Spain to Keep Up Reform Momentum

Outlook for Spain remains difficult but country on the right track

More fiscal reforms needed, including at the regional level

Restructuring of banking sector to continue

Bolder labor market reform to improve unacceptably high unemployment

But as recent developments in the sovereign debt markets have made clear, Spain is not out of the danger zone yet. The government will have to persevere with reforms to further build market confidence and to create a new growth model that can generate jobs for the country’s millions of unemployed.

As the IMF wraps up its annual health check of the Spanish economy, IMF mission chief James Daniel discusses what is needed for Spain to firmly put the crisis behind it.

IMF Survey online: What is the outlook for Spain’s economy?

Daniel: A modest recovery is currently under way in Spain, led by an encouragingly strong rebound in exports. But the outlook remains difficult. The country has built up imbalances over many years, and it will take years for these to be unwound. The problems are compounded by the lingering effects of the global financial crisis―which resulted in a large fiscal deficit―and the current sovereign debt crisis in Europe, which has increased borrowing costs for Spanish banks and for the government.

Spain’s policymakers are well aware of the challenges, and have mounted a strong and wide-ranging policy response. Measures adopted since mid-2010 include a front-loaded plan to reduce the fiscal deficit, a pension reform that increased the official retirement age from 65 to 67 years, and steps to make permanent hires more attractive.

The government has also implemented strong reforms in the banking sector, reshaping the savings banks―the cajas, as they are known―by strengthening capital standards, transferring their operations to commercial banks, and making it easier to assess each bank through improved access to information.

But Spain is not yet out of the danger zone, as recent events have demonstrated. More determined policy choices will be needed to further enhance market confidence and move Spain to a new growth model.

IMF Survey online: A significant fiscal consolidation is already underway. Is this enough, or is more needed?

Daniel: This year the deficit will be about 6 percent of GDP. This is already a big achievement, given that it stood at 11 percent in 2009. But the goal is to achieve a deficit of 2 percent of GDP in 2014, so there is a long way to go.

The government...