IMF: Decisive and ambitious reforms will be needed to combat Spain's "unacceptably high" unemployment

The International Monetary Fund (IMF) has called for “urgent action” to address Spain’s “unacceptably high” unemployment in a report released today.

While strong progress has been made in Spain since last year, there is still plenty of room for improvement. The report credits decisive action and a wide range of fiscal measures with smoothing out key imbalances, and notes that sovereign spreads have halved since last summer as market confidence increases. But sovereign borrowing costs “are not feeding though to the real economy: credit is contracting sharply and lending rates remain too high”.

Meanwhile, falling unit labour costs and moderated wage growth is restoring competitiveness, but “rigidities” in the labour market have resulted in unemployment growing to 27 per cent and output contracting over the last seven quarters.

The IMF’s baseline scenario for the country is for positive growth later on in the year and a pick up to one per cent in the medium term with some limited gains in employment. However, for growth to pick up, the country will need to enact a decisive pro-jobs policy – ensuring banks can extend credit to healthy businesses, aligning severance costs for permanent employees with EU norms to reduce disincentives to of permanent hiring, providing more training and placement services, and reducing the costs of hiring the young and low-skilled.

In addition, deregulation and the cutting of red tape around employment rights (with some incentives to unions and workers in return) could help accelerate gains.

Similarly, the banking system has shown significant improvements in strength, but risks still remain. The IMF advises banks to show prudency on cash dividends while cleaning up loan books and selling distressed assets to “reinforce the quality and quantity of capital” they hold.

The IMF also makes some recommendations of what can be done at the European level to improve Spain’s situation. Moving more rapidly to a full banking union would be a particular boon for Spanish firms, which could then compete based on merit rather than country of origin. It also advocates keeping the outright monetary transactions (OMT) option open to the country in order to keep confidence high and yields low.