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Bleak horizon

The International Monetary Fund’s gaunt forecast is consistent with economic reality

The International Monetary Fund (IMF) has just made official what had already been expected: the Spanish economy will continue in recession throughout 2013. For 2012, however, it calculates a contraction in GDP of 1.5 percent, rather less than the government’s forecast, but does not factor in the new budget adjustments approved last Friday (with a deplorable paucity of explanation). Thus the depth of the recession hardly eases in the Fund’s predictions for 2012-2013, against a background of global, albeit weaker, growth this year and the next. The IMF includes an explicit recommendation: that the European Central Bank purchase debt from the countries affected by financial stresses, and close the huge breach, in financing and growth, apparent between the Franco-German economic nucleus and the peripheral countries. Although this recommendation makes sense, especially when the countries affected by financial instability are complying with austerity demands, it is still at variance with the orthodox line prevailing in the ECB.

The IMF’s forecast is consistent with reality. Credit will not begin to recover until the end of 2013, and only if the bank bailout is carried out successfully in the first quarter of next year. Foreign investment is flowing out of Spain, driven by low expectations for a recovery and hesitation on financial reform, hence the need for the bailout. At the same time, the adjustments implemented by the government further diminish the possibilities of growth. Nor is it obvious in what sector any such growth might take place. Between 1999 and 2007 it was construction; today there are no clear options.

There are further factors detrimental to confidence. One of these is the deplorable handling of information, which erodes the credibility of the government. Last weekend it offered another obvious example of its tendency to camouflage things. During their appearance after Friday's Cabinet meeting to explain the measures taken, the deputy prime minister and the economic ministers failed to clarify details as important as the possibility of withdrawing unemployment benefits payments in the case of “indications” of fraud, or the lack of commitment to restoring bonuses to civil servants, or the size of the adjustment to 2014. These details were revealed later in the ministry’s web page, written in English, for the information of foreign investors. These practices do not befit these times. They offend the public, and damage the credibility of our economic options. For example, the sound decision to raise VAT and lower social-security contributions.

The Economy and Finance ministries have to give more explanations on matters decisive for investor confidence. The adjustment needed for compliance with the deficit objective in 2014 is far greater than the 54.4 billion euros that the government says it will obtain with the provisions announced on Friday. Indeed, it is not clear where the more than 21 billion euros in revenue to be yielded by the VAT hike will come from, given that in macroeconomic terms the increase in revenue attributable to this is some 12.6 billion. The rest of the announced cutbacks suffer from similar imprecision, in quantity and in time-frame. Vagueness is not conducive to confidence in the markets; and makes it all the more difficult to demand what is natural, for the Spanish public and for the IMF: that the ECB must ease the stresses on debt while the bank bailout is implemented and the banking union takes shape.

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