''Spain has only one problem left, but it’s big'' by Victoria Dendrinou

LONDON, June 20 (Reuters Breakingviews) - Spain has almost finished with the easy part of recovering its housing, banking and fiscal bust. The International Monetary Fund rightly praised Madrid’s efforts in its latest update, published on Wednesday. But, as the IMF noted, there is still one big problem - unemployment.

Credit to the Spanish political system: the fiscal deficit will be 6.5 percent of GDP this year, down from 11.2 percent in 2009, according to European Commission forecasts. Credit to Spanish employers and workers: unit labour costs have fallen and exports, Madrid’s beacon of hope, have risen from 23 percent of GDP in 2009 to 33 percent this year. And credit to the European Central Bank for helping, and investors for noticing - yields on 10-year debt have fallen from to 7.7 percent last July to 4.8 percent.

The troubled financial sector is deleveraging. That’s not all good news, since credit is tight and expensive. But business is getting some help, from Germany and perhaps from the government of Mariano Rajoy. On Wednesday the prime minister pledged "less paperwork, less red tape".

But in a way, all these improvements are the easy part. They basically reverse the excesses built up during the Spanish credit and construction boom. What remains is a problem that has never been sufficiently addressed: an unacceptably high level of structural unemployment.

The current rate is 27 percent, and 56 percent for young adults. But even at its lowest, when the economy was flowering and immigration was high, Spanish unemployment was a jarring 8.3 percent. The dysfunctional job market is the main blot on the country’s otherwise improving economic picture.

The main problem is well known: rigid rules which make hiring expensive. The cure involves changes of practices which have been ingrained for generations, predominantly the privileged position of labour market "insiders". Contracts need to be open-ended rather than temporary, and severance payouts need to be lower. Tax incentives can help.

Rajoy, who has two years left with an absolute parliamentary majority, should attack these entrenched bad practices. Without much lower unemployment, any Spanish recovery will be sickly, volatile and short-lived.