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©2013 International Monetary Fund
IMF Country Report No. 13/244
 Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions withmembers, usually every year. In the context of the 2013 Article IV consultation with Spain, thefollowing documents have been released and are included in this package:
Staff Report
for the 2013 Article IV consultation, prepared by a staff team of the IMF,following discussions that ended on June 19, 2013, with the officials of Spain on economicdevelopments and policies. Based on information available at the time of these discussions,the staff report was completed on July 11, 2013. The views expressed in the staff report arethose of the staff team and do not necessarily reflect the views of the Executive Board of theIMF.
Informational Annex
prepared by the IMF.
Press Release
on the Executive Board Discussion.
Statement by the Executive Director
for Spain.The document listed below has been or will be separately released.Selected Issues PaperThe policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.Copies of this report are available to the public fromInternational Monetary Fund
Publication Services700 19
Street, N.W.
Washington, D.C. 20431Telephone: (202) 623-7430
Telefax: (202) 623-7201E-mail:publications@imf.orgInternet: http://www.imf.org
International Monetary FundWashington, D.C.
August 2013
Strong reform progress is helping stabilize the economy and external and fiscalimbalances are correcting rapidly. But unemployment remains unacceptably high andthe outlook difficult. This calls for urgent action to generate jobs and growth.
. The reform effort needs to be raised to the level of the challenge.
Despite reforms, labor market rigidities continue to force the adjustment ontoemployment.
The reform needs to go further: increasing firms’ internal flexibility,reducing duality, and enhancing employment opportunities for the unemployed. Asocial agreement could bring forward the employment gains from structural reforms.
Private sector deleveraging is weighing on growth.
The insolvency regime should befurther improved to provide incentives for accelerating debt workouts and cleaning upcorporate balance sheets.
The banking system is stronger, but risks remain elevated
. This calls for continuing toreinforce capital, cleaning up loan books (encouraging banks to dispose of assets and to use the proceeds to lend), and removing credit supply constraints.
The fiscal deficit is falling but remains too high.
Consolidation should continue, but beas gradual and growth friendly as possible. Nominal, and if necessary, structural,targets should be flexible in the event growth disappoints.
The inflation gap with the euro area has not narrowed significantly.
Competitionshould be improved.
European policies have helped, but—crucially—monetary policy is not feedingthrough.
Europe should move faster to full banking union and the ECB implement further measures to reduce the much higher borrowing costs of Spain’s private sector.
 July 11, 2013
Approved By
Ranjit Teja andMartin Mühleisen
A Staff team comprising J. Daniel (Head), K. Fletcher, P. Lopez Murphy,P. Medas, P. Sodsriwiboon (all EUR), A. Buffa di Perrero (MCM),M. Chivakul (SPR), R. Romeu (FAD), R. Espinoza (RES), K. ChristophersonPuh (LEG) visited Madrid on June 6–19, 2013 to conduct the 2013Article IV Consultation discussions. The mission also visited Barcelona,Sevilla, and Valencia. R. Teja (EUR) and A. Gaviria (COM) joined for theconcluding meetings. Mr. Varela and Ms. Navarro from the ExecutiveDirector’s office attended the discussions. S. Chinta and C. Chepteasupported the mission from Headquarters. The mission met with Economyand Competitiveness Minister De Guindos, Finance and PublicAdministration Minister Montoro, Bank of Spain Governor Linde, othersenior officials, and financial, industry, academic, parliament, and unionrepresentatives.
CONTEXT: REBALANCING AFTER THE BOOM-BUST ___________________________________________ 4
OUTLOOK: A LONG AND DIFFICULT ADJUSTMENT ___________________________________________ 8
THE POLICY IMPERATIVE: JOBS AND GROWTH ______________________________________________ 11
A. Labor: Reinforcing the Reform to Generate Jobs ______________________________________________ 11
B. Helping the Private Sector Delever ____________________________________________________________ 15
C. Financial: Supporting Credit While Safeguarding Financial Stability ___________________________ 16
D. Fiscal Consolidation: Minimizing the Inevitable Drag _________________________________________ 20
E. Structural: Building a World-Class Business Environment ______________________________________ 22
F. Pan-European Support _________________________________________________________________________ 23
STAFF APPRAISAL ______________________________________________________________________________ 24
Wage-Employment Dynamics ____________________________________________________________________ 14
1. Recent Economic Developments ________________________________________________________________5
2. Private Sector Debt is Weighing on Demand ____________________________________________________9
3. Economic Activity______________________________________________________________________________ 26
4. Competitiveness_______________________________________________________________________________ 27
5. Imbalances and Adjustment___________________________________________________________________ 28
6. Financial Market Indicators____________________________________________________________________ 29
7. Labor Markets_________________________________________________________________________________ 30
8. Credit Conditions______________________________________________________________________________ 32

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