The euro is tanking once again, breaking $1.23.
The IMF came out with a fresh report on Spain today warning that Spain must make tough reforms to its economy. Yet the nation is at the same time challenged with a weak economic recovery as well, which can make reforms harder to push through.
Spain’s economy needs far-reaching and comprehensive reforms. The challenges are severe: a dysfunctional labour market, the deflating property bubble, a large fiscal deficit, heavy private sector and external indebtedness, anemic productivity growth, weak competitiveness, and a banking sector with pockets of weakness. Ambitious fiscal consolidation is underway, recently reinforced and front-loaded. This needs to be complemented with growth-enhancing structural reforms, building on the progress made on product markets and the housing sector, especially overhauling the labour market. A bold pension reform, along the lines proposed by the government, should be quickly adopted. Consolidation and reform of the banking system needs to be accelerated. Such a comprehensive strategy would be helped by broad political and social support, and time is of the essence.
The euro’s about to wipe out its entire rally from the end of last week, perhaps due to the fact that markets aren’t confident Spain will be able to make the hard reforms mentioned above.
Still, the Spanish 10 year bond yield is holding steady and actually eased back slightly, to 4.03% according to Bloomberg. So Spanish default isn’t the concern, but the costs to the Eurozone of a Spanish rescue could be.
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