Recommendation for a COUNCIL RECOMMENDATION on the 2016 national reform programme of Spain and delivering a Council opinion on the 2016 stability programme of Spain
Date: 2016-05-18
Institutions: European Commission, Secretariat-General
Subjects: Spain, budget deficit, economic policy, economic reform, higher education, invitation to tender, labour market, retail trade, social policy, stability programme

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   EUROPEAN COMMISSION  Brussels, 18.5.2016  COM(2016) 329 final   Recommendation for a COUNCIL RECOMMENDATION on the 2016 national reform programme of Spain  and delivering a Council opinion on the 2016 stability programme of Spain  
 
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the 2016 national reform programme of Spain 

and delivering a Council opinion on the 2016 stability programme of Spain 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Articles 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(2) thereof, 

Having  regard  to  Regulation  (EU)  No  1176/2011  of  the  European  Parliament  and  of  the 
Council  of  16  November  2011  on  the  prevention  and  correction  of  macroeconomic 
imbalances2, and in particular Article 6(1) thereof, 
Having regard to the recommendation of the European Commission3, 
Having regard to the resolutions of the European Parliament4, 

Having regard to the conclusions of the European Council, 

Having regard to the opinion of the Employment Committee, 

Having regard to the opinion of the Economic and Financial Committee, 

Having regard to the opinion of the Social Protection Committee, 

Having regard to the opinion of the Economic Policy Committee, 

Whereas: 

(1) 

On  26  November  2015,  the  Commission  adopted  the  Annual  Growth  Survey5, 
marking  the  start  of  the  2016  European  Semester  of  economic  policy  coordination. 
The priorities of the Annual Growth Survey were endorsed by the European Council 
on  17-18  March  2016.  On  26  November  2015,  on  the  basis  of  Regulation  (EU) 
No 1176/2011,  the  Commission  adopted  the  Alert  Mechanism  Report6,  in  which  it 
identified Spain as one of the Member States for which an in-depth review would be 
carried out. On the same day, the Commission also adopted a recommendation for a 

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OJ L 209, 2.8.1997, p. 1. 
OJ L 306, 23.11.2011, p. 25. 
COM(2016) 329 final. 
P8_TA(2016)0058, P8_TA(2016)0059, and P8_TA(2016)0060. 
COM(2015) 690 final. 
COM(2015) 691 final. 

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(2) 

(3) 

(4) 

(5) 

Council  recommendation  on  the  economic  policy  of  the  euro  area7.  This 
recommendation was endorsed by the European Council on 18-19 February 2016 and 
adopted by the Council on 8 March 2016. As a country whose currency is the euro 
and  in  view  of  the  close  interlinkages  between  the  economies  in  the  economic  and 
monetary  union,  Spain  should  ensure  the  full  and  timely  implementation  of  the 
recommendation. 
The 2016 country report for Spain8 was published on 26 February 2016. It assessed 
Spain’s progress in addressing the country-specific recommendations adopted by the 
Council  on  14  July  2015  and  Spain’s  progress  towards  its  national  Europe  2020 
targets. It also included the in-depth review under Article 5 of Regulation (EU) No 
1176/2011. On 8 March 2016, the Commission presented the results of the in-depth 
review.  9  The  Commission  analysis  leads  it  to  conclude  that  Spain  is  experiencing 
macroeconomic  imbalances.  In  particular,    high  external  and  internal  debt,  both 
public  and  private,  continue  to  constitute  vulnerabilities  in  a  context  of  high 
unemployment. The need for action so as to reduce the risk of adverse effects on the 
Spanish  economy  and,  given  its  size,  of  negative  spillovers  to  the  economic  and 
monetary  union,  is  particularly  great.  Despite  improvement  in  the  current  account 
balance, net external liabilities are not projected to reach prudent levels in the short 
term. Private sector deleveraging is on track, supported partly by favourable growth 
conditions, but deleveraging needs are large and public debt remains high. Measures 
have  been  taken  in  the  financial  sector  and  in  corporate  and  personal  insolvency 
frameworks, but further action is needed  on innovation and skills and on compliance 
with the Stability and Growth Pact.  

