MADRID, Oct 2 (Reuters) - The European Union must do more to get credit flowing in Spain and other southern member states, EU Economic and Monetary Affairs Commissioner Olli Rehn said in an interview published on Wednesday.
Spain's economic prospects are improving "modestly", Rehn told Spanish newspaper Expansion, and that should lead to a gradual recuperation in credit, but this must be supported by policies.
"I am referring to the banking union, which will bring back confidence to the financial sector, possible decisions by the ECB and the European initiative with the EIB to boost loans to SMEs," he said.
"I kindly ask member states to take a strong and coherent position in favour of this initiative to unblock the worst bottleneck for economic growth, especially in southern Europe, where credit conditions are too strict for small and medium enterprises in Spain, Italy and other countries."
The European Central Bank concludes its monthly meeting on Wednesday, with investors looking for any new hints on whether it could offer new long-term unlimited loans to banks (LTROs) to keep banking liquidity ample and short-term interest rates low.
Debt held by Spanish companies dropped for the 29th straight month in August to the lowest level since March 2007, with the credit crunch hitting small businesses particularly hard, according to Bank of Spain figures.
He did not give any details on what the initiative would consist of.
Countries should be supported by the European Union's move towards banking union, as well as possible action from the European Central Bank (ECB) and the European Investment Bank (EIB).
Rehn reiterated that Spain may not need further aid for its financial sector after a 41 billion euro ($55.45 billion) bailout last year.
"It seems to me that Spain is in a position where it is managing that alone and will not need more programmes once this one expires," Rehn told Expansion.
The commissioner said the biggest risk he saw for Spanish banks was the economic situation, though if it evolves positively, as expected by the government, there will be no need for dramatic recapitalisation of entities in the country.
Spain's recession-plagued economy is expected to have grown for the first time in two years in the third quarter, according to government estimates, lifted by strong exports as companies look abroad to offset losses due to dire demand at home.
Rehn also said that Spain's 2014 budget, presented earlier this week "seems to be based on reasonable scenarios and estimates at first glance". A more detailed analysis will be presented in mid-November.
He urged Spain's government to focus on cost-cutting and avoid raising taxes, after a series of increases, including on income tax and value-added tax (VAT).
"New tax raises would have a very damaging effect on the economy," Rehn said.