COMMISSION STAFF WORKING DOCUMENT Country Report Spain 2017 Including an In-Depth Review on the prevention and correction of macroeconomic imbalances Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2017 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011 {COM(2017) 90 final} {SWD(2017) 67 final to SWD(2017) 93 final}
Date: 2017-02-22
Institutions: European Commission, Secretariat-General
Subjects: EU employment policy, EU investment, Spain, economic development, economic recovery, euro area, fiscal policy, macroeconomics, multilateral surveillance, structural adjustment

EN 

   EN 

   EUROPEAN COMMISSION  Brussels, 22.2.2017  SWD(2017) 74 final   COMMISSION STAFF WORKING DOCUMENT Country Report Spain 2017 Including an In-Depth Review on the prevention and correction of macroeconomic imbalances Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2017 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011  {COM(2017) 90 final} {SWD(2017) 67 final to SWD(2017) 93 final}  
 
 
CONTENTS 

Executive summary 

1. 

Economic situation and outlook 

2. 

Progress with country-specific recommendations 

3. 

Summary of the main findings from the MIP in-depth review 

4. 

Reform priorities 

4.1.  Public finances and taxation 

4.2. 

Financial sector and private sector deleveraging 

4.3. 

Labour market, education and social policies 

4.4. 

Investment 

4.5. 

Sectoral policies 

4.6.  Public administration 

A.  Overview table 

B.  MIP Scoreboard 

C. 

Standard tables 

References 

1 

4 

9 

12 

20 

20 

31 

36 

45 

52 

56 

59 

64 

65 

70 

 
 
 
LIST OF TABLES 

1.1. 

2.1. 

3.1. 

Key economic, financial and social indicators — Spain 

Summary table on 2016 CSR assessment 

Current account and net international investment position sensitivity analysis 

3.2.  MIP assessment matrix — Spain 

4.1.1.  Correlation between (1) changes in regional revenues and (2) changes in expenditure 

with changes in regions' deficits 

B.1. 

The MIP Scoreboard for Spain 

C.1. 

Financial market indicators 

C.2. 

Labour market and social indicators 

C.3. 

Labour market and social indicators (continued) 

C.4. 

Product market performance and policy indicators 

C.5.  Green growth 

LIST OF GRAPHS 

1.1. 

1.2. 

1.3. 

1.4. 

3.1. 

3.2. 

Contributions to GDP growth 

Net lending/borrowing by sector 

Breakdown of unit labour costs (ULC) 

Employment, unemployment and long-term unemployment 

Non-cyclical current account and NIIP 

Breakdown of rate of change of net international investment position 

4.1.1.  Evolution of expenditure ratios for various categories 

4.1.2.  General government revenue, expenditure and balance by subsector 

4.1.3.  Expenditure structure of regional governments, 2014 

4.1.4.  Revenue structure of regional governments, 2015 

4.1.5.  Evolution of the Regional Authority Index since 1980 and level in 2010 

4.1.6. 

Taxing power of the regional government sector (as % of general government tax 

revenue) 

4.1.7.  Regional governments: real expenditure in EUR per capita by COFOG function. 

Differences 2015-2006 

4.2.1.  Non-performing loans 

4.2.2.  Financing the Spanish economy 

4.2.3.  Bank loans to the private sector 

4.2.4. 

Indebtedness by sector 

4.2.5.  Breakdown of y-o-y changes in households’ debt-to-GDP ratio 

4.2.6.  Households’ financial assets acquisition 

4.2.7.  Breakdown of y-o-y changes in NFCs’ debt-to-GDP ratio 

4.2.8.  NFCs’ balance sheet and financial position 

4.2.9. 

The interest coverage ratio for Spanish construction SMEs 

8 

10 

15 

16 

30 

64 

65 

66 

67 

68 

69 

4 

5 

6 

6 

13 

13 

24 

25 

25 

26 

27 

27 

30 

31 

31 

32 

32 

33 

33 

33 

34 

34 

 
 
 
4.2.10.  The interest coverage ratio for Spanish manufacturing SMEs 

4.3.1.  Share of temporary employees, transition rates from temporary to permanent, wage 

premium for permanent and full-time temporary employed at risk of not being entitled to 

unemployment benefits. 

