A calendar of reforms to boost the economy

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July 2nd, 2013

The Spanish economy must deepen its structural reforms and these must be implemented without delay. That is the main message contained in the report issued by the EC on 29 May regarding the National Reform Programme and the Stability Programme presented by the government.

The EC's recommendations are not new insofar as they attempt to resolve structural weaknesses in the economy which have already been pointed out on many occasions. What is new is the pressure to implement these quickly: a strict calendar has been established and adherence to this will be closely monitored. It should be noted that, under the protocol of the European Semester, the EC is now in a stronger position to control national economic policies, even being able to impose penalties of up to 0.1% of GDP should its recommendations not be taken into account.

With an unemployment rate of 27%, a figure that rises to 57% for young people, it comes as no surprise that reform of the labour market is a priority. Although the 2012 reform has started to bring about greater internal flexibility in companies, lower dismissal costs and wage moderation, Brussels warns that the labour market is still highly fragmented and questions the advances made in other essential areas, such as active employment policies and education and training policies. The former are aimed at helping the unemployed to find work, for example by promoting public-private collaboration in job placement services and offering individualized guidance to those hardest hit by unemployment. This is an area in which Spain is quite deficient at present. In the area of education and training, measures must be taken to reduce the number of pupils leaving school education early, to encourage professional training and improve continued training throughout an employee's career.

Given the delayed application of measures in these areas, the EC has asked the Spanish government to carry out an in-depth assessment of the effects of the 2012 reform by July at the latest. The deficiencies detected must be tackled by introducing the necessary amendments in September. In its annual report on the Spanish economy, the IMF also recommends pushing labour reform further in order to generate employment. Particularly of note among its proposals are measures aimed at reducing duality; i.e. the huge differences between permanent and temporary contracts. To this end, it recommends aligning dismissal costs for permanent contracts with the EU average and increasing these gradually according to length of service, as well as reducing the number of contracts and extending the use of permanent contracts, narrowing the margin for judicial interpretation in lawful dismissals.

A second block of recommendations made by the EC refers to the application of structural fiscal reforms to underpin the long-term sustainability of public finances. In this area, the government has made progress with several initiatives, such as its reform of local government and in detecting overlaps between the different administrations, but it has yet to create an independent fiscal council, apply a sustainability factor to the pension system (both in December) and carry out a systematic review of the main items of expenditure (in March 2014) in order to improve the efficiency of public spending.

One priority among the recommendations to increase competitiveness and encourage growth is the urgent need to tackle the electricity tariff deficit with a global solution before December. To date, the government has approved several measures that have not been enough to bring the tariff paid up closer to the cost of generating and distributing electricity: in 2012, this deficit totalled 5 billion euros, far above the target set of 1.5 billion. Specifically, the EC recommends gradually adjusting the electricity tariffs, reassessing any subsidies that discourage energy efficiency and redoubling efforts to complete the gas and electricity connection with France.

In short, a long list of recommendations that are essential in order to return to the path of sustainable, balanced growth. As proposed by the EC, the extended deadline for correcting the excessive public deficit should be
used to speed up the rate of implementation.