# EUR-Lex - 52011SC0817 - EN

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# 52011SC0817

**Recommendation for a COUNCIL RECOMMENDATION on the National Reform Programme 2011 of Spainand delivering a Council opinionon the updated Stability Programme of Spain, 2011-2014 /* SEC/2011/0817 final */**

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Recommendation for a

COUNCIL RECOMMENDATION

on the National Reform Programme 2011 of
Spain
and delivering a Council opinion
on the updated Stability Programme of Spain, 2011-2014

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning
of the European Union, and in particular Article 121(2) and 148(4) thereof,

Having regard to Council Regulation (EC) No
1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary
positions and the surveillance and coordination of economic policies[1],
and in particular Article 5(3) thereof,

Having regard to the recommendation of the European
Commission[2],

Having regard to the conclusions of the
European Council,

Having regard to the opinion of the
Employment Committee,

After consulting the Economic and Financial
Committee,

Whereas:

(1) 
On 26 March 2010, the European Council agreed to
the European Commission's proposal to launch a new strategy for jobs and
growth, Europe 2020, based on enhanced coordination of economic policies, which
will focus on the key areas where action is needed to boost Europe’s potential
for sustainable growth and competitiveness.

(2) 
On 13 July 2010, the Council adopted a
recommendation on the broad guidelines for the economic policies of the Member
States and the Union (2010 to 2014) and on 21 October 2010, adopted a decision
on guidelines for the employment policies of the Member States[3],
which together form the “integrated guidelines”. Member States were invited to
take the integrated guidelines into account in their national economic and
employment policies.

(3) 
On 12 January 2011, the Commission adopted the
first Annual Growth Survey, marking the start of a new cycle of economic
governance in the EU and the first European semester of ex-ante and integrated
policy coordination, which is anchored in the Europe 2020 strategy.

(4) 
On 25 March 2011, the European Council endorsed
the priorities for fiscal consolidation and structural reform (in line with the
Council’s conclusions of 15 February and 7 March 2011 and further to the
Commission’s Annual Growth Survey). It underscored the need to give priority to
restoring sound budgets and fiscal sustainability, reducing unemployment
through labour market reforms and making new efforts to enhance growth. It
requested Member States to translate these priorities into concrete measures to
be included in their Stability or Convergence Programmes and National Reform
Programmes.

(5) 
On 25 March 2011, the European Council also
invited the Member States participating in the Euro Plus Pact to present their
commitments in time to be included in their Stability or Convergence Programmes
and their National Reform Programmes.

(6) 
On 29 April 2011, Spain submitted its 2011
Stability Programme update covering the period 2011-2014 and its 2011 National
Reform Programme. In order to take account of the interlinkages, the two
programmes have been assessed at the same time.

(7) 
The Spanish economy was severely hit by the
crisis and went through a sharp adjustment in 2008-2009. Real GDP fell by 4.3%
between the beginning of 2008 and the end of 2010, and employment declined by
over 10%. As a consequence, the unemployment rate rose to 20.1% at the end of
2010, the highest in the EU. The young (41.6% unemployment rate) and the less
educated workers (26.4% unemployment rate) bore much of the brunt of the
Spanish recession. Sovereign debt yields increased and the banking system, in
particular savings banks, came under pressure with the burst of the housing
bubble and the sharp contraction of the construction sector. The process of
absorbing large macro-economic imbalances built up during the boom period will
continue for some time. In response to these challenges, the Spanish Government
has embarked on a reform agenda covering fiscal consolidation, savings bank
restructuring and labour and product market reforms.

(8) 
Based on the assessment of the updated Stability
Programme pursuant to Council Regulation (EC) No 1466/97, the Council is of the
opinion that the macroeconomic scenario underpinning the budgetary projections
in the Stability Programme is too favourable in 2011 and 2012. The Programme
plans to bring the budget deficit below the 3% reference value by 2013, in line
with the Council recommendations of April 2009, and reduce the deficit further
to 2.1% of GDP in 2014. The programme does not foresee the achievement of the
MTO, which remains a balanced budget, in the programme horizon. This adjustment
path is broadly appropriate. The annual average improvement of the structural
balance is 1.5% of GDP on average for 2010-13, in line with the Council
recommendation, and an additional 0.3% of GDP in 2014. The debt-to-GDP ratio is
projected to rise from 60.1% of GDP in 2010 to around 69% at the end of the
programme period. There are downside risks to the consolidation path related to
the underlying macroeconomic assumptions and to the respect of budgetary
targets at the regional level. Regions account for a large share of total
public expenditure and many exceeded their fiscal objectives in 2010. However,
the Spanish government has committed to take additional measures, if budgetary
slippages emerge.