4.3.2.  Shares of temporary employees by age and education level (2015) 

4.3.3. 

In-work-poverty rate, groups, Spain 

4.3.4.  Changes in social protection expenditure in real terms, and contributions by function 

4.4.1.  Breakdown of external position 

4.4.2. 

Trade balance of goods (Jan-Nov), total and non-energy products 

4.4.3.  Density function of Spanish export value per quality rank 

4.4.4.  Breakdown of rate of change of unit labour costs 

4.4.5. 

Total factor productivity of small firms for selected sectors in Spain, France and Italy 

4.4.6.  Allocative efficiency in selected sectors in Spain, France, Germany and Italy 2013 

LIST OF BOXES 

2.1. 

3.1. 

Contribution of the EU budget to structural change in Spain 

Euro area spillovers 

4.1.1. 

Long-term projections of general government debt 

4.1.2.  EUROMOD simulations for narrowing of the actionable policy gap in VAT 

4.4.1. 

Investment challenges and reforms in Spain 

4.6.1.  Selected highlights 

35 

37 

38 

42 

42 

45 

45 

46 

47 

47 

48 

11 

18 

21 

23 

51 

58 

 
 
 
 
EXECUTIVE SUMMARY 

This report assesses Spain’s economy in light of 
the  European  Commission’s  Annual  Growth 
Survey  published  on  16 November 2016.  In  the 
survey,  the  Commission  calls  on  EU  Member 
States  to  redouble  their  efforts  on  the  three 
elements  of  the  virtuous  triangle  of  economic 
policy — boosting investment, pursuing structural 
reforms and ensuring responsible fiscal policies. In 
so  doing,  Member  States  should 
focus  on 
enhancing  social  fairness  in  order  to  deliver  more 
inclusive growth. The Commission also published 
the  Alert  Mechanism  Report  (AMR)  that  initiated 
the  sixth  round  of  the  macroeconomic  imbalance 
procedure.  The  in-depth  review,  which  the  2017 
AMR  concluded  should  be  undertaken  for  the 
Spanish economy, is presented in this report. 

The  Spanish  economy  continues  to  enjoy  a 
strong  recovery  and  is  moving  towards  a  more 
balanced composition of growth than before the 
crisis.  In  its  third  year  of  expansion,  Spanish  real 
GDP  is  almost  back  to  its  2008  pre-crisis  peak. 
The  recovery  was  initially  led  by  exports,  helped 
by  a  reversal  of  the  cost-competitiveness  losses 
then 
accumulated 
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. 

the  pre-crisis  years.  It 

in 

Growth is expected to slow, but remain robust. 
Spain’s  ambitious  structural  reforms  in  recent 
years  laid  the  ground  for  the  strong  economic 
recovery,  but  favourable  conditions  also  helped. 
As  oil  prices  pick  up,  and  assuming  geopolitical 
tensions in competing tourist destinations subside, 
Spain's external balance may worsen. Furthermore, 
no  further  significant  cost-competitiveness  gains 
are  expected  as  productivity  growth  remains 
modest  and  wage  growth  resumes.  Domestic 
demand  is  set  to  lose  vigour  as  falling  prices,  the 
tax  cuts  implemented  in  2015-2016,  and  the 
improvement  in  financing  conditions  no  longer 
provide  a  boost.  Overall,  real  GDP  growth  is 
expected  to  moderate  but  remain  robust,  at  2.3 % 
in 2017 and 2.1 % in 2018. 

