Spain needs EU bailout to calm fears: expert

MADRID - Spain will need to ask the European Union for a sovereign bailout, Morton Olsen, a professor of economics at the IESE Business School, said in an interview with Xinhua.

"I think they are quite substantial, the ball is in the court of Spain. the European Central Bank (ECB) have said that they are willing to help if Spain with its full force meets the requirements," Olsen said, adding that he expected Spanish Prime Minister Mariano Rajoy to take the step in the near future.

"I think it is very likely he will do so in the autumn. I think he should do it immediately," he said. He added Rajoy's timing could be affected by regional elections in Galicia and the Basque Country in late October, and Catalonia in November, where pro-independence movements have gained strength.

The price Spain would have to pay for asking for the bailout would be a series of conditions imposed by the EU. "If we look at the case of Ireland, Portugal and Greece, it is a combination of structural reforms, which in Spain would be the retirement system and the labor market and some form of austerity: cutting spending and increasing taxes or broadening the tax base," said Olsen.

"I would prefer measures to be on structural reforms, rather than austerity. We have already known Spain is in the middle of a recession. If you cut spending further, that would make things even worse. Structural changes would improve things in the medium and long-term," he stated.

"It seems like structural reforms would make retirement age of 65 the norm," said Olsen. He said it could be hard for Rajoy's government to pass further labor reforms after an unpopular measure making it easier for companies to sack workers was approved in February this year.

"We have seen in Greece and Portugal that you cannot go on pushing these things. There is resentment against Rajoy here, so it's hard to see what he could do, unless he is able to say he was forced to do it by EU bureaucrats," he said.

The EU has agreed a 100-billion-euro ($128 billion) bailout for Spain's banks this summer. The exact amount needed will be known later this week when an independent report into the debts of the banking system is made public.

"We hope with the credibility that a bailout for Spain's sovereign debt will give, that Spain's banks will be able to regain confidence of the people and we can restart the banking system," he said.

Olsen believes there are two possible roads the Spanish economy can travel down. "There is one in which Spain leaves the euro and one in which it does not leave the euro," he said.

If Spain remains in the euro and the current uncertainty is ended, its economy could recover in between five and seven years, Olsen said.

If on the other hand, Spain left the euro, it would become more competitive and have a possible export-led boom. But the downside of creating its own currency is "close to unpredictable", although it would probably cause a steep recession before eventually recovering.