In its third annual report on economic imbalances in EU member countries released Wednesday, the European Commission identified five areas in which Spain continued to fall short of the mark, among them high public and private sector debt levels and rampant unemployment.
The report was issued a day before the Eurogroup – made up of euro-zone finance and economy ministers – is due to give its seal of approval to Spain’s fulfillment of the conditions imposed as part of the European bailout of the Spanish banking sector.
However, the formal decision to sign off on the program is not expected to be taken until the start of next year after ministers have examined the final review of compliance with the conditions. “There will be a clean exit from the bailout,” a Eurogroup source said.
There will still be a clean exit from the bailout"
Although Spain failed Brussels’ economic imbalance exam on five of the 11 counts reviewed, the possibility of sanctions being imposed is not on the horizon, with the Commission appreciative of the efforts of the conservative Popular Party government of Prime Minister Mariano Rajoy in addressing the problems through structural reforms.
Spain failed in six areas in last year’s report, although since then it has managed to transform a current account deficit into a surplus as a result of productivity gains and enhanced competitiveness. However, Brussels noted ongoing deficiencies in Spain’s real effective exchange rate, losses in export market shares and in its net international investment position.
The Commission noted that public sector debt continues to swell due to ongoing public deficits, the impact of the bank bailout and the settlement of arrears to suppliers. Public debt is expected to exceed 100 percent of GDP within the next few years, the highest level in over a decade.
The EU executive body also noted that debt deleveraging by companies and households had also been slower than hoped because of the recession. Private sector debt is around 200 percent of GDP.
Brussels said that the correction in the housing market after a massive bubble burst five years ago has accelerated.
The report highlighted the social costs of the crisis in the form of high unemployment and lower income. “High shares of long-term and youth unemployment, combined with falling household incomes, are taking their toll, leading to an increase in poverty and social exclusion,” it said.
One of the novelties of this year’s report was to include Luxembourg and Germany as EU member countries with economic imbalances, particularly regarding Germany’s current account surplus, which it noted accounts for most of the surplus in the euro area at 7 percent of GDP.
Brussels said the phenomenon was not of a short-lived cyclical nature and could put upward pressure on the euro to the detriment of the peripheral euro-zone countries such as Spain and Portugal by making it more difficult for them to recover competitiveness through internal depreciation.
Other countries where imbalances were identified include Slovenia, Belgium, Bulgaria, Denmark, France, Italy, Hungary, Malta, Britain and Sweden.