Spanish Economy Faces Tough Questions

Posted by: Mark Scott on November 19

Spanish banks may have dodged the damage caused by subprime loans and securitized assets, but Europe’s fifth largest economy is still suffering from its own financial problems. The country’s real estate market is in the doldrums, unemployment has reached double digits, and GDP growth declined 0.2% in the last quarter.

In its economic survey of Spain 2008 published on Nov. 19, the Organisation of Economic Cooperation and Development (OECD) offers a warning of future problems. “Immigration flows may slow, the potential for further gains in women’s labor force participation is diminishing, and the expansionary impact of low real interest rates and strong credit growth following euro area entry on investment has ended,” the report reads.

So what does the OECD suggest to get Spain back on its feet? Not surprisingly, structural reforms, such as a more flexible workforce, better secondary and tertiary education, and increased market competition, all top the list of prescribed remedies. “Severe labor market segmentation and low geographical mobility are holding back the integration of young highly qualified workers in the labor market,” the OECD warns.

That might help, but the Spanish government also plans to bolster the country’s short-term economic plight through a multi-billion dollar stimulus package. Among the many proposals, Spain’s Prime Minister Jose Luis Rodriguez Zapatero says he will raise the limit for bank deposit guarantees from ?20,000 ($25,155) to ?100,000 ($125,747), allow distressed borrowers to delay half their mortgage payments for up to two years, and provide a ?1,500 ($1,866) subsidy for companies that hire workers with families.

All these extra costs will turn a 2.2% national budget surplus in 2007 into a 1.9% deficit by next year. Yet if Spain doesn’t address some of the underlying problems facing the domestic economy — highlighted in the Nov. 19 OECD report — the Iberian country could face a longer financial downturn than the country’s policymakers may have first thought.

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