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
Date: 2011-06-07
Institutions: European Commission
Subjects: EU programme, Spain, economic growth, employment policy, financial policy

EUROPEAN COMMISSION 

Brussels, 7.6.2011 
SEC(2011) 817 final 

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 

{SEC(2011) 718 final} 

EN 

   EN 

 
 
 
  
 
 
 
 
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 
policies1, and in particular Article 5(3) thereof, 

Having regard to the recommendation of the European Commission2, 

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) 

(2) 

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 
to  boost  Europe’s  potential  for  sustainable  growth  and 
competitiveness. 

is  needed 

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 States3, which together form the “integrated guidelines”. Member States were 
invited  to  take  the  integrated  guidelines  into  account  in  their  national  economic  and 
employment policies. 

1 
2 
3 

OJ L 209, 2.8.1997, p. 1. 
OJ C , , p. . 
Maintained for 2011 by Council Decision 2011/308/EU of 19 May 2011. 

EN 

2 

   EN 

 
 
 
                                                 
(3) 

(4) 

(5) 

(6) 

(7) 

(8) 

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.  

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. 

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. 

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.  

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. 

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.  

EN 

3 

   EN 

(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 
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. 

the  budgetary 

the  event 

targets 

in 

(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 

EN 

4 

   EN 

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 
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. 

lower  non-wage 

to 

(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  Pact4.  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. 

4 

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

EN 

5 

   EN 

                                                 
(19)  The  Commission  has  assessed  the  Stability  Programme  and  National  Reform 
Programme, including the Euro Plus Pact commitments5. 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 
opinion6  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) 

(2) 

(3) 

(4) 

5 
6 

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. 

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. 

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

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 

SEC(2011) 718. 
Foreseen in Article 5(3) of Council Regulation (EC) No 1466/97. 

EN 

6 

   EN 

                                                 
(5) 

(6) 

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.  

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. 

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 

EN 

7 

   EN