IMF presses Spain for major shifts in spending, labor rules

By Howard Schneider
Washington Post Staff Writer
Tuesday, May 25, 2010

FRANKFURT, GERMANY -- The International Monetary Fund on Monday urged Spain to push forward with a major restructuring of its economy, including an overhaul of union-dominated labor markets and progress on cutting government budget deficits.

The IMF statement, issued at the end of a routine consultation with the country, served as a reminder of how the same issues that have caused an acute panic in Greece are troubling other European nations.

In Greece's case, issues including high government debt and uncompetitive labor markets pushed the country to a near-default before the IMF and a collection of European Union countries offered an emergency bailout.

Spain has not requested similar assistance, but E.U. nations and the IMF have assembled a trillion-dollar fund to try to assure global bond markets that the 16 nations that share the euro will repay any money they borrow.

But the long list of IMF recommendations for Spain shows just how tough a climb it might be for the euro area, as it tries to renew growth and regain its competitive footing.

Spanish labor markets are "dysfunctional," the IMF said, using a set of collective bargaining agreements that "hamstrings" companies' ability to hire and fire and set wages.

The situation "is ill-suited to membership of a currency union," the IMF said, because it allows other nations in the eurozone with more flexible wage and work arrangements, such as Germany, to produce more cheaply and attract more investment.

Although Spain's still-stagnant economy should begin growing again, the country's recovery will be "weak and fragile" without efforts to restructure, the fund said.

The IMF also demanded a clearer accounting of the Spanish banks that are at risk of failure. Banks are still plagued by the collapse of a real estate bubble and uncertainty about the real value of assets they hold, the IMF said. The country's banks overall have "robust" levels of capital, it said, but "the risks remain elevated and unevenly distributed" in different institutions.

As in Greece, the IMF has been pressing highly indebted countries such as Spain to reduce their budget deficits. The fund complimented recent public-sector wage cuts and other efforts to bring down spending, but it said the country needed to do even more to meet deficit-reduction goals.

Given the sensitivity of the situation, with markets reacting zealously to bad news, "any slippage should be aggressively pre-empted."

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