The  legacy  of  the  crisis  has  not  yet  been  fully 
overcome,  and  significant  challenges  remain. 
Spain  has  undertaken  a  substantial  economic 

1 

adjustment, but the stock of imbalances leaves the 
economy vulnerable. Private sector debt continued 
to  decrease,  supported  by  a  healthier  financial 
sector, but public sector debt has not been reduced, 
resulting in a slow reduction of the very high level 
of external debt. Although unemployment has been 
falling  rapidly,  it  remains  very  high,  and  both 
poverty  and  income  inequality  are  among  the 
highest in the EU. 

source  of  moderate 
Spain  represents  a 
spillovers 
to  other  euro  area  countries. 
Simulations  show  that  an  increase  in  government 
expenditure  (e.g.  for  higher  education  and  R&D 
support), financed by a value-added tax rise would 
have  limited  impact  on  the  growth  of  other  euro 
area countries, except Portugal, for which Spain is 
the main export market. 

the 

2016 

progress 

assessing 

support  by 

individualised 

frameworks,  and 

Overall,  Spain  has  made  limited  progress  in 
country-specific 
addressing 
recommendations  (CSRs).  It  should  be  borne  in 
mind  when 
towards 
implementing the CSRs that, since the publication 
of the CSRs and until early November 2016, Spain 
had a caretaker government without full legislative 
powers. On the fiscal CSR, in November 2016 the 
Commission  concluded  that  the  excessive  deficit 
procedure could be kept on hold. However, limited 
progress  was  achieved  in  strengthening  public 
procurement  policy 
some 
progress  in  implementing  the  fiscal  framework 
law. Some progress was achieved in the provision 
of 
regional 
employment  services.  However,  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. 
Some progress was made in the provision of long-
term  care  services.  Progress  was 
in 
improving  the  labour  market  relevance  of  tertiary 
education  and  in  fostering  university-business 
cooperation, as well as in increasing performance-
based  funding  for  public  research  bodies  and 
research  and 
private 
innovation. In goods and services markets, limited 
progress was made in implementing the 2014 retail 
reform,  and  some  progress  in  implementing  the 
market  unity  law  at  regional  level.  No  progress 
was  made 
the  regulation  of  professional 
services. 

investment 

limited 

sector 

the 

in 

in 

 
 
Executive summary 

Regarding  progress  in  reaching  the  national 
targets under the Europe 2020 strategy, Spain is 
performing  well 
in  reducing  greenhouse  gas 
emissions  and  is  also  on  track  to  achieve  the 
agreed  renewable  energy  share.  The 
tertiary 
education  attainment  target  is  within  close  reach. 
While  the  country  is  still  far  from  the  targets  for 
the employment rate and early school leaving, the 
gaps were reduced substantially in 2015 and 2016. 
By  contrast,  there  was  little  progress  towards  the 
targets for R&D investment, energy efficiency, and 
reducing poverty risk. 

capital requirements in the EBA stress tests of 
July 2016. The aggregate non-performing loan 
ratio fell to just above 9% in November 2016. 
As elsewhere in Europe, squeezed profitability, 
against the background of low interest rates and 
remaining scope to further improve the sector's 
business  model,  is  the  main  challenge.  The 
outstanding volume of credit is still falling, but 
bank  lending  to  firms,  in  particular  small  and 
medium-sized enterprises, and consumer credit 
have resumed, supporting economic activity. 

findings  of 

The  main 
review 
contained  in  this  report,  and  the  related  policy 
challenges, are as follows: 

in-depth 

the 

  Current  account  surpluses  are  translating 
into a slow reduction of Spain's net external 
liabilities.  The  current  account  adjustment 
since  the  aftermath  of  the  crisis  has  been 
largely  due  to  structural  improvements  in 
export  performance,  supported  by  sustained 
cost  competitiveness  gains.  However,  recently 
it  has  also  been  driven  by  temporary  factors, 
such as the low oil prices, which are gradually 
abating. Moreover, the still sizeable amount of 
external liabilities exposes the country to shifts 
in  market  sentiment.  In  order  to  bring  them  to 
prudential  levels,  Spain  needs  to  maintain 
current  account  surpluses  over  a  sustained 
period of time. 

