Spain Adopts New Measures to Reverse Economic Slump

By Emma Ross-Thomas and Sharon Smyth

Aug. 14 (Bloomberg) -- Spain eliminated its wealth tax and approved 20 billion euros ($29 billion) of financing for businesses and consumers in a bid to revive an economy growing at the slowest pace since a 1993 recession.

The measures, which follows an 18 billion-euro ($27 billion) stimulus package approved in April, aims to ease bureaucracy, increase competition and speed up public works projects. The plan seeks to return economic growth to a 3 percent rate by 2010, from the 1.8 percent annual pace announced for the second quarter today.

Prime Minister Jose Luis Rodriguez Zapatero, who called his ministers back early from their summer vacation to approve the measures, said the country's economy risked stagnating. ``We are going to work hard so as not to fall into negative growth, which others, including the most important countries of the euro zone, have done,'' he said at a press conference in Madrid.

Spain's economy has expanded faster than the euro-region average for more than a decade, driven by a building boom that has now collapsed because of rising interest rates and increasing joblessness. The economy grew 0.1 percent in the second quarter from the previous three months, when it expanded 0.3 percent, the national statistics agency said today.

Wealth Tax

``The measures will help in some way, but they will not change the situation,'' said Diego Fernandez, economist at Fortis Bank in Madrid, before Zapatero announced all the details of the package. ``The correction in the real estate sector will continue, as will the correction in the rest of the economy.''

As part of the plan, the government will make an additional 20 billion euros in financing available in 2009-2010 for small businesses and families trying to buy public housing, Zapatero said.

To help sustain the construction industry and speed up public works projects, the government will set a six-month limit on environmental impact studies. There are 3,000 pending public works projects and environmental impact studies are averaging more than 2 years, he said.

Zapatero also announced the government had approved a law making good on a previous pledge to eliminate the country's wealth tax and speed reimbursement to companies of value-added taxes. Those measures would inject 10 billion euros into the economy, he said. They must still be approved by parliament.

European Contraction

Even with economic growth decelerating from 4 percent as recently as the second quarter of last year, Spain continues to fare better than the larger euro-region economies. The euro zone contracted 0.2 percent in the second quarter with the German, French and Italian economies all shrinking.

Zapatero said that the recent decline in oil prices may help reduce Spain's inflation rate as soon as August. Consumer prices rose an annual 5.3 percent in July, the most in a decade.

Oil prices have fallen more than 20 percent since reaching a record $147.27 on July 11. That decline might also allow the European Central Bank to lower its benchmark interest rate, Zapatero said.

``If oil prices perform favorably, that should in a reasonable period of time also affect interest rates in the euro zone. It should affect them, and more so when we have just seen that there is a sharp slowdown in the whole of Europe and particularly in the euro zone''

The ECB last month raised the rate to a seven-year high of 4.25 percent to try to tame oil-driven inflation even as economic growth slowed.

To contact the reporter on this story: Emma Ross-Thomas in Madrid erossthomas@bloomberg.net