On 29  April 2016, Spain submitted its 2016 national reform programme and on 30 
April  2016  it  submitted  its  2016  stability  programme.  To  take  account  of  their 
interlinkages, the two programmes have been assessed at the same time. 

recommendations  have  been  addressed 

Relevant  country-specific 
the 
programming  of  the  European  Structural  and  Investment  Funds  for  the  2014-2020 
period.  As  foreseen  in  Article  23  of  Regulation  (EU)  No  1303/2013,  where  it  is 
necessary  to  support  the  implementation  of  relevant  Council  recommendations,  the 
Commission may request a Member State to review and propose amendments to its 
Partnership  Agreement  and  relevant  programmes.  The  Commission  has  provided 
further  details  on  how  it  would  make  use  of  this  provision  in  guidelines  on  the 
application  of  the  measures  linking  effectiveness  of  the  European  Structural  and 
Investment Funds to sound economic governance10. 

in 

Spain is currently in the corrective arm of the Stability and Growth Pact. In its 2016 
stability programme, Spain plans to achieve headline deficit targets of 3.6% of GDP 
in  2016  and  2.9%  of  GDP  in  2017.  The  excessive  deficit  is  thus  planned  to  be 
corrected one year later than currently recommended by the Council, the fiscal effort 
and headline targets having been missed in 2014 and 2015. These targets assume the 
full  implementation  of  0.4%  of  GDP  in  permanent  savings  at  central  and  regional 
government 
the  Autonomous  Commission 
recommendation  of  9  March  2016.  The  deficit  is  planned  to  continue  declining 

level  announced 

in  response 

to 

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COM(2015) 692 final. 
SWD(2016) 78 final. 
COM(2016) 95 final. 
COM(2014) 494 final. 

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thereafter,  to  1.6%  of  GDP  in  2019.  However,  the  medium-term  objective  of  a 
balanced budgetary position in  structural  terms is  not  planned to  be reached within 
the time horizon of the stability programme. In particular, the recalculated  structural 
balance is projected to improve only marginally in 2016 and 2017 to around -2½% of 
GDP, and decline slowly to reach -2¾% of GDP in 2019. The government debt-to-
GDP  ratio  declined  only  marginally  in  2015  to  99.2%  of  GDP  and  is  expected  to 
decline slightly in 2016 and 2017 and more decisively in the two following years, to 
96%  of  GDP  in  2019,  as  the  primary  balance  turns  into  a  surplus.  The 
macroeconomic  scenario  underpinning  these  budgetary  projections  is  plausible  for 
2016 and 2017 and somewhat optimistic thereafter;  it has been endorsed by Spain's 
Independent  Fiscal  Institution  (AIReF).  The  Commission  2016  spring  forecast 
projects  the  deficit  at  3.9%  of  GDP  in  2016  and  3.1%  of  GDP  in  2017,  above  the 
headline targets in the stability programme. Spain is thus not projected to correct the 
excessive deficit by 2016 as recommended by the Council. Risks to the deficit targets 
in the programme largely stem from uncertainties surrounding the implementation of 
the  savings  from  the  March/April  2016  measures.  As  the  structural  deficit  is 
projected  to  slightly  increase  in  both  years,  the  fiscal  effort  is  not  in  line  with  the 
requirements  of  the  Stability  and  Growth  Pact.  Based  on  its  assessment  of  the 
stability programme and taking into account the Commission's 2016 spring forecast, 
the Council is of the opinion that there is a risk that Spain will not comply with the 
provisions of the Stability and Growth Pact. Therefore, further measures are needed 
to ensure compliance in 2016 and 2017. 

Pursuant  to  Article  10(1)  of  Regulation  (EC)  N°  1467/97,  the  Commission  will 
regularly monitor the implementation of action taken by Spain in response to the last 
recommendation made by the Council under Article 126(7) TFEU: the Commission 
will  therefore  recommend  to  the  Council  the  appropriate  steps  to  be  taken  in  the 
framework of the excessive deficit procedure. 

