Spanish contraction
January 23, 2012
The Spanish central bank forecast that the southern European country would fall back into a recession this year, contracting by 1.5 percent as a result of sagging business confidence and reduced lending by Spanish banks.
"In 2011, the modest recovery which the Spanish economy began a year earlier weakened as the eurozone sovereign debt crisis extended to a greater number of countries and financial market tensions strengthened," the Bank of Spain said in its latest monthly bulletin.
The bank also blamed the slowdown on "falling internal demand due to government austerity measures and high unemployment."
"The news underlines our view that Spain is set for a difficult 2012 and is likely to be dragged deeper into the eurozone debt crisis," Ben May, a European economist at Capital Economics in London told AFP news agency.
Austerity plan bites
Spain's new right-leaning government announced shortly after it was sworn in last month that the 2011 public deficit would come in at around 8.0 percent of GDP, way above the 6.0-percent target agreed with Brussels by the previous government.
It plans spending cuts of 8.9 billion euros ($11.5 billion) and tax increases to the tune of 6.3 billion euros, in an effort to reduce the deficit.
Prime Minister Mariano Rajoy's conservative government has vowed to implement further austerity measures. But Finance Minister Cristobal Montoro has said the deficit target for this year should be changed to reflect the worsening economic picture.
"It is obvious that when the target was set to reduce the deficit ... it was based on a scenario of economic growth and not of recession," he said in an interview published Sunday in the daily newspaper La Vanguardia.
Calls for reform
The Bank of Spain also predicted unemployment would soar to 23.4 percent this year, adding that the rate of joblessness would only decline very marginally in 2013, unless the government carried out an "ambitious" reform of the labor market.
The government plans to unveil a shake-up of the country's rigid labor laws later this month, attempting to drive down the current unemployment rate of 21.5 percent - the highest in the European Union.
The International Monetary Fund (IMF) predicted the Spanish economy would shrink by 1.7 percent this year and by 0.3 percent in 2013.
IMF chief Christine Lagarde on Monday called for a boosting of the eurozone's bailout fund, including the introduction of a system of eurobonds.
Lagarde said there should be a "larger firewall" in the current debt crisis.
"Without it, countries like Italy and Spain ... could be forced into a solvency crisis by abnormal financing costs," she said.
Author: Uwe Hessler (dpa, Reuters, AFP)
Editor: Nancy Isenson