Tags: Forbes | Spanish | Bailout | banks

Steve Forbes: Spanish Bailout Won't Heal Chronic Economic Ailments

Monday, 11 Jun 2012 10:10 AM

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The $125 billion bailout arranged by eurozone finance ministers for Spain will help the economy there in the near term by recapitalizing Spanish banks, but more pro-growth strategies need to follow suit to better ensure more lasting reform, says publisher Steve Forbes.

Many indebted European countries have undertaken austerity measures championed by European paymaster Germany, including tax hikes to streamline their bloated public sectors.

Such moves won't work because they stifle growth, Forbes says.

Editor's Note: Google Banned This Video But You Can Watch it Here

Lower taxes on top of fiscal reforms will help.

"Near term, it will give them a boost, but the question is will Spain follow through on structural reforms?" Forbes tells CNBC.

"One of the things the Germans have not gotten right in this whole thing is you have to have pro-growth policies to get these economies back on their feet. So Spain has put in tax increases. They're piling tax increases on Greece and Portugal. It does not work. They tried that in the early '30s. It fails. It buys time, but the time, sadly, I think, is going to be frittered away."

Spain has become the fourth European country to accept a bailout following Greece, Ireland and Portugal.

While the bailout will rescue the country's banking system, the country's unemployment rate hovers over 24 percent while the economy remains mired in recession.

Pro-growth fiscal policies can bring the Spain and other European countries back to growth and prosperity, Forbes says.

"How about a flat tax or substantially reducing the tax rates? Liberalizing labor markets so you can hire somebody and not fear you've got a million-dollar liability on your hands? How about doing things like making it easier to set up a legal business," Forbes says.

"In Greece it's very difficult. They should do what New Zealand does — you can do it with a click on a computer. If you do those structural changes especially on the tax side, these economies will grow even if you don't get substantial reforms from the government."

Despite the bailout, Spain's overall economy will continue to get worse until it gets better.

Unemployment will rise and the recession will remain.

"This year is going to be a bad one," says Prime Minister Mariano Rajoy, according to the AFP newswire.

Other experts agree the bailout will prop up the Spanish financial sector and will calm markets for a while, but eurozone policymakers must work to mend structural flaws in the European economy.

"We still have some pretty fundamental problems to solve," says Nicolas Veron, senior fellow at the Bruegel think tank in Brussels, according to the Associated Press.

"We need more radical solutions than this one."

Editor's Note: Google Banned This Video But You Can Watch it Here



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