Since 2012, Spain's fiscal framework has been strengthened in order to, among other 
things, prevent deviations and ensure compliance by all government levels with their 
respective deficit, debt and expenditure targets. In addition, a rule for application (on 
a  voluntary  basis)  at  regional  level  was  approved  in  mid-2015  to  limit  growth  in 
expenditure  on  healthcare  and  pharmaceutical  products  and  an  agreement  between 
the  government  and  the  pharmaceutical  industry  was  signed  in  November  2015  to 
help rationalise spending on pharmaceuticals. Despite this, in 2015, most regions as 
well  as  the  social  security  sector  fell  significantly  short  of  meeting  their  domestic 
fiscal  targets.  The  stability  law's  expenditure  rule  was  not  observed  by  the  central, 
in  expenditure  of 
regional  and 
pharmaceutical  products,  namely  in  hospitals,  strengthened  further,  even  excluding 
the impact of new anti-hepatitis C treatments. 

local  government  subsectors  and  growth 

In the field of public procurement, Spain performs well concerning the quality of the 
legislation  and  the  availability  of  review  procedures.  Efforts  have  been  made  to 
rationalise  public  purchasing,  in  particular  via  joint  procurement  mechanisms. 
However,  there  are  disparities  in  the  implementation  of  public  procurement  across 
administrations and insufficient control mechanisms hinder the correct application of 
public  procurement  rules.  The  number  of  presumed  breaches  of  EU  public 
procurement  legislation  brought  to  the  Commission’s  attention  in  recent  years  has 
been relatively high. Furthermore, the Spanish Court of Auditors has pointed to some 
weaknesses such as the frequent use of the negotiated procedure without publication, 
the repeated modification of contracts, the splitting of contracts into smaller ones and 

(6) 

(7) 

(8) 

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(9) 

(10) 

(11) 

the  insufficient  precision  and  clarity  of  some  tender  documents  and  administrative 
decisions. 

Spain has made substantial progress in restructuring the financial sector. The law on 
savings  banks  to  strengthen  their  governance  and  reduce  controlling  stakes  held  by 
banking  foundations  has  been  implemented.  The  implementation  of  plans  for 
restructuring state-aided banks is well advanced. The Bank of Spain has amended the 
existing accounting regime for credit institutions and adopted a new framework for 
SAREB,  the  Spanish  asset  management  company.  The  new  framework  will  allow 
SAREB  a  proper  treatment  of  impairments  and  help  in  adapting  its  deleveraging 
policies to credible market assumptions.  

Labour  market  reforms  undertaken  in  recent  years  have  made  employment  more 
responsive to growth and job creation has resumed, supported by increased flexibility 
and continued wage moderation. Collective agreements have been supportive of this 
trend, also owing to the inter-professional agreement signed in June 2015. The recent 
increase  in  overall  employment  has  been  driven  mainly  by  temporary  contracts, 
although  the  number  of  newly  signed  open-ended  contracts  is  slowly  rising. 
However,  the  take  up  of  incentives  for  new  permanent  hiring  remains  limited,  and 
the proportion of temporary workers remains one of the highest in the EU, while the 
opportunities  for  temporary  workers  to  move  to  a  permanent  contract  remain  low. 
The  short  duration  of  temporary  contracts  limits  incentives  to  invest  in  human 
capital, hampering productivity growth. Although decreasing rapidly, unemployment 
remains  very  high,  in  particular  among  young  people,  and  its  average  duration  is 
rising.  Persistently  high  long-term  unemployment  implies  that  unemployment  risks 
becoming  entrenched,  negatively  affecting  working  and  social  conditions.  Nearly 
60% of the long-term unemployed are low-skilled, which calls for appropriate active 
and passive labour market and training policies to tackle pervasive skills mismatches 
and prevent skills depreciation among this group. Interaction with  employers in the 
design of training programmes is still weak. 

The  effectiveness  of  activation  and  active  labour  market  measures  depends  heavily 
on the capacity of employment services to design and offer individualised support to 
beneficiaries. The implementation of recent reforms of active labour market policies 
is progressing slowly and the capacity of the public employment services to provide 
effective,  individualised  counselling  and  job  search  assistance  is  still  limited. 
Cooperation between the regional public employment services and private placement 
agencies  remains  limited.  Moreover,  cooperation  between  employment  and  social 
services is uneven across regions, hampering the provision of coordinated assistance 
for  those  further  away  from  the  labour  market,  in  particular  minimum  income 
beneficiaries.  There  are  significant  disparities  across  regions  as  regards  income 
support  schemes,  for  example  in  delivery  arrangements,  eligibility  requirements, 
coverage and adequacy, while difficulties in transferring social benefits hamper inter-
regional  job  mobility.  In  addition,  information  about  the  transition  to  employment 
from minimum income schemes is quite limited. Spain is currently preparing a map 
of  national  and  regional  income  support  schemes  in  the  country,  covering  national 
and regional levels. While some measures have been introduced, the effectiveness of 
family  and  housing  benefits  in  reducing  poverty  remains  limited,  and  the  lack  of 
adequate and affordable child care and long-term care provision discourages women, 
in particular, from taking up a job. 

