Crisis
IMF recommends radical changes to Spanish economy
The IMF on Monday urged the Spanish government to introduce sweeping structural reforms to support its efforts to restore its precarious financial situation.
"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," the International Monetary Fund concluded in its latest analysis of the Spanish economy.
The multilateral agency put special emphasis on the labor market in a country which currently has an unemployment rate of 20 percent, almost double the average in the European Union.
Spain's labor unions and employer groups are currently in talks on changes to the job market, which has been plagued by the duality of large numbers of workers on temporary contracts with few rights and permanent employees with generous severance pay entitlements of up to 45 days for every year in service.
"A radical overhaul of the labor market is urgent," the report says. The IMF recommends lowering the cost of firing permanent workers to at least the average in the EU and moving away from reliance on collective bargaining for setting working conditions and the practice of indexing wages to inflation.
The IMF also focused on the need to speed up consolidation in the savings bank sector before the mandate of the Orderly Bank Restructuring Fund runs out at the start of June.
The report was issued after the Bank of Spain took over local savings bank Cajasur after it pulled out of a merger agreement with Unicaja, a policy endorsed by the IMF. "The Bank of Spain should be prepared to intervene promptly if pockets of weakness remain," the agency said.
The IMF also backed recent moves by the government, backed by the opposition, governing capital raised by the savings banks. In the case of the biggest lenders in the sector, such as La Caixa and Caja Madrid, it recommended transforming them into stock-holding companies. It also advocated limiting the powers of regional governments to veto cross-regional mergers in the sector.
The agency welcomed the government's program to slash its public deficit to 6.0 percent in 2011 from 11.2 percent last year through 15 billion euros in spending cuts over the next two years, but warned of the risks of deviating from this plan. The report also lauded the proposal to raise the retirement age to 67 from 65.
The need for reform was highlighted by the IMF’s prediction of a "weak and fragile" recovery from Spain’s worst recession in 80 years, estimating a gradual return to growth of 1.5-2.0 percent in the medium term.
(Published by El País – May 25, 2010)