* Slovenia, Spain face risks from financial sector
* Both countries need to make economies more competitive,
By Jan Strupczewski
BRUSSELS, April 10 Spain and Slovenia have
banking and labour-market problems that are causing imbalances
in their economies, the European Commission warned on Wednesday
after an in-depth review of 13 European Union countries designed
to stop trouble in individual states becoming a wider problem.
The early warning system, called the macroeconomic
imbalances procedure, was set up after problems in Greece,
Ireland and Portugal triggered the euro zone sovereign debt
crisis, forcing euro zone countries to bail them out.
It can result in a fine of 0.1 percent of GDP for a country
which has been warned that its economy is excessively unbalanced
but does not take the recommended steps to fix the problem.
"(In) Spain and Slovenia, imbalances can be considered
excessive," the Commission said, mentioning problems with high
deficits and debt, imbalances in the banking system and the
structure of the labour market.
It said that in Spain, which had to borrow 40 billion euros
from the euro zone bailout fund to recapitalise its banks, very
high domestic and external debt levels posed serious risks for
growth and financial stability.
"Although adjustment is taking place, the magnitude of the
necessary correction requires continuous strong policy action,"
the Commission said.
"Developments over the last year, including further
contraction in economic activity, rising unemployment, and the
need for public support for the recapitalisation of a number of
banks, have exposed the vulnerabilities represented by those
imbalances for growth, employment, public finances and financial
stability," it said.
Unemployment in Spain is likely to reach 27 percent of the
workforce this year as the country goes through a second full
year of recession. The economic contraction could extend into
2014, the Commission said.
That is a more pessimistic view than Madrid's, where
officials expect the economy to grow in 2014 after a tough 2013.
The Commission said that Spanish reforms, designed to
improve public finances, increase the competitiveness of the
economy and create jobs, were under way, but were not yet
complete or they have not yet started to bear fruit.
Spain should liberalise its network industries, make its tax
system more growth-friendly and review its labour market reform
from last year to see if it made wage-setting more flexible and
made young people more attractive as workers, as intended.
It should also use public employment services and vocational
training to better help the unemployed find jobs, and continue
consolidating public finances, the Commission said.
The recapitalisation of Spanish banks should be quickly
completed and Madrid should think of other ways to provide
credit to small and medium sized companies before banks can
fully return to that role, it said.
Slovenia also faced substantial risks to the stability of
its financial sector because of corporate indebtedness and
deleveraging and the sector's links with public finances.
A relatively large bad loan portfolio is threatening the
stability of Slovenia's banks and has raised investor concern
that the country could become the next candidate for emergency
euro zone loans.
"Urgent policy action is needed to halt the rapid build-up
of these imbalances and to manage their unwinding," the
The Commission suggested that Slovenia should recapitalise
and privatise banks and attract foreign direct investment,
sell-off state owned firms, and make Slovenian exports more
attractive through wage restraint.
Both countries will now have to tell the Commission before
the end of April how they want to address the problems and the
EU executive will issue recommendations for them at the end of