News Column

OECD Encourages EU to Send Markets Strong Signal on Spain

Nov. 29, 2012

The eurozone should make it clear that an aid request from Spain would be welcome, the head of the Organization for Economic Cooperation and Development (OECD) said Thursday.

It was up to Spain to decide whether to seek financial aid from the eurozone bailout funds, Angel Gurria said on presenting an OECD survey on Spain in Madrid.

But the eurozone should nevertheless back Spain's austerity efforts by declaring the aid available, Gurria said.

That alone might be enough to lower Spain's borrowing costs, without "a single euro needing to change hands," he added.

Spain's borrowing costs are at a "substantial risk" of remaining high in the short run, according to the OECD survey.

The European Central Bank has said it will curb high rates by purchasing troubled eurozone states' bonds, if they formally ask for aid with strict conditions.

Spanish Prime Minister Mariano Rajoy's government has so far refrained from making such a request. Spain's borrowing costs have meanwhile gone down after eurozone countries agreed on a new aid deal for Greece.

The OECD said Spain's recovery from recession would be slow, and that the recession would have a "lasting effect."

However, Spain could speed up its recovery by "broadening and deepening" current policy efforts such as fiscal consolidation and strengthening the banking sector, according to the survey.

But Spain's spending cuts might increase social unequality, the OECD warned, advising Madrid to shift its emphasis to tax hikes affecting consumer goods, property and the environment.

The OECD also stressed the need to make the labour market still more flexible by reducing severance pay and the need for businesses to justify dismissals.

The gap separating temporary workers from much better-protected permanent ones should be diminished by replacing the different types of work contracts with a single one, which would allow severance pay to increase with seniority, the OECD recommended.

The labour market reforms undertaken so far in Spain have sparked widespread protests, with trade unions accusing the government of dismantling workers' rights.

The OECD expects the Spanish economy to shrink by 1.4 per cent in 2013. The economy is not expected to begin growing until the following year. About a quarter of the Spanish workforce is unemployed.

Source: Copyright 2012 dpa Deutsche Presse-Agentur GmbH

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