Brussels sees risk of Spanish recession continuing into 2014

The European Commission on Wednesday warned that Spain’s macroeconomic imbalances could cause the current recession in the country to extend into next year.

The Popular Party (PP) government of Prime Minister Mariano Rajoy expects the domestic economy to start to recover from its second recession in scarcely four years in the second half of 2013, with the pace of growth picking up in 2014.

According to a report presented by the European Union’s commissioner for economic and monetary affairs, Olli Rehn, Spain’s main problem lies in the difficulties faced by the private sector, particularly households, in reducing their debt, which has narrowed only 15 percentage points from a high of 227 percent of GDP marked just before the crisis broke in 2008.

“Very high domestic and external debt levels continue to pose risks for growth and financial stability,” the report said.

In the case of families, the main obstacle lies in persistently high unemployment, which is expected to move above 27 percent this year, and a reduction in wealth due to falling house prices, which have dropped 31 percent in nominal terms from the high watermark at around the end of 2007. Brussels also pointed to volatile market conditions, structural rigidities and tight lending conditions.

The sacrifices we are making must not be at the cost of cohesion"

“The housing market has not yet stabilized,” the report added. “Rigidities in product and labor markets contribute to high and rising unemployment, and more generally hinder the adjustment of the economy.”

The Commission said that while the Rajoy administration has introduced reforms, the agenda remains incomplete. The changes that the conservative government has introduced have yet to take effect, the report adds.

In parallel with the release of the EC report, Rajoy announced in Congress that the government plans to unveil a second round of reforms on April 26. Rehn said the Commission will work closely with the Spanish administration in correcting the imbalances that have been identified. “We have to continue with reformist policies,” the prime minister said.

Rajoy complained that there is a growing trend in Europe to ask member countries for reforms with nothing in return. “Member states that have embarked on far-reaching structural reforms and adjustments hope to count on the support of other partners and institutions in order to ensure that the effort and sacrifices we are making are not at the cost of cohesion, which is a fundamental value of the European Union,” the prime minister told lawmakers.

Lamenting a lack of urgency in implementing pro-growth policies in the EU, Rajoy pointed to the fact that “of all of the major economic areas in the world, Europe is the only one that is not growing.”

Rajoy’s government is waiting for the Commission to decide whether it will cut Spain some slack on the current public deficit target of 4.5 percent of GDP.

The Commission’s report also highlighted “excessive” imbalances in the Slovenian economy and less severe ones in 11 other EU countries. Brussels will re-examine Spain’s moves to rectify these imbalances on May 29. If Spain’s report card is not up to scratch, it could face a fine of up to 0.1 percent of its GDP, or about one billion euros.