(9) 
Achieving the foreseen fiscal consolidation in
2011 and 2012 requires strict application of the deficit and debt control
mechanisms that have been put in place for regional governments. Achieving the
budgetary targets in the event that macroeconomic and budgetary developments
turn out worse than expected in 2011 and 2012, will require additional measures
that the Government has committed to take. For 2013 only a few measures have
been identified to underpin the budgetary targets.

(10) 
The medium-term budgetary framework in Spain has
been instrumental in promoting multi-annual fiscal planning and overall shows a
good track record. However, the crisis has put this framework to the test and
showed the need to strengthen further fiscal stability and the preventive
aspect of fiscal policy. This would be enhanced by introducing a spending rule
based on medium-term nominal GDP growth. The rule, put forward by the Spanish
authorities in the Stability Programme, would automatically bind the central
government and local governments. The government also plans to seek consensus
within the Council for Fiscal and Financial Policy on applying the rule to the
Autonomous Communities.

(11) 
The likely long-term impact of ageing on the
Spanish public budget is higher than the EU average. This is primarily because
of the substantial increase in pension expenditure as a share of GDP that is
projected for the coming decades. In the long run ageing will lead to a significant
increase in the ratio of retirees per worker. In the absence of reform,
expenditure on pensions is estimated to increase at a rate well above the EU
average and put at risk the sustainability of public finances. The government
proposal for a pension reform, agreed with social partners, will help to
improve fiscal sustainability and raise incentives for labour market
participation. However, the reform still needs to be approved by Parliament and
may still be subject to changes.

(12) 
Spain has taken important steps to strengthen
its banking system, notably by providing sizeable public support and taking
measures to restructure savings banks, reinforce banks' solvency, and improve
transparency of their balance sheets. However, the problems created by the role
of local authorities in the governance of savings banks are not yet fully
solved. The form of savings banks' consolidation via 'cold mergers' has given
rise to some uncertainty regarding the effective reorganisation and downsizing
of the banks. The Government has undertaken to finalise the restructuring by
the end of September 2011.

(13) 
The ongoing labour market reform in Spain needs
to be complemented by an overhaul of the current unwieldy collective bargaining
system. The predominance of provincial and industry agreements leaves little
room for negotiations at firm level. The automatic extension of collective
agreements, the validity of non-renewed contracts and the use of ex-post
inflation indexation clauses contribute to wage-inertia, preventing the wage
flexibility needed to speed up economic adjustment and restore competitiveness.
The Government has requested social partners to agree on a reform of the
collective wage bargaining system during Spring 2011 and has undertaken to
legislate subsequently.

(14) 
Against the background of very high
unemployment, Spain launched a reform of its labour market with the law of
September 2010. The law aims to reduce labour market duality and youth
unemployment, increase the employability of vulnerable groups and increase
flexibility at company level. To this end, reform of the active labour market
policies was adopted in February 2011 that also included measures to strengthen
the advisory and guiding role of employment services and their coordination at
national and regional levels. At this stage it is too early to assess whether
the reform is sufficient to reduce segmentation and reduce youth and long-term
unemployment since some measures are not operational yet. The Government has
committed to further steps by October 2011.

(15) 
Spain experienced a strong increase in unit
labour costs since the late 1990s, implying a loss of price and cost
competitiveness. Higher wage growth coupled with lower productivity growth than
in the euro area contributed to persistently higher inflation in Spain. Finding
room to reduce in a budget-neutral way the relatively high level of social
contributions to lower non-wage labour costs, would help boost competitiveness.
For instance, energy taxes, especially fuel taxes, remain relatively low in
Spain and could be a way of offsetting revenue.

(16) 
The high level of early school leaving in Spain
(31.2% in 2009) is particularly worrying, as it undermines the size of the
skilled work force, affects the job prospects of the concerned individuals and
reduces potential growth. The Law on Sustainable Economy, adopted on 15
February 2011, includes measures aiming at increasing the quality and quantity
of human capital through education and vocational training. However, the
effectiveness of the new measures to combat early school leaving and to improve
vocational training is uncertain and implementation at all levels of government
may prove difficult.

(17) 
Spain has made progress in improving the
conditions for competition in product and service markets, addressing one of
the causes of slow productivity growth. Although transposition of the Services
Directive into law is well advanced in Spain, further opening up of
professional services is needed. The Law on Sustainable Economy includes a wide
array of measures to improve the business environment, strengthen competition
and promote environmental sustainability. However, implementation may prove
difficult to carry through at all levels of government. Specifically, there is
a need to prevent overlaps between layers of the administration, multi-level
legislative gold-plating, and substantially heterogeneous legislation across
regions.

