Its credit rating in tatters and it banks in trouble, Spain was kicked by S&P while it was down.
Spain’s economy needs far-reaching and comprehensive reforms. The challenges are severe: a dysfunctional labor market, the deflating property bubble, a large fiscal deficit, heavy private sector and external indebtedness, anemic productivity growth, weak competitiveness, and a banking sector with pockets of weakness. Ambitious fiscal consolidation is underway, recently reinforced and front-loaded. This needs to be complemented with growth-enhancing structural reforms, building on the progress made on product markets and the housing sector, especially overhauling the labor market. A bold pension reform, along the lines proposed by the government, should be quickly adopted. Consolidation and reform of the banking system needs to be accelerated. Such a comprehensive strategy would be helped by broad political and social support, and time is of the essence.
24/7 Wall St. commentary: The cures offered by the IMF were nearly as bad as the problems. It suggested that Spain make its work force more flexible to promote relocation opportunities. That goal is nearly impossible for a nation which has unemployment of 20%. The agency also suggested that Spain’s businesses be allowed to offer lower severance programs, part of the “entitlement” rules that have helped build the nation’s deficit. Trade unions are likely to resist the action, perhaps violently.
The IMF also indicated that that the deficit is Spain will have to be reduced to only 5% of GDP in 2010 and 2011. Given that 2010 is nearly half over and the tax and labor reform could take several years to complete, that goal cannot be reached.
Douglas A. McIntyre
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