Press Release No. 14/336

Press Release: IMF Executive Board Concludes 2014 Article IV Consultation with Spain

July 10, 2014

On July 7, 2014, the Executive Board of the International Monetary Fund (IMF) concluded the 2014 Article IV consultation¹ with Spain.

After a protracted double-dip recession, Spain has turned the corner. Growth has resumed, and unemployment is falling. Exporters are gaining market share and the current account is in surplus for the first time in decades. Financial conditions have improved sharply, with sovereign yields at record lows. Business investment is rebounding strongly and private consumption has also started to recover due to improved employment prospects and rising confidence.

But the legacy of the crisis persists. Unemployment, at 26 percent, remains unacceptably high, with the majority of the unemployed without a job for at least a year. The labor market remains highly fragmented with a large share of workers dependent on temporary and involuntarily part-time jobs. Livings standards have fallen, trend productivity growth is low, and the deleveraging of high debt burdens—public and private—is weighing on growth.

The outlook has improved significantly compared to last year’s consultation. Several factors are helping the recovery, including much stronger euro area financial market conditions and confidence; improving labor market trends, helped by the 2012 labor reform; and business investment rebounding, driven by robust exports. The contribution to growth from net exports will likely be more subdued in the near term due to an increase in imports (reflecting the stronger domestic demand), but, over time, continued reform efforts should further improve the contribution from net exports.

The reform agenda is progressing on several fronts, which is critical for a strong, long-lasting and job-rich recovery. Fiscal reforms have continued (e.g. pension reform and establishing the fiscal council) and a tax reform has been announced. The financial sector reform program was successfully completed, helping make the system stronger, safer and better able to support the recovery. There is a concerted effort aimed at reducing barriers to trade across Spain’s different regions, with the Law on Market Unity as the cornerstone. The government also plans to further liberalize professional services, and to push ahead with implementation of new active employment policies and the electricity reform. Measures were introduced to facilitate corporate debt restructuring, including by facilitating out-of-court debt restructuring for viable firms under financial stress, and additional measures in this area have recently been announced. European policies have also been supportive, including, monetary easing, progress on banking union, and flexibility on fiscal targets.

Executive Board Assessment²

Executive Directors welcomed the improving Spanish economy, thanks to strong policy actions by the authorities and policies at the European level. However, the legacy of the crisis persists, as unemployment remains high and public and private debt levels are elevated. Directors stressed that continued decisive policy action, with support from European partners, will be critical to ensure a sustainable, strong, and job-rich growth.

Directors welcomed the recent measures to improve the corporate debt restructuring process. They encouraged the authorities to make further efforts to reduce the private sector’s debt overhang, especially for small and medium-sized enterprises. Directors generally encouraged consideration of a personal insolvency framework that allows an eventual fresh start while preserving the payment culture.

Directors welcomed the positive signs in the labor market, which reflect the 2012 labor reform and recent wage moderation. However, noting that high unemployment remains a pressing challenge, they encouraged additional reforms aimed at improving the skills of the unemployed, further decentralizing wage setting mechanisms, and reducing labor market duality between temporary and permanent contracts. Directors also highlighted that additional steps toward flexible wage setting at the firm and sector level would make the labor market more inclusive and responsive to economic conditions.

Directors stressed that labor market reform should be accompanied by product and service market liberalization to maximize the gains to growth and jobs. These include implementing the ambitious efforts to reduce barriers to business across Spain’s regions, such as the Market Unity Law, and to open up professional services. Directors underscored the need to continue the aggressive reform agenda in order to continue achieving productivity gains and reduce Spain’s external vulnerabilities.

Directors welcomed the authorities’ commitment to fiscal consolidation. The envisaged steady and growth-friendly consolidation path strikes the right balance between protecting growth in the short term and putting debt on a declining trend. Given the large adjustment still needed over the medium term and Spain’s relatively low revenue and spending ratios, Directors recommended further improvements to spending efficiency, and enhancing the proposed tax reform to boost employment through cuts in social security contributions and increasing indirect tax revenue while protecting the most vulnerable.

Directors commended the authorities for the successfully-completed ESM-supported financial sector program, which helped make the financial system stronger, safer, and better able to support the recovery. Continued progress in raising capital levels over time, including by limiting cash dividends and bonuses, would further strengthen the system and foster credit. Directors considered that stronger policies by European partners to help lower borrowing costs in Spain would support the recovery in both the euro area and in Spain.