Spain: Continue Reforms to Strengthen Recovery, Create Jobs

Growth expected later this year, but continued reforms needed to spur job creation

Call for prudence in the banking sector

Fiscal consolidation unavoidable, but should be gradual and growth friendly

Speaking to IMF Survey at the launch of the IMF’s regular health check of the Spanish economy, mission chief James Daniel said Spain needed to maintain its recent progress on reforms.

IMF Survey: When will Spain's economy grow again?

Probably later this year, in the fourth or even third quarter. But the really important question is not whether Spain will grow, but whether Spain will grow enough to create lots of new jobs to bring down unacceptably high unemployment, and to increase household incomes.

That’s where the real problem is: we see a recovery, but only a weak one, with growth weighed down by the unavoidable fiscal consolidation and by households and firms dealing with their high debts amid very tight credit conditions. So the government should do everything it can to strengthen the recovery, especially by continuing with their reforms.

IMF Survey: Even if the economy returns to growth, you project high unemployment for several years. What needs to be done to create jobs, faster?

Growth needs to be stronger and needs to become more job rich. That requires action in many areas, including from Europe. But specifically on labor issues, it means increasing wage flexibility so that growth produces more jobs, improving the training of the unemployed and helping them find work, lowering taxes and regulations that discourage hiring, and creating a more even playing field between those with permanent jobs and those with temporary jobs.

IMF Survey: Given the expected weak recovery, should Spain be concerned about the health of its banking sector?

Certainly there is a need to remain vigilant. The clean-up done in 2012 was a thorough exercise and greatly improved the health of the banking system. But risks remain elevated. A key risk is the macroeconomic outlook. If the economy recovers strongly, then banks will benefit, for example, as firms and households can service their debts better. And of course the opposite is also true, if the economy does poorly, so will the banks.

It will also be important for Spanish banks to pass the forthcoming European “stress tests” which are designed to determine whether a bank is strong enough to withstand the impact of adverse...