MADRID (Reuters) - The European Union and the OECD group of wealthy countries piled pressure on Spain on Wednesday to step up economic reforms and focus on growth not just cutting deficits.
Spain’s economy continues to show major imbalances, the European Commission said, calling on Prime Minister Mariano Rajoy to review its labor laws, speed up public pension reforms, streamline its administration and move to correct its energy tariff deficit.
The measures are part of a national program of reform agreed with Brussels, but EU officials are concerned Spain may be dragging its feet over implementing them.
European authorities granted Madrid two extra years, until 2016, to bring its public deficit below the European ceiling of 3 percent of Gross Domestic Product and urged the country to use this breathing space to push though planned economic reforms.
The Commission recommended Spain’s government cut roughly 1 percent a year out of its structural deficit, which strips out cyclical factors.
This would put Spain on track to hit nominal deficit targets of 6.5 percent of GDP in 2013, 5.8 percent of GDP in 2014, 4.2 pct in 2015, and 2.8 percent in 2016, a slightly slower deficit-cutting path than the one set out by the Spanish government in April.
Earlier on Wednesday, the Organisation for Economic Co-operation and Development delivered a stark message on the state of the Spanish economy.
It forecast it would contract by 1.7 percent this year, more than initially expected and also worse than a government forecast of a 1.3 percent slump. The jobless rate is set to hit 28 percent in 2014.
It also said Spain, under current policies, would likely miss its deficit targets this year and next although it insisted the country should focus on boosting growth and on meeting its structural fiscal goals rather than the nominal ones.
The European recommendation and the new OECD figures deal a blow to the official message that Spain is on the road to recovery thanks to a quick correction of the country’s traditionally big trade deficit, the reduction of its fiscal gap and a drop in labour costs.
While acknowledging that growth in trading partner countries and cost competitiveness gains should help the country return to growth in 2014, the OECD also slightly cut its GDP forecast for next year to 0.4 percent.
It said Spain’s economic situation remained highly dependent on policy decisions being taken at a European level.
Rajoy on Tuesday urged European institutions to do more to help credit flow to small businesses and said the euro zone should not fall behind on building up the banking union agreed last year.
He, in return, was given a long homework list by Europe.
This includes reforming Spain’s tax system by March 2014, especially by implementing changes in consumer tax and by hiking taxes on fuel.
The Commission also asked Rajoy to complete long-overdue public pensions reform by the end of the year in order to make the system sustainable and link the retirement age to gains in life expectancy.
It also wants the Spanish government to finalize the evaluation of last year’s flagship labour reform by July and present amendments, if necessary, by September 2013.
Among other measures, the government must overhaul the electricity sector this year to address the gap between the cost of generating energy and the government-regulated cost to consumers, an imbalance that has created a 28 billion euros deficit.
Editing by Fiona Ortiz, Jeremy Gaunt