The Spanish economy will experience a further recession next year, according to the IMF. The contraction may go as far as 1.3% GDP, a figure that nearly trebles official forecasts. The 2103 budget stands as the forerunner casualty, likely to witness a substantial deviation. Worse than that, the IMF casts serious doubts on the ability to meet this year’s target, a pattern that will replicate in future. Up to 2015 the gap would broaden largely missing the 3% safe barrier a goal only achieved a couple of years later.
Debt will accordingly increase at a rapid pace, dashing any hope to rein it. In drawing such a gloomy future, the IMF has delivered a severe blow to fiscal consolidation credibility in the most delicate moment.
Madrid is eagerly waiting for some encouraging tips from partners paving the way for triggering the debt rescue plan. The IMF disclosure has further cooled the scarce enthusiasm Germany, Holland and Finland already showed at the prospect of securing help for the ailing southern economy.
Markets are flagging clear signs of disbelief at the potential the firewall designed by the European Central Bank might have in practice. They fear key countries might refrain from providing their full agreement until Spain faces real trouble. But investors will not wait for that to happen. Well before utter discomfiture, they are likely to force a Euro zone intervention.
Don’t blame the Washington messenger for the bad news. Most analysts share the view that Spain will undergo a recession for at least one extra year. A full-fledged deleverage, coupled with tight credit conditions while banking institutions tidy up their battled balance sheets, fails to entice investment and growth. High flying unemployment levels plus a sustained fall in consumers’ confidence does little to put production back on track. No budget can overcome such hurdles, for all the austerity measures that might be taken.
Spain desperately needs extra time to address its financial and budgetary imbalances.
The fixed rate constraint under a monetary union only allows real adjustment in recovering the competitive edge carelessly dumped during the bonanza period. It badly needs a wide range of sweeping reforms, rather than following Greece or Portugal down the road leading to nowhere. Will its northern partners be ready to provide the room of manoeuvre it needs? It doesn’t seem they would, being obsessed as they are with fiscal virtue.
Should they stubbornly stick to austerity as the only recipe, they risk throwing the Euro baby with the bath water.