Spain’s efforts to repair its economy are incomplete and risks are “considerable,” even after the government implemented a “wide-ranging policy response,” according to the International Monetary Fund.
Spain’s “strong” policy response has contributed to the economic recovery, the Washington-based fund said in an Article IV report today. Still, the IMF called for “no let up in the reform momentum,” to bolster the recovery and reduce a 21 percent unemployment rate that is “unacceptably high.”
Spain’s Socialist government is carrying out the deepest budget cuts in at least three decades while raising the retirement age and reducing firing costs. Prime Minister Jose Luis Rodriguez Zapatero overhauled wage-bargaining rules on June 10 in the latest step aimed at reining in borrowing costs that surged to the highest in a decade last week on mounting expectations of a Greek default.
“Financial conditions could deteriorate further, reflecting rising concerns about sovereign risks in the euro area,” the fund said. “This could put additional pressure on sovereign and bank funding costs for Spain, which in turn could feedback to the real economy.”
The IMF called on the government, which has passed two labor overhauls in the past year, to make deeper changes to reduce the highest unemployment rate in Europe.
“Some of the underlying problems of the Spanish economy, especially weak productivity growth and the dysfunctional labor market, remain to be fully addressed,” the IMF said. It called for “further enhancing the credibility of fiscal consolidation, completing financial sector reform,” and “boldly strengthening the reforms of the labor market.”
The government has pledged to cut the budget deficit to 6 percent of gross domestic product this year and 3 percent in 2013 from 9.2 percent last year, with measures including public-sector wage cuts and a pension freeze.
Meeting the medium-term targets “will likely require additional measures,” the IMF said, as its economic projections are less optimistic than those of the government.
Economic growth, led by exports, will rise “gradually” to 1.5 percent to 2 percent in the medium-term, the report said. The Spanish government forecasts growth of 1.3 percent this year, rising to 2.3 percent next year and 2.4 percent in 2013.
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