  Private sector debt reduction has continued, 
but  indebtedness  remains  high,  especially 
for  households.  The  total  stock  of  private 
sector  debt  has  continued  to  fall,  although  the 
pace of reduction has slowed as new credit has 
started  to  flow  again.  Economic  growth  has 
become,  and  is  expected  to  remain,  the  main 
driver  of  debt  reduction  in  the  medium  term, 
also  facilitated  by  the  expected  rebound  in 
inflation.  Debt 
have 
significantly  declined  for  the  corporate  sector, 
but remain relatively high for households.  

reduction 

needs 

  The financial sector has continued to show a 
high  degree  of  stability,  supported  by  its 
ongoing restructuring, low funding costs and 
the  economic  recovery.  The  banking  system 
further  strengthened  its  capital  buffers  and  the 
six largest Spanish banks comfortably met their 

  Fiscal sustainability risks remain high in the 
medium  term.  Spain's  general  government 
debt ratio remains high, at just below 100 % of 
GDP  in  2016.  While  in  the  long  term  the 
projected  savings  in  age-related  expenditure 
would  significantly  mitigate  risks  to  fiscal 
sustainability, the public debt ratio  is expected 
to  continue rising  in  the  medium  term.  On the 
is  not 
revenue 
sufficiently  supported  by  consumption  taxes, 
mainly  due  to  a  large  policy  gap  in  VAT,  and 
environmental  taxes.  On  the  expenditure  side, 
some  ongoing  and  planned  policy  initiatives 
aim  to  increase  efficiency  of  spending  at  all 
government 
in 
public procurement remain an obstacle. 

though  weaknesses 

fiscal  adjustment 

levels, 

side, 

the 

the 

fall 

increased 

responsiveness 

to  have  cushioned 

  Job creation has been strong in recent years 
and  unemployment  decreased  rapidly,  but 
remains very high. Labour market reforms are 
in 
credited 
employment during the later stages of the crisis 
and 
of 
employment  to  growth.  Wage  moderation  has 
also  been  an  important  driver  of  strong  job 
creation  and  competitiveness  gains  in  recent 
years.  The  unemployment  rate  has  been 
declining  rapidly  in  the  past  three  years,  but 
remains  among 
the  EU, 
low-skilled 
especially  among  young  and 
workers.  Almost  half  of  the  unemployed  have 
been without a job for more than a year. Spain 
is  taking  measures  to  strengthen  individual 
support to the long-term unemployed, but their 
effectiveness  depends  on  the  capacity  of  the 
regional public employment services.  

the  highest 

in 

Other key economic issues analysed in this report 
pointing 
to  particular  challenges  for  Spain’s 
economy are: 

2 

 
 
Executive summary 

The  cooperation  of  regional  governments  is 
critical for Spain to reach its fiscal targets. Over 
2013-2015, regional governments were responsible 
for around one third of the average annual general 
government  deficit.  While  enjoying  a  high  degree 
of  tax  autonomy,  the  extent  to  which  it  has  been 
used  to  finance  increases  in  spending  has  varied 
across  taxes  and  regional  governments.  Limited 
use  of 
tools 
established in domestic legislation and other policy 
settings have not provided sufficient incentives for 
fiscal discipline.  

the  preventive  and  corrective 

Innovation  performance  remains  weak,  despite 
some  modest  improvements.  Expenditure  for 
research  and  development  as  a  share  of  GDP  and 
innovation  performance  have  both  continued  to 
decline.  A  complex  governance  framework  and 
lack  of  an  evaluation  culture  weigh  on  the 
effectiveness of R&I support. Despite some bright 
spots,  coordination  of  regional  and  national 
innovation  policy  is  still  limited.  Obstacles  to 
cooperation  between  universities  and  businesses 
remain, in particular regarding technology transfer 
and the inter-sectoral mobility of researchers.  

The  business  environment  hampers  efficient 
resource  allocation  and  productivity  growth. 
The  average  cost  of  starting  a  business  is  higher 
in  most  Member  States  and  varies 
than 
substantially across regions. Shortages of digitally 
skilled labour slow down the integration of digital 
technologies 
The 
implementation of the market unity law only made 
minor  advances 
in  2016  and  regulation  of 
professional  services  remains  restrictive  and  the 
corresponding  mark-ups  high.  Venture  capital 
though  public 
remains  underdeveloped,  even 
support  instruments  contributed  to  stimulating  its 
supply.  

economy. 

