IMF Pessimistic About Spain

Less than a day after Spain disclosed that its unemployment rate reached 24.6% in the second quarter, and just weaks after its neighbors agreed to bailout of its troubled banks, the IMF issued an extremely a pessimistic report on the sourthern European nation. The report said nothing that the international capital markets have not already expressed as they exit Spain’s sovereign debt at a pace which has cause the country to pay interest rates above 7% on two-year notes.

The IMF report included this obvervation:

The government seeks to strike a balance between the need to cut back the deficit and boost economic growth in three ways.

First, by making sure the measures to reduce the fiscal deficit are as growth-friendly as possible. One example of such measures would be increasing the revenue derived from the value-added tax, rather than cutting productive spending. Raising the value-added tax has a less negative effect on growth than cutting spending; especially spending that has the potential to help growth. When compared to other countries in Europe, Spain raises less from the value added tax.

Second, the government is implementing reforms to make the economy more competitive, which will have a positive effect on growth. It should do more in this area.

And third, by making the financial system work better. For example, the European loan will help clean up banks so they can lend more to healthy businesses rather than being stuck with loans to defunct real estate projects.

So far, there is little belief that the balance between austerity and stimulus is really possible. Germany, the most powerful voice in bailout activity, continues to press for budget concessions over any stimulus packaged which might cost it larger contributions to bailout funds.

Spain’s recession is so deep and its unemployment rate is so high, that it seem unimaginable that anything less that several tens of billions of euros for stimulus on top of those euros meant to help its banks and finance its deficits could beging to pull the nation’s economy out of its tailspin

Douglas A. McIntyre