(18) 
Spain has made a number of commitments under the
Euro Plus Pact[4]. On the fiscal side,
Spain commits to establishing an expenditure rule to enhance fiscal stability
and thus sustainability of public finances. To reinforce financial stability,
Spain committed to complete before 30 September the restructuring process of
the financial sector. Employment measures focus on implementing acts on active
labour market policies and provisions in the field of vocational training, as
well as on addressing informal employment. The competitiveness measures focus
on reforming the collective bargaining system, regulated professions, setting
up an Advisory Committee on Competitiveness and a reform of bankruptcy law. The
above commitments refer to all four areas of the Pact. They represent a
continuity of the ongoing reform agenda, adding a firm timeframe for the
implementation of certain reforms and ensuring full implementation of reforms
that have already been carried out. These commitments have been assessed and
taken into account in the recommendations.

(19) 
The Commission has assessed the Stability
Programme and National Reform Programme, including the Euro Plus Pact commitments[5].
It has taken into account not only their relevance for sustainable fiscal and
socio-economic policy in Spain but also their respect of EU rules and guidance,
given the need to reinforce the overall economic governance of the European
Union by providing EU level input into future national decisions. In this
light, the Commission considers that the Spanish government has established
fiscal consolidation plans consistent with the required targets, but that some
downside risks remain. Public expenditure growth should be kept below the rate
of medium-term GDP growth and the pension reform needs to be adopted. Further
steps in 2011-12 should focus on ensuring the stability of the financial system
(through the finalisation of the restructuring and consolidation of the savings
banks) and the strengthening of domestic sources for growth, by addressing the
current surge in unemployment in particular through the reform of collective
bargaining and continued implementation of the ongoing reforms in the labour
market, with a close monitoring and evaluation of their effectiveness. The
services sector, trades and professions should be opened up to greater
competition, and the administrative burden for enterprises should be reduced.

(20) 
In light of this assessment, also taking into
account the Council Recommendation under Article 126(7) Treaty on the
Functioning of the European Union of 2 June 2010, the Council has examined the
2011 update of the Stability Programme of Spain and its opinion[6]
is reflected in particular in its recommendation under (1) set out below.
Taking into account the European Council conclusions of 25 March 2011, the
Council has examined the National Reform Programme of Spain,

HEREBY RECOMMENDS that Spain should
take action within the period 2011-2012 to:

(1) 
Implement the budgetary strategy in 2011 and
2012, ensuring the achievement of deficit targets at all levels of government,
including by strictly applying the existing deficit and debt control mechanisms
for regional governments; adopt further measures in case budgetary and economic
developments do not turn out as expected; take any opportunity including from
better economic conditions to accelerate the deficit reduction; set out
concrete measures to fully underpin the targets for 2013 and 2014. Keep public
expenditure growth below the rate of medium-term GDP growth, by introducing an
expenditure rule at all levels of government in the Budget Stability Law, as
envisaged.

(2) 
Adopt the proposed pension
reform to extend the retirement age and increase the
number of working years for the calculation of pensions as planned; regularly
review pension parameters in line with changes to life expectancy, as planned,
and develop further measures to raise the effective retirement age, including
lifelong learning for older workers.

(3) 
Reinforce the ongoing restructuring of the
savings banks sector by addressing remaining weaknesses in their governance
structure.

(4) 
Explore the scope to reduce the level of social
security contributions in order to lower non-wage labour costs in a budget-neutral
way, for example by changing the structure and rate of VAT and energy taxation.
Adopt and implement, following consultation with social
partners in accordance to national practice, a reform of the collective wage
bargaining process and the wage indexation system to ensure that wage growth
better reflects productivity developments as well as local and firm level
conditions.

(5) 
Assess by the end of 2011 the impacts of the
labour market reforms of September 2010 and of the reform of active labour market
policies of February 2011, accompanied, if necessary, by proposals for further
reforms to reduce labour market segmentation, and to improve employment
opportunities for young people; ensure a close
monitoring of the effectiveness of the measures set out in the National Reform
Programme to reduce early school leaving, including through prevention
policies, and facilitate the transition to vocational education and training.

(6) 
Further open up professional services and enact
the planned legislation in order to redesign the regulatory framework and
eliminate current restrictions to competition, efficiency and innovation;
implement the Law on Sustainable Economy, notably measures aimed at improving
the business environment and enhancing competition in the product and service
markets, at all levels of government; improve coordination between regional and
national administrations to reduce the administrative burden for enterprises.

Done at Brussels,

For
the Council

The
President

[1]               OJ L 209, 2.8.1997, p. 1.

[2]               OJ C , , p. .

[3]               Maintained for 2011 by Council Decision 2011/308/EU
of 19 May 2011.

[4]               More details on the commitments under the Euro Plus
Pact can be found in SEC(2011) 718.

[5]               SEC(2011) 718.

[6]               Foreseen in Article 5(3) of Council Regulation (EC)
No 1466/97.