into 

the 

The public procurement policy framework does 
not foster efficiency and legal compliance. Spain 
lacks a nation-wide public procurement policy that 
ensures efficiency and legal compliance and a high 
level  of  competition  across  the  country.  Some 
measures  have  been  taken  recently  to  improve 
public  procurement  practices,  but  weaknesses 
remain,  including  low  coordination  across general 
government 
control 
mechanisms, gaps in transparency and a relatively 
low use of centralised purchasing. 

insufficient 

levels, 

The  widespread  use  of  temporary  contracts 
may  impact  negatively  on  the  social  situation 
and  hinder  productivity  growth.  Spain  has  one 
of  the  highest  shares  of  employees  on  temporary 
contracts in total employment in the EU. Many of 
these  contracts  are  of  very  short  duration.  The 
widespread  use  of  temporary  contracts  may  harm 
productivity  growth,  including  through  lower  on-
the-job 
often, 
temporary  jobs  fail  to  be  a  stepping  stone  into 
stable careers and might be associated with poorer 
working  conditions  and  higher  poverty  risks.  The 
recent  labour  market  reforms  seem  to  have  a 
mildly  positive  effect  in  reducing  segmentation 
between  permanent  and  temporary  contracts,  but 
some aspects of the labour law may still create an 
incentive to hire on temporary contracts. 

opportunities.  Too 

training 

Weaknesses  in  activation  and  social  policies 
hinder  a  fast  reduction  in  poverty.  The  risk  of 
poverty  or  social  exclusion  started  to  decline  in 
2015.  However,  it  remained  very  high,  especially 
for  children,  and  in-work  poverty  was  still  on  the 
rise. Limited coverage of social benefits other than 
lack  of  coordination  between 
pensions,  and 
employment  and  social  services 
leave  many 
jobless  people  without  support  in  their  efforts  to 
(re)enter  the  labour  market.  Support to families  is 
low and poorly targeted to low-income families. 

Gaps  in  education  outcomes  are  set  to  hamper 
future  productivity  growth.  The 
average 
students'  performance  remains  stable  and  Spain 
still  has  the  highest  share  of  early  school  leavers 
and  low  basic  skills  among  adults  in  the  EU, 
despite  measures  to  improve  the  attractiveness  of 
vocational  education  and  training.  Wide  regional 
disparities  in  the  performance  of  students  remain. 
The  employability  of  university  graduates 
is 
relatively low. 

3 

 
 
1.  ECONOMIC SITUATION AND OUTLOOK 

Economic growth 

The  Spanish  economy  expanded  by  3.2 %  in 
2016,  well  above  the  euro  area  average.  On  its 
third  year  of  expansion,  GDP  growth  has 
continued to outpace the euro area average, and the 
level  of  output  has  almost  reached  its  pre-crisis 
level.  Growth  has  continued  to  surprise  on  the 
upside  in  recent  quarters,  and  GDP  expanded  by 
3.2% in 2016, the same rate as in 2015 (European 
Commission 2017a). The composition of growth is 
expected to have been more balanced in 2016 than 
in  previous  years.  Growth  is  projected  to  have 
been  driven  by  private 
and 
investment,  but  the  external  sector  is  expected  to 
have had a positive contribution to growth in 2016 
for  the  first  year  since  the  recovery  started  (see 
Graph 1.1). 

consumption 

Graph 1.1:  Contributions to GDP growth 

construction 

non-residential 

and 
investment 
gradually  recovering,  while equipment  investment 
growth  is  expected  to  moderate  in  line  with  final 
demand.  This  is  likely  to  lead  total  investment 
growth to ease slightly in 2017, before picking up 
modestly again in 2018. 

