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IMF: “Spain’s Economy Needs Far-Reaching and Comprehensive Reforms”

Posted by Larry Doyle on May 25, 2010 9:00 AM |

Global markets are down 2-3% overnight. What is going on?

From a military standpoint, all eyes are focused on the Korean Peninsula after North Korea’s admission of sinking a South Korean vessel in late March. How will the world respond? Will the U.S. issue some sort of warning shot across the North Korean bow? Will the international community, and especially those who treasure freedom, rally and aggressively denounce the North Korean’s aggression or will we witness what amounts to a ‘kumbaya’ session?

From an economic standpoint, all eyes are focused on the Euro-zone where fiscal pressures remain elevated. Today the focus is Spain.

The International Monetary Fund recently completed a mission to Spain. What is the purpose of an IMF mission? The IMF defines it as follows:

Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF’s Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, and as part of other staff reviews of economic developments.

Sounds to me like the necessary outreach as a nation “cries for help.” Clearly, Spain’s economy is in very rough shape and in need of very real reforms. How rough? What reforms? The IMF report, Spain-2010 Article IV Consultation Concluding Statement of the Mission, highlights the desperate nature for expedited reforms in Spain. The report summarizes:

Spain’s economy needs far-reaching and comprehensive reforms. The challenges are severe: a dysfunctional labor market, the deflating property bubble, a large fiscal deficit, heavy private sector and external indebtedness, anemic productivity growth, weak competitiveness, and a banking sector with pockets of weakness. Ambitious fiscal consolidation is underway, recently reinforced and front-loaded. This needs to be complemented with growth-enhancing structural reforms, building on the progress made on product markets and the housing sector, especially overhauling the labor market. A bold pension reform, along the lines proposed by the government, should be quickly adopted. Consolidation and reform of the banking system needs to be accelerated. Such a comprehensive strategy would be helped by broad political and social support, and time is of the essence.

Not exactly sugarcoating it, as some in Washington are wont to do. Against this backdrop, the future for Spain will be extremely challenging. How so? Spain needs to structurally address almost every corner of its economic landscape. Unlike the rah-rah crowd which remains predisposed to highlighting the cyclical shifts on our overall global economic landscape, the IMF highlights the need for Spain to enact dramatic structural changes within its economy. The challenges for Spain will require real austerity and likely real pain.

While Spain or any country would prefer to have the luxury of time to make these structural changes, the pressures from fiscal deficits will not allow that luxury.

Are these developments new? No, not at all. These structural shortcomings in Spain have been evident for a while. The fact is, neither the media nor the financial industry care to focus on them until the point of desperation. That approach is no way to properly navigate an economic landscape.

Rest assured, the structural issues facing Spain today will be front page news tomorrow amidst the other PIIGS. Without real urgency to address the structural issues within our domestic economy (and I do not see the urgency), how long before these issues come ashore here in the United States? Don’t think for a second that we are immune. Our economy is larger in scope than those in the Euro-zone, but our debt/GDP ratio is similar in magnitude.


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