"Leaders should set their sights high and be ambitious when facing challenges and making decisions"

At the Menéndez Pelayo International University (UIMP) and Spanish Association of Financial Reporters (APIE) course in Santander, sponsored by BBVA, José Manuel González-Páramo began his presentation by analyzing the lessons learned from the crisis. His main conclusion was that passive attitudes do not address the structural problems in Europe, Spain and the entire financial sector.

He urged leaders – politicians, bankers and regulators – to be ambitious in building a more resilient Europe. To accomplish this he pointed to the need for greater economic, fiscal and political integration; resolving the political uncertainty in Spain and undertaking reforms, mainly in the labor sector to create more and better employment; and for the technological transformation of the financial sector and customers’ new needs, as well as avoiding competitive disparities in regulation.

His presentation focused on three main topics: how Europe faced the 2012 institutional crisis and what remains to be done; the current situation of the Spanish economy and the challenges that will follow the elections; and the future of the banking sector and the impact of the digital transformation.

He first addressed the “perfect storm” that took place in Europe due to the banking crisis, the sovereign debt crisis, the risk of the euro breaking up and the risk of deflation. The economic and financial crisis put pressure on political and economic institutions, which were forced to go into unchartered territory, he explained.

The former member of the European Central Bank’s (ECB) Executive Board and Governing Council from 2004 and 2012 feels this institution has strengthened its traditional monetary role as a guarantor of price stability while also taking on new responsibilities as a guarantor of financial stability and banking supervision. He also warned, however, that the role it has played to preserve the unity of the euro could work against it, as assuming excessive risks could be considered a bias, or future crisis could be attributed to its actions during this period of time. In his opinion, the solution is to move forward in creating a more integrated Europe with greater solidarity.

BBVA’s Executive Board Director foresees a long and difficult road ahead for Europe due to the economic slowdown, political and social instability from the refugee crisis, Brexit and the rise of extremist political movements and its geopolitical irrelevance in the new global order. European leaders must address these issues with a long-term vision in mind in order to complete the construction of the Europe we want for the future, he underscored.

After reviewing the issues in Europe, he focused on Spain. According to his calculations, the foundations of the Spanish economy indicate that recovery will continue over the next two years. He expects the GDP to keep growing at a healthy rate despite the uncertainty and weaker tailwind from certain factors, such as oil prices and fiscal and monetary policies. BBVA Research estimates that Spain’s GDP will grow 2.7% in both 2016 and 2017, creating approximately one million jobs over this two year period and lowering the unemployment rate to around 17.5%.

He also recalled that uncertainty over future economic policy has remained high over the past six months due to the lack of government. Even though a clear decline in economic activity has not been detected, he noted that the economy could have grown two tenths more in 2017 and five tenths more in 2017 in an environment free of uncertainty.

For this reason, he feels the next government should implement an ambitious economic reform process, especially in the labor sector. He was convinced that Spanish political authorities should be more ambitious and set their sights high, reaching agreements to form a government and subsequently, addressing the necessary economic reforms that will bolster current growth and resolve the scourge of unemployment, with more and better employment.

During the last part of his speech he discussed the challenges facing the financial industry. In his opinion, the European banking system is facing a particularly difficult situation due to the extremely low interest rates, and flat yield curves; a very modest demand for credit; the reputational problems still weighing on banks; the consequences of the regulatory tsunami; and technological advances. In his view, banks need to transform their business model completely to survive in this environment.

Looking toward the future, BBVA’s Executive Board Director foresees two possible scenarios. In the first, banks will evolve toward simply providing infrastructure for third parties, or just offer financial products, leaving the services with a high added value to other actors. In the second scenario, growing competition from different agents (banks, fintech firms, and digital giants) will substantially transform the sector, and only a few of today’s banks will survive.

He again urged for greater ambition, this time from those managing financial institutions to take on the sector’s transformation. In his opinion, digitization represents an opportunity for the banking sector to become more efficient, manage its risks better and offer consumers more value.