Spain: Reform policies pay off – they must only be continued

After eight months and two rounds of general elections, Spain’s parliamentarians have still not succeeded in establishing a new government. Rajoy, the prime minister to date, is therefore only a caretaker prime minister. What is problematic is that the cabinet is not permitted to submit new bills to parliament and therefore simply administers the status quo. Despite the economic successes, the popularity of Rajoy and his conservative party has fallen. Corruption scandals have weakened confidence in the established parties and courageous structural reforms have led to painful cuts for the population.

The reforms to date no doubt played a key role in Spain managing to come out of recession and now being in a strong economic upturn. Core elements of the economic reform programme were reforms to labour law to enable greater flexibility. Protection against termination was eased and collective bargaining agreements made more flexible. There have also been extensive administrative reforms as well as countless measures to reduce red tape and standardise the Spanish domestic market.

The product markets have been deregulated by opening barriers that had blocked access to the liberal professions, rendering retailing more flexible, and standardising product and production approvals nationwide. A fiscal reform has served to reduce the income and corporation tax rates, while at the same time the basis for tax assessments has been expanded. The pension system has also been fine-tuned, with the trend for future pensions being aligned to the demographic development, while regulations on access to early retirement and part‑time employment at a pensionable age have been tightened considerably.

The more than robust economic growth in recent years was in large part fuelled by comprehensive reforms. To place the economic upturn on a steady footing, a functioning government is soon needed. The impact of the structural measures resolved will probably slowly dwindle and the growing uncertainty among investors will then become an additional drag on investment sentiment and correspondingly impair Spain’s growth momentum.

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