IMF calls on government to reduce wage and firing costs even further

The International Monetary Fund (IMF) on Wednesday called on Spain to introduce tougher labor reforms to combat the nation’s unprecedented high unemployment rate, which stands at around 27 percent, while at the same time lowering workers’ salaries.

The latest report on the Spanish economy was drafted following a number of visits to the country by the IMF’s staff to examine the results of the reforms introduced by the Popular Party (PP) government.

“While there are signs the economic contraction may end soon, the outlook remains difficult,” the IMF said in the summary posted on its website. “In our baseline scenario, we expect growth to start to turn positive later this year and to gradually pick up to around one percent in the medium term, with limited gains in employment. The external sector will likely continue to be the bright spot, but probably not enough to generate sufficiently strong growth given weak domestic demand.”

IMF officials also called on Spain and Brussels to take “urgent action to generate growth and jobs.”

“Last year’s [labor] reform made substantial improvements and is gaining traction. But labor market dynamics need to improve to reduce unemployment sufficiently.”

For enhancing job opportunities, the IMF suggests better training and placement services. “For certain groups, such as the young and the low-skilled, more ambitious policies to reduce the cost (including tax cost) of employing them may be required.”

Losses need to be promptly recognized and distressed assets sold"

The government also needs to do more to help the private sector, such as eliminating barriers to help existing firms find refinancing, and strengthen measures to help small- and medium-size businesses (SMEs), the IMF said.

“The authorities have implemented a range of measures to address residential mortgage distress. They should consider further progress by complementing these reforms in the future by introducing (like other euro-area countries) a personal insolvency regime, with strict conditions that maintains payment culture,” the report states, adding that the government could also provide more information and advice “for highly indebted individuals on options to address their debt problems.”

Addressing the country’s banking system, the IMF said that lenders should take an active role in helping the Spanish economy get back on its feet.

“Losses need to be promptly recognized and distressed assets sold to avoid tying up resources that could flow to more productive uses. And while it is only to be expected that aggregate credit contracts in a recession following a credit boom, a slower pace would benefit the economy as a whole,” the report states.

As for Brussels, the IMF said that European officials need to do more to help the Madrid government overcome the current crisis, including moving faster to create a continent-wide banking union. This would help “break the sovereign/bank loop by allowing Spanish firms to compete for funds on their own merits rather than on their country of residence.”