External position 

also 

recover, 

reflecting 

The  contribution  of  the  external  sector  to 
growth  is  expected  to  remain  positive  until 
2018.  Export  growth  is  expected  to  have  slowed 
down  slightly  in  2016  and  ease  a  bit  further  in 
2017, before picking up in 2018 as Spain's trading 
partners 
structural 
improvements  in  export  performance  (see  Section 
4.4.1).  Import  growth  is  projected  to  follow  a 
similar  pattern,  slowing  down  in  2016  and  2017, 
and accelerating in 2018, in line with the evolution 
of final demand. However, as growth of imports is 
expected  to  remain  below  that  of  exports  until 
2018, net trade is set to give a positive contribution 
to growth throughout the period. However, after a 
projected increase in 2016, Spain’s current account 
surplus  is  forecast  to  decline  somewhat  in  2017 
and  2018,  mainly  reflecting  the  impact  of  the 
expected  deterioration  in  the  terms  of  trade.  Net 
external lending is similarly expected to gradually 
decline in until 2018. 

(1) GFCF: Gross fixed capital formation 
Source: European Commission 

As  favourable  tailwinds  gradually  subside, 
growth  is  expected  to  decelerate  but  remain 
robust. Real GDP growth is projected at 2.3 % in 
2017  and  2.1 %  in  2018,  mainly  driven  by 
domestic demand. Private consumption is expected 
to slow down as job creation decelerates, and other 
factors  that  supported  the  growth  of  disposable 
income  in  recent  years  -  i.e.  declining  oil  prices, 
tax  cuts  and  improving  financing  conditions  - 
gradually  abate.  However,  private  consumption  is 
projected to remain the main contributor to growth 
until  2018.  Investment  is  expected  to  be  affected 
by two opposing trends, with growth in residential 

The  current  account  surpluses  recorded  in 
recent  years  are  finally  translating  into  a 
reduction of Spain's external liabilities. The net 
international  investment  position  (NIIP)  has  been 
improving  since  2015,  but  remains  sizeable  at  -
88.7 % of GDP in Q3-2016. At the same time, the 
liabilities  has  been 
composition  of  external 
gradually  shifting  from  the  private  to  the  public 
sector.  The  expected  continued  strong  growth, 
pickup  in  inflation  and  net  external  surpluses 
projected  until  2018  should  facilitate  the  further 
improvement  of  the  NIIP.  However,  the  current 
external  dynamics  do  not  seem  sufficient  to 
decisively  bring  down  the  NIIP  over  the  medium 
term (See section 3.2). 

Private indebtedness 

Private  sector  deleveraging  is  progressing,  but 
the  level  of  debt  is  still  high.  Private  sector  debt 
stood  at  nearly  167.5 %  of  GDP  in  Q3-2016,  a 
decrease of about 50 % of GDP since its peak (see 
Section  4.2).  A  large  part  of  this  reduction  — 

4 

-8-6-4-2024609101112131415161718pps.Private consumptionPublic consumptionGFCFNet exportsInventoriesReal GDP (y-o-y%) 
 
 
1. Economic situation and outlook 

about 30 pps. — has been due to the fall in debt of 
non-financial  companies  (NFCs),  but  progress  in 
household deleveraging was also quite remarkable 
(see Graph 1.2). Real growth has now become the 
main driver of the reduction in debt ratios, as new 
credit  to  households  and  SMEs  has  continued  to 
grow,  supported  by  a  healthier  financial  sector. 
However,  deleveraging  needs  are  still  sizeable, 
especially for households. 

Graph 1.2:  Net lending/borrowing by sector 

Inflation 

Inflation  is  expected  to  pick  up,  as  oil  prices 
increase  and  core 
inflation  recovers.  The 
projected  oil  price  increases  are  set  to  continue 
dominating  inflation  developments  in  the  short 
term.  Headline  inflation  is  forecast  to  rise  from 
−0.3 % 
in  2017,  before 
to  1.9 % 
decreasing  slightly  to  1.7 %  in  2018  as  the  effect 
of energy price increases fades away. At the same 
time,  core  inflation  is  expected  to  gradually 
increase over the next two years, as wages pick up, 
the  output  gap  closes,  and  the  energy  price 
increases pass-through into consumer prices. 

in  2016 

Labour market 

Strong  job  creation  has  continued  throughout 
2016, and it is expected to moderate but remain 
robust until 2018. The employment rate increased 
again  in  2016  on  the  back  of  sustained  economic 
growth  but  is  still  well  below  the  pre-crisis  level 
(64.5 % in Q3-2016, compared to 69.7 % in 2