1887

Executive summary

Spain is immersed in a prolonged recession. The depressing impact on activity of private sector deleveraging and the need for sizeable fiscal consolidation following the bust of the domestic credit boom has been compounded by the euro area debt crisis and structural rigidities in the labour market, resulting in a steep increase in unemployment and a banking crisis. The prospect of an immediate recovery remains remote as deleveraging of the private sector still has a long way to go while the feedback loop between government finances and the banking sector remains strong, notwithstanding the loan of up to 100 billion euros from the euro area governments to recapitalise the banks. This feedback loop must be broken. Further structural reforms are needed to boost employment, notably among youth, and improve competitiveness, helping to reduce the current account deficit further. Given the major risks that have built up, decisive policy action on all these fronts is urgent if the situation is to be turned around.

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