MercoPress. South Atlantic News Agency

IMF report exposed Spain's long term vulnerability

Spain could become stalled in protracted weak growth and high unemployment unless it undertakes reforms to raise productivity and cut costs, the International Monetary Fund said in a report published on Wednesday.

"The recovery is likely to be tepid if productivity remains sub-par, inflation above trading partners, and reforms tentative," the IMF said in a statement. After 15 straight years of housing-led growth, Spanish economic output will drop at least one percent in 2009 as home prices fall, the IMF said. Spain has targeted stimulus measures worth 4% of gross domestic product in 2008-2009 and its public deficit will rise over 5% in 2009 as a result, the IMF said. The fiscal effort, including a public works program, will temporarily boost demand but must be accompanied by plans to reduce public debt once activity rebounds. The medium-term recovery also crucially depends on progress with implementing comprehensive structural reforms. "In their absence, Spain could get stuck in a low-competitiveness, slow-growth, extended-deleveraging, and high-unemployment equilibrium, from which returning to lower public debt would be difficult". The government has embarked on service sector reforms, in line with European Union directives, but has remained silent on the more difficult issue of labor reforms. Spanish unions have threatened a general strike if Primer Minister Jose Luis Rodriguez Zapatero tries to cut labor costs during the crisis. "More significant reforms than currently contemplated are needed to achieve a vigorous-term recovery and avoid a potential L-shaped outlook," the IMF said. Without an overhaul to wage bargaining and contracts, Spain will be forced to curb high wage costs through layoffs rather than salary controls, the IMF said. Spain must end wage indexation with inflation that has sent its salary and consumer price growth above euro zone averages, sapping competitiveness, the IMF said. Dismissal costs need to be lowered, to boost hiring of younger, better educated workers. Collective bargaining agreements have to be more flexible to prevent bankruptcies and preserve jobs in restructured firms, underlined the IMF.