(12) 

The increasingly rapid change in the sectoral composition of employment that Spain 
has  been  witnessing  since  2008  has  been  accompanied  by  an  increase  in  skills 

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mismatches.  The  low  overall  skills  level  constrains  the  transition  towards  higher 
value-added  activities  and  hampers  productivity  growth.  Despite  a  high  level  of 
tertiary  education  attainment,  skills  supply  is  not  sufficiently  aligned  with  labour 
market  needs  and  employability  rates  for  recent  tertiary  graduates  are  among  the 
lowest in Europe, with a significant proportion employed in jobs that do not require a 
university  degree.  Furthermore,  despite  a  slight  improvement  over  the  past  five 
years, partly supported by initiatives to increase business representation on university 
governing  boards,  cooperation  between  universities  and  businesses  remains  weak. 
The reduced mobility of academics, the rigidity of the university governance system 
and  the  administrative  barriers  faced  by  the  Offices  for  the  Transfer  of  Research 
outcomes  (Oficinas  de  transferencia  de  resultados  de  investigación)  compound 
obstacles to closer cooperation.  

Research  and  innovation  policy  in  Spain  faces  several  challenges.  Interaction 
between  public  and  private  research  is  weak.  Spain’s  R&D  intensity  (spending  on 
R&D  relative  to  GDP)  and  innovation  performance  keeps  declining,  against  the 
backdrop  of  a  relatively  low  number  of  innovative  firms  and  limited  incentives  for 
collaboration between public research and business. Spain underperforms in respect 
of  most  business  innovation  indicators.  The  gap  on  spending  on  R&D  intensity 
compared  to  the  EU  as  a  whole  is  especially  significant  as  regards  investment  in 
R&D by the private sector (0.6% in Spain compared to 1.3% in the EU as a whole). 
Venture  capital  is  still  not  widely  used  in  Spain,  notably  at  seed  stage.  Weak 
coordination of R&I policies in Spain has led to a fragmented regional landscape of 
bodies and programmes to promote innovation activities and foster science-business 
cooperation,  which  creates  significant  challenges  for  businesses,  especially  for 
smaller  firms.  Low  business  involvement  in  innovation  activities  could  point  to  a 
lack  of  innovation-friendly  framework  conditions  and  incentives.  As  highlighted  in 
the 2014 ERAC (European Research Area Committee) Peer Review of the Spanish 
Research and Innovation System, most successful public research systems are driven 
by  higher  degrees  of  evaluation  and  accountability  than  are  found  in  Spain.  In  this 
context, the allocation of public funding for R&D activities in universities and public 
research bodies is usually not based on performance, thus reducing the incentives to 
improve the quality and relevance of scientific outputs. 

The small average size of Spanish firms helps explain the economy's  persistent low 
productivity.  Firm  growth,  combined  with  improvements  in  human  capital, 
innovation, technology, access  to  finance  and  efficient  justice  could  spur  aggregate 
productivity.  In  2015,  business  investment  strengthened,  underpinned  by  dynamic 
demand  conditions,  low  borrowing  costs  and  ongoing  balance  sheet  repair  by  the 
corporate sector and households. Spain has taken various measures to ease business 
growth.  For  example,  a  recent  law  on  business  financing  is  expected  to  facilitate 
access to finance for small and medium-sized enterprises (SMEs). Furthermore, prior 
assessment  of  the  potential  impact  of  new  legislation  on  SMEs  has  now  become 
compulsory.  However,  the  time  and  number  of  permits  required  for  starting  up  a 
business and launching certain economic activities remains relatively high.  

(13) 

(14) 

(15) 

Spain's considerable differences across regions in regulatory practices, including on 
business licencing, may limit firms' capacity to grow. The law on market unity aims 
to  reduce  barriers  to  access  to  and  exercise  of  economic  activities  across  Spanish 
regions and to improve regulation. It could potentially have a significant impact on 
removing barriers to investment and facilitate business licensing, business operations 
and  company  growth.  However,  in  its  third  year  of  application,  it  is  being 

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implemented  slowly  by  regional  governments.  Likewise,  the  benefits  of  the  retail 
sector  reform  of  2014  depend  on  regional  governments  adopting  the  necessary 
implementing  acts.  Furthermore,  tackling  obstacles  to  access  to  the  professional 
services sector is likely to improve productivity in other sectors that use those inputs. 
Apart  from  the  transposition  of  the  Services  Directive  into  Spanish  law,  there  has 
been  no  progress  on  a  horizontal  reform  of  the  regulatory  framework  for  regulated 
professions and professional associations, other than in the area of professional board 
certification  of  projects.  The  reform  planned  in  successive  National  Reform 
Programmes  was  not  adopted.  This  reform  aimed  at  defining  the  professions 
requiring  registration  in  a  professional  organisation,  increasing  transparency  and 
accountability of professional bodies, opening up unjustified reserved activities and 
safeguarding  market  unity  in  the  access  to  and  exercise  of  professional  services  in 
Spain.   

In the context of the European Semester, the Commission has carried out an analysis 
of  Spain’s economic policy and  published it in the  2016 country  report. It has  also 
assessed the stability programme and the national reform programme and the follow-
up given to the recommendations addressed to Spain in previous years. It has taken 
into account not only their relevance for sustainable fiscal and socioeconomic policy 
in  Spain  but  also  their  compliance  with  EU  rules  and  guidance,  given  the  need  to 
strengthen the  EU’s overall economic governance by providing EU-level input into 
future  national  decisions.  The  recommendations  under  the  European  Semester  are 
reflected in recommendations 1 to 4 below. 

In  the  light  of  this  assessment,  the  Council  has  examined  the  stability  programme, 
and its opinion11 is reflected in particular in recommendation 1 below. 

In  the  light  of  the  Commission’s  in-depth  review  and  this  assessment,  the  Council 
has  examined  the  national  reform  programme  and  the  stability  programme.  Its 
recommendations under Article 6 of Regulation (EU) No 1176/2011 are reflected in 
recommendations 1 to 4 below. 

(16) 

(17) 

(18) 

HEREBY RECOMMENDS that Spain take action in 2016 and 2017 to: 

(1)  Ensure  a  durable  correction  of  the  excessive  deficit  by  2017,  reducing  the 
general  government  deficit  to  3.7%  of  GDP  in  2016  and  to  2.5%  of  GDP  in 
2017,  by  taking  the  necessary  structural  measures  and  by  using  all  windfall 
gains for deficit and debt reduction. This is consistent with an improvement in 
the structural balance of 0.25% of GDP in 2016 and of 0.5% of GDP in 2017. 
Implement  at  all  government  levels  the  tools  set  out  in  the  fiscal  framework 
law. Enhance control mechanisms for public procurement and coordination of 
procurement policies across government levels.  

(2)  Take  further  measures  to  improve  labour  market  integration,  by  focusing  on 
training 
individualised  support  and  strengthening 
measures. Enhance the capacity of regional employment services and reinforce 
their  coordination  with  social  services.  Address  gaps  and  disparities  in 
minimum  income  schemes  and  improve  family  support  schemes,  including 
access to quality child-care and long-term care. 

the  effectiveness  of 

(3)  Take  further  measures  to  improve  the  labour  market  relevance  of  tertiary 
incentives  for  cooperation  between 

including  by  providing 

education, 

11 

Under Article 5(2) of Council Regulation (EC) No 1466/97. 

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universities, firms and research. Increase performance-based funding of public 
research  bodies  and  universities  and  foster  R&I  investment  by  the  private 
sector. 

(4)  Accelerate  the  implementation  of  the  law  on  market  unity  at  regional  level. 
Ensure    implementation  by  the  autonomous  regions  of  the  reform  measures 
adopted for the retail sector. Adopt the planned reform on professional services 
and associations.  

Done at Brussels, 

For the Council 
The President 

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