© Santiago Carbo Valverde
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Dukascopy asked Santiago Carbo-Valverde, Professor of Economics at University of Granada in Spain and Consultant at the Federal Reserve Bank of Chicago, to evaluate the current economic situation in Spain and share his outlook for the Spanish economy for the 2012.
How would you evaluate the current economic situation in Spain?
Currently Spain is facing three important challenges. The first one is how Spain is going to grow over the next few years, which is a key issue that affects the other two. The country is experiencing a very serious problem with unemployment. Currently the unemployment rate is over 23 % and 50% for those below 27 years of age. This is a worrying situation, which affects everything. We need to find new ways of growth. In the past we had construction and tourism as the only drivers for expansion, now we need to find others. That is the main challenge at least in the long run, but it affects short-term challenges which are the other two. First, fiscal adjustment, because with no growth it is going to be more difficult and more painful to meet fiscal targets that were agreed with the European Commission. The second challenge is banking sector, which is going through a process of restructuring, recapitalization and clearing up of balance sheet. However, if the economy does not pick up, the banking sector may face other challenges in the near future. These are three major challenges and combination of problems which make Spain to be again on the headlines, because no other country in the Eurozone is in the same situation, facing similar combination of problems.
There are more pronounced opinions that Spain's default risk is rising. Do you agree?
I do not think that Spain is close to the risk of default, despite of the fact that the country is experiencing numerous challenges. Moreover, access to the markets may be more difficult, if things do not improve. However, Spain is a sovereign country and it has access to the market. Of course the situation is not favourable—the yield, which is 350 basis points over the Bund, the German bond, is too high. Nevertheless, Spain has to face the challenges successfully, otherwise in one year time, we will be talking about the different story, but at this particular moment I do not see any default risk.
How in your opinion, should Spain battle the ongoing economic troubles?
The government has started taking a few measures and reforms, that would help the economy to revive. I think the labour market reform might be effective. The first effect of the labour reforms are over. In the very short run people are fired, made redundant and laid off. I do not see that happing in year-time, because the market reform is aimed at reducing the probability of layoffs.
I think the labour market reforms is a good news at least for the medium and long term. Financial sector is moving in the right direction. I believe Spain is also very credible in terms of fiscal adjustment. Spain's Prime Minister Mariano Rajoy will announce 2012 budget on Friday, 30 March. If we gain fiscal and financial economic credibility, that would help us come out of the trough. The problem is that the country has a process of delivery, I think it is going to be very acute and that may endanger the economy. I guess the government is going to introduce more measures and reforms. Hopefully, the government is trying to adjust the economy, trying to look at different economic model prospective, where house building is no longer a key source of growth. We have to be very credible and to comply with the European Union agreement, because Spain has access to the market. The country still has a substantial deficit to be covered during the year to have a better position. This is basically the type of policy and reforms to comply with the targets.
Do you think that Spain might need bailout?
I do not think so. In case the combination of three problems is getting very acute and are not fixed over the next year, Spain might need bailout. Still Spain has low level of debt compared to other countries.
How do you think will Spain's troubles hinder the Eurozone recovery?
I think Spain is the main problem for the Eurozone now, as Spain is a big country. If Spain does not do well, the Eurozone debt crisis may rebound. Anyway I think the worst of the Eurozone crisis is over –it passed last autumn. Nevertheless, we should fix our problems. I believe it is possible, because we have enough funding from ECB and many other measures that will stimulate the country's economic recovery. However, if we do not, the Eurozone crisis may revive.
What is your forecast for the country's economy for the end of 2012? What drivers will define the economic situation at the end of the year?
GDP growth will be around -1.5% by the end of 2012. If Eurozone grows more, than we previously thought, which seems to be happening now, as the recession there is not that severe, then it could be even better for Spain too, because our exports go to the Eurozone. I think we will be able to have a milder recession, because we can meet the fiscal targets, as the EU does not impose strict restrictions on Spain. The government is able to adapt our budget to avoid a deep recession, because we cannot make cut, we have to increase taxes. The government is able to fix some of the financial sector problems. If there are good signs from the labour market at the end of the year, then the country will be out of the trough. The main driver for the recovery would be the export industry, which I think it is not going to grow on domestic demand at all.
As to unemployment rate, I expect it to be around 24.5%. I do not think it will reach 25%.