2017 Spain Country Report

Source: European Commission
Type of item: Recommendation / Analysis
Date: 22/02/2017
Upcoming commitment expected by: 22/02/2017

The Spanish economy continues to enjoy a strong recovery and is moving towards a more balanced composition of growth than before the crisis. The recovery was initially led by exports, helped by a reversal of the cost-competitiveness losses accumulated in the pre-crisis years. It then gradually broadened to the domestic sector. Since 2015, high job creation, low oil prices and improving financing conditions have boosted consumer spending. Investment in equipment has also been growing strongly, while investment in construction has started to recover. The current-account balance maintains a surplus position. Although unemployment has been falling rapidly, it remains very high, and both poverty and income inequality are among the highest in the EU. Spain's ambitious structural reforms in recent years laid the ground for the strong economic recovery, but favourable conditions also helped.

Spain has a comparatively good record of Country Specific Recommendations (CSRs) implementation since 2011, which has however weakened since 2014, as the recovery gathered strength and reform fatigue set in. The Spanish economy has experienced a significant turnaround in recent years, also thanks to reforms undertaken in a challenging economic environment that partially addressed some of the rigidities in labour, product and financial markets.

Overall, Spain has made limited progress in addressing the 2016 country-specific recommendations (CSRs).

This document includes the following recommendations in the corresponding reform areas


1.1 R+D and the knowledge society

- Limited progress made towards increasing performance-based funding of public research bodies and universities, and on fostering R&I investment by the private sector.

- Obstacles to cooperation between universities and businesses remain, in particular regarding technology transfer and the inter-sectoral mobility of researchers. There is no strategic approach to knowledge transfer.

- Weaknesses in innovation policy contribute to slowing down firm and productivity growth. promoting innovation and supporting research and development is becoming more central to ensuring competitiveness of the Spanish economy.

- For sustained productivity as well as employment growth, boosting total factor productivity is essential. One way to do this is to reinforce research and innovation (R&I) investment (an area where Spain trails behind). This would also accelerate the transformation towards a knowledge-intensive economy. Relatively weak private R&D limits not only firm-internal innovation to enhance productivity, but also their absorptive capacity to benefit from R&D spillovers.

- Weaknesses in Spain's R&I governance framework, especially on the regional level, hamper the effectiveness of public R&I support.

- Public-private cooperation in research and innovation remains weak.

- Progress in integrating digital technologies throughout the economy is slowed down by the low use of internet and scarcity of digital skills.

- The low percentage of people with basic digital skills and the low share of ICT specialists in the workforce remains a challenge whose gravity, if not addressed, may increase if new cohorts with low digital skills enter the labour market.

- The National Coalition for Digital Skills and Jobs, which aims to enhance digital skills at all government levels, has not yet been set up.

- Spain remains a ‘moderate innovator' (the second-lowest category), ranked 20th out of 28 in the European Innovation Scoreboard 2016, but its gap to the EU average has been widening since 2013. Spain's relative performance is weakest in the following dimensions: business R&D and innovation investment; SMEs' innovation activity; and knowledge transfer and collaboration.

- The Offices for the Transfer of Research Outcomes (‘OTRIs') lack institutional support and experience in knowledge management. Excessive bureaucracy and heterogeneity hamper effective knowledge transfer.

- In rural areas, only 28 % of households have fast broadband network access, indicating that there is still a gap between urban and rural areas.

1.2 Internationalization

- The Spanish freight transport system relies heavily on roads for intra-EU trade. Serious road congestion problems appear repeatedly at border crossings with France. Developing the potential of maritime transport and improving the connections — in particular freight railway links — between Atlantic and Mediterranean ports and the industrial sites, could help to address the problem.

1.4 Education

- Employability of tertiary graduates remains an issue.

- High early school leaving (ESL) rates and a high share of low-skilled people among the adult population remain major challenges.

- High rates of grade repetition increase inequality and education costs. Progress was limited in improving the labour market relevance of tertiary education and in fostering university-business cooperation.


2.1 Competition enforcement

- The costs of airport services operated by AENA are not always transparent but some progress has been made in setting up an independent regulator and a more independent slot coordinator. The proper fulfilment of their respective functions will be crucial.

- Although the port system in Spain is profitable, the high cost of certain port services and high port charges are an obstacle to further increases in traffic. The system of port charges is complex and non-transparent, and ports still do not have sufficient autonomy in their charging policy. Moreover, according to the Spanish competition authority, there is lack of competition in the provision of services within ports and the European Court of Justice has required Spain to adapt urgently the existing law on port labour.

- Limited progress has been made on implementing the retail sector reform, as only some regions have adopted implementing measures. This has to go along with the development of a strategic plan for the deployment of UIC gauge throughout the Iberian Peninsula, including trans-shipment terminals.

- Restrictions to competition remain, especially in the services sector.

2.2 Regulation of product and service markets

- The benefits of the 2014 retail sector reform adopted by Spain's central government still depend on regional governments adopting the necessary implementing acts.

- The development of the collaborative economy is held back by restrictive regulation in some regions.

- Insufficient interconnection capacity between Spain and rest of the EU is a major obstacle for the creation of the internal energy market. While declining since 2005, Spain's energy dependency rate is still above the EU average.

- Better water management, more efficient use of water supply infrastructures and better water governance would improve water efficiency. An appropriate water-pricing policy, promotion of wastewater reuse, modernisation of irrigation systems and better control of water abstraction, could all harness water saving potential.

- Other aspect of the business environment not conducive to investment are lengthy judicial proceedings and high time and monetary costs for obtaining permits.


2.3 Red tape and business environment regulation

- The average cost of starting a business is higher than in most Member States and varies substantially across regions.

- The sluggish implementation of the market unity law leaves regulatory fragmentation still insufficiently addressed. The implementation of the market unity law only made minor advances in 2016. Firms' inter-regional expansion is hampered by a still somewhat fragmented national market.

- Restrictive business regulations contribute to slowing down firm and productivity growth.

- Tax and other regulations applicable to large companies may constitute disincentives to Spanish firms to grow beyond certain turnover and personnel thresholds.

- Spain continues to underperform relative to most Member States are late payments and time and costs to obtain permits and licenses. The latter is especially cumbersome for newly-incorporated industrial companies.

- Regulation adopted by some regions on collaborative economy activities may in fact be contrary to the spirit of the market unity law and other Spanish laws transposing the Services Directive (CNMC, 2016).

- Regulation hamper investment in innovation and a move towards higher value added activities.


2.4 Professional services

- No progress was made in the regulation of professional services.

- Restrictive regulation of professional services has not been reformed, keeping entry barriers high, corresponding mark-ups high, and discouraging investment in those industries.

- The draft professional services law envisaging liberalisation of professional association membership and reduction of reserved activities has not been adopted.


 3.1 Labor market regulations

- Unemployment and segmentation remain important challenges.

- The remaining gap in firing costs between temporary and permanent contracts, and uncertainty in case of legal dispute may incentivise fixed-term hiring.

- The share of temporary work, most of which of short duration, is still very high.

- Plan for fighting employment segmentation agreed upon in the tripartite agreement of 29 July 2014 has not been further developed.

3.2 Active Labour Market policies

- Spain has relatively low expenditure on active labour market policies (ALMPs).

- Hiring incentives aimed at reducing segmentation are not always well targeted. The groups of eligible workers are rather broad, suggesting that incentives are not sufficiently targeted towards those with greater difficulties to (re-)enter the labour market.

- Some progress was achieved in the provision of individualised support by the regional employment services. Despite that challenges are still present in enhancing the capacity of public employment services.

- A benchmarking evaluation of regional PES run by the Spanish authorities (EVADES) points to large differences in performance across regions linked, among other factors, to weak cooperation with national authorities and a focus on procedures rather than on results. There is also little progress on implementing single points of contact.

- Limited progress was made in improving coordination between employment and social services, addressing gaps in social benefits and improving family support, including the provision of child-care services.


4.2 Other financial measures

- Despite sound growth since 2013, venture capital supply is still underdeveloped. One reason is the lack of attractive opportunities for investors to exit from their investments: Spain's public stock market for small firms is not very dynamic, which means that venture capital-backed firms rarely go public.

- Low equity supply hamper investment in innovation and a move towards higher value added activities.

- The debt bias in the taxation of corporate financing discourages equity investment and the deepening of equity markets. 


5.1 Economic Governance

- A revised regional financing system along the principles of co-responsibility, solidarity and coordination with the central government's fiscal policy could increase incentives for fiscal compliance at regional level.

- A gradual return of region's financing schemes to market conditions can contribute to reduce moral hazard and increase fiscal prudence at the regional level.

- Differentiated deficit and debt targets would help regions to increase the likelihood of reaching their fiscal targets, as it would allow keeping a better balance between their ambition and realism

- The current system of periodic payments from the central to regional governments of shared taxes and equalisation transfers (whereby payments are made in year t on account of the final settlement of those taxes and transfers in year t+2), reduces the sensitivity to the cycle of regions' revenues

- The setting up of rainy day fund (i.e., a fund made of contributions from regions to help them deal with revenue shortfalls in slowdowns) could also enhance the contribution of regional governments to the stabilisation of the economy.


5.2 Fiscal consolidation and fiscal reform

- Tax rates hamper a move towards higher value added activities.

- The low share of consumption tax revenues is linked to a relatively high policy gap in VAT. Spain has relatively low VAT revenues. This is mainly due to Spain extensively applying exemptions or reduced rates on various goods and services.

Environmental taxes are still below the EU average, despite increases in recent years. In particular, taxes on transportation only yield half as much revenue in Spain as the EU average, reflecting a relatively low level of excise duties on both unleaded petrol and diesel.

- In property taxation, Spain relies to a relatively low extent on recurrent taxes. No major policy changes have been introduced in the area of property taxation in recent years, except for the gradual phasing out of mortgage deductibility. From a theoretical point of view, recurrent property taxes are considered among the taxes least detrimental to growth and preferable to transaction taxes, as the former allow a more efficient allocation of assets, as well as higher labour mobility.


5.3 Reform of the Public Administration

- There is no consistent public procurement policy in Spain. Spain lacks a nation-wide public procurement policy that ensures efficiency and legal compliance and a high level of competition across the country. Weaknesses remain, including low coordination across general government levels, insufficient control mechanisms, gaps in transparency and a relatively low use of centralised purchasing.

- Demand-side policies to induce investment are weak due to long payment delays by public authorities and lack of transparency in public procurement.

- There is scope for enhancing ex-ante and ex-post controls on contracting authorities.

- The absence of an independent body in charge of ensuring efficiency and legal compliance in public procurement throughout the country hampers the proper implementation of procurement rules and may leave space for wrongdoings.

- Spain stands out for a relatively high use of the negotiated procedure without prior publication which translates into an absence of call for competition at EU level and frequently leads to a direct award.

- No tailor-made preventive strategies to mitigate corruption risks have been developed at local and regional government level nor is there a shared preventive strategy across government levels

Lack of legislation to protect whistle-blowers - other than in the areas of unfair dismissal and discriminatory treatment of employees-, the degree of independence of the recently established Office of Conflicts of Interest and lack of regulation of lobbying -European Commission, 2016e) have not been the object of a specific follow up.

- Other aspect of the business environment not conducive to investment are lengthy judicial proceedings.

- There is also room for improving the qualitative aspects of justice, for example, relating to compulsory training for judges, including on IT techniques. Lastly, while legislative reforms have been adopted recently, such as the 2015 reform on workload allocation, they require full implementation and application over a certain period of time to be duly assessed.


6.3 Other welfare state reforms

- There was little progress towards reducing poverty risk

- The lack of coordination between employment and social services hampers the provision of extended services that jobseekers need to overcome the multiple barriers they face

- Wide inequalities in access to long-term care services persist across regions, due to large disparities in the number of places available, services offered and prices. Fragmentation and large regional disparities in income guarantee schemes could explain their low average effectiveness.

- Limited progress has been made in addressing gaps and disparities in minimum income schemes and improving family support schemes, including the provision of child-care services.

Child poverty remained high mainly because of parents' labour market situation and weak family support. The impact of social transfers on reducing child poverty further deteriorated and was lower than the EU average.

- There is a strong social gradient in the uptake of childcare suggesting barriers to access to childcare for low-income parents.

- The redistributive impact of both taxes and social transfers remains below the EU average. Spain's income support schemes have limited coverage and effectiveness.