To do whatever you could to avoid that full bailout?

LDG: Well it was important because first of all you have to bear in mind the size of the Spanish economy. The Spanish economy was not comparable to other econmies that were bailed out. As a country I think there is an element of self-esteem that is very important. Spain is a large economy. And one if the man in black, do not come back, have to come back (SIREN GOES OFF) to the office next to my office to impose the conditions and they have a lot of the political sensibilities. I think that Spain, you know would have suffered quite a lot.

JC: Like Greece suffered?

LDG: In the case of Spain I think it's a little more complex.

JC: But the self-esteem point that you make is very valid.

LDG: Yes, yes. I think that every country have self-esteem. But you know in the case of Spain, Spain is a very large economy, a diversified Economy. I think that we had territorial tensions, we had institutional problems, and I think that could have been a real problem for Spain.

JC: Somebody recently said to me that in Spain to negotiate is to surrender. Would you agree with that?

LDG: No. Not at all. To negotiate is to change views, and to reach an agreement.

JC: I was in Barcelona actually when someone said that to me. Do you think the economy helps you win this election?

LDG: Well I think that the economy is an important element. It will be taken into consideration by the Spanish voters. I think that it's important; it's relevant that the economic situation of Spain is totally different than it was 4 years ago. It's also not only the present economic situation, it's also the prospect. It's the Outlook. Now we have reduced imbalance in the Spanish economy. I think that it's perfectly feasible to have the Spanish economy growing at a rate close to 3% over the next few years.

JC: Does that depend on who is in power?

LDG: Well it will depend on economic policy. Because I think there is one important element – the Spanish economy continues to be reliable, despite the fact that we have corrected many of our imbalances. But the importance in our abilities, the first one is this, the unemployment rate, that is very obvious, but the second one is investment position of spain, we have a lot of external debt. And through confidence we could have a very rapid impact on the Spanish economy. If confidence is extended…immediately the financial conditions would be, you know, could be worsened rapidly and this would go immediately to err you know, situation of the deterioration of the economic activity. So we have to be careful, we have to be careful and we have to apply and pursue the correct economic activity.

JC: So what we've seen heading into this election is the traditional two party system blown wide open, we've got Podemos,– could the people's party work with Podemos hypothetically going forward? A reformist party, a pro-Europe party…

LDG: Well I think one year ago the major problem of the Spanish economy was the possibility of having Podemos in power do you remember that? (I do). I think that you know, the impact of Greece on Podemos was very relevant.

JC: The Yanis Varoufakis affect?

LDG: Varoufakis is a good friend of mine, but its not only Varoufakis. I think the image of you know retired people lining up in front of an ATM to withdraw money, I think it had a lot of impact on the Spanish population and especially in the possibilities of the political party like Po demos and I think that this was a reality check for everybody. And simultaneously I think that the Spanish population mature, they are wise. They know perfectly where we are stood only four years ago and where we stand today. And I think that this contrast is a clear indication of the efforts that we have implemented and I do not believe that the Spanish population wants to take spain back to the position we were in in 2010 or 2011, I am totally sure they would not repeat that mistake.

JC: The wind, the one way that the parties attack your party is to focus on corruption – how do you say to the Spanish population that actually that is behind the party now and that's something that shouldn't be a focus and actually this would be a fresh start.

LDG: But for instance, corruption is something that I understand is perfectly…..errr you know the feelings of the Spanish population in respect to corruption. Especially in the middle of the financial and economic crisis as deep as the one we have suffered. But there is one point that some times is a little bit over looked. The majority of the cases of corruption were taken to the judiciary by this government. For instance in the case of the old cajas saving banks. Well the majority of the cases, the majority of the scandals, the majority of the corruption events wrere taken to the courts by the government, so and many of them, those events that took place happened in the past, but have come to the surface now during the political term of this govt. But those events where developed in the past. So I think the clean up that this government has implemented in that area I think that is quite relevant, sometimes I think it is difficult to explain to the population. That you are raising those cases because they are happening simultaneously.

JC: Because just ….

LDG: Priority facts. And no, the point, the real point is that this govt has made a whole hearted effort to clean up, for eg, the savings banks. We had a bubble, we had a property bubble – we had extremely profound problems in the governance of the saving banks and we have modified on that. And I think that's the real, the paradigm, and that was Bankia. Bankia now is a very solvent bank that has been recapitalised that has a very professional manangement team and despite the fact that the government owns 64% of Bankia – the stake of the government is 64%, well I have never interfered in the management of Bankia. What a difference to the situation that we had 3-4-5 years ago. So it makes a very important contrast. And I think that is something that is perceived by the Spanish population I understand perfectly the kind of feelings the kind of sensations when they start to see the corruption scandals but I can assure you that many of these corruption scandals took place in the past, having cleaned up. This government and the Spanish courts are going to deal with them. 1

JC: So this perception that corruption goes up to the Echelons of the party is entirely incorrect?

LDG: Well I would not say that it is entirely incorrect. But the effort to clean up the corruption scandals implemented and perceived by this government I think that it has no comparison with the efforts of previous government.

JC: So do you think that if you were not to get enough votes to rule independently a coalition could work?

LDG: Well let's see the outcome of the election. I see the polls. But you know some polls in some countries, in Britain for instance, in Argentina recently, even in Greece they were wrong. So let's see the outcome but I have the confidence on the maturity of the Spanish population, and they will vote freely, and we will have to accept the outcome and to behave accordingly.

JC: Obviously the run-up to this election saw a bit of noise around Catalonia and the independence bid there. Do you think it was a strategic mistake to not give more ground to nip the succession quest in the bud by actually just giving a bit more ground?

LDG: Well you have to take into consideration that in 2012... we were on the verge of collapse. So the only thing that we could distribute at that time was misery. Now the situation is totally different. Secondly I think that there is one element. The independence or the succession of Catalonia is something that could be of detriment to everybody. The Catalonian Society, the Spanish Society overall. I think that the real point is that the Outlook and the future for the Catalonian society and the Spanish society is much better united. And this is something that we have to take into consideration. And finally there is another element that is legality. We have a constitution and a constitution that was voted in Catalonia and I think that now the real problem is that in Catalonian original government of Catalonia.... It has held functions for example education, culture, security, etc etc etc. Is in the hands of a radical group, it's even more radical and I think that's really a pity. That a region so European, so open as Catalonia now is in the hands of a very radical party and I think that is something that we have to take into consideration. I am totally sure that now in the Catalonian societies, they're thinking about the consequences. Independence is out of the question, it's not going to take place. Not only because it's illegal. But because it's extremely detrimental to everybody.

JC: but people are voting for this extremely radical party as you call it?

LDG: Well yeah but they have a percentage of the vote that you know is not a majority, so the problem is that you have a marginal radical party calling the shots in Catalonia. That's the consequence of the policies implemented by some people.

JC: But they argue if they were allowed to have a referendum actually they may get that majority?

LDG: I don't think so, I don't think so but the point is not the referendum I think that they had three general elections quite recently and we have seen the outcome. And again I think the future of Catalonia is much brighter in Spain and in Europe than outside Spain and outside Europe.

JC: With a bit more autonomy potentially?

LDG: Well you know this is something that we can discuss. We are open, we're open to analyse these possibilities even the PM of spain has said that next year he is totally open to analyse the possibility of improving the financial conditions of the different regions, to have a different system of funding for the Spanish regions and this is something that we are totally open to do... We have to do it, take into consideration what we want to do, what we want to accomplish finally is to have a situation for different regions of Spain. Now for instance the Spanish Treasury is funding at a zero interest rate the Catalan government. Why? Because we want to maintain and sustain the welfare state of Catalonia and we are not going to let the catalonia operation down.

JC: I want to move on to talk about you specifically. You've mentioned some pivotal moments the bailout, the decision over the baking bailout as well what next for you?

LDG: For me? Well I don't know, I don't know I do not pay much attention to that. I have to finalise my work. I think you know I was finance minister in the most difficult times for the Spanish economy. I think I have made a small contribution. I am proud about that, I am proud of my country. And I think the future, the future we will see what happens, we will see what happens. No but I am not concerned about that.

JC: You mentioned the greatest success, what about the greatest failure- what do you regret most?

LDG: well you know your failures are especially mentioned by your rivals (laughs) so you know I leave that job to my rivals. But I think that in general terms, I think that the Spanish government and the ministry of finance can be satisfied with the outcome. Always you can do more but you could have done less. And I don't know whether it was for conviction or for necessity I think that the reform agenda that the Spanish government implemented over the last three years will be analysed in the books of economic history.

JC: And you're proud?

LDG: Yes for sure, yes. I am especially prpud because of the Spanish population

JC: I want to ask one final question, you were merkel's choice for the presidency of the Euro group.

LDG: Yes, yes

JC: And then obviously the president took over again. Was that a blow?

LDG: No, I think to have a Spanish candidate was a success. If I had been told only 4 years ago I could be a candidate for the euro group I think I would not have believed it at all. I think Spain deserved the job, we are clearly under represented in the European institutions but I expect we will fill the gap. And we will bridge the gap over the next years. And that the efforts of the Spanish society will be acknowledged, it is acknowledged in the capital markets and I everybody, you know, I would say everybody recognises the effort that Spanish society and the Spanish economy has made. This is the important point. I would say only one point, the best thing I can say about perhaps the job that they have made is that the legacy that is going to be inherited by the next minister of finance is going to be much better than the one that I inherited 4 years ago.

JC: And Europe? What's your hope for Europe over the next…

LDG: Europe, well we have problems in Europe we have a lot of tailwinds you have the depreciation fo the Euro, you have the decline of prices of oil and commodities we have QE and despite all those tailwinds the growth rate of Europe is medicore – it's only 1.5. Well this is something that we have to analyse in detail and focus on why the growth in Europe is so low and I think it has to do, especially with the lack of structural reforms. And it has to do, you know with the case of the Euro zone we have to keep improving our institutional fframework, these are the two main reforms that we have to pursue. In the near future.

JC: Lets hope, Ok thank you.

LDG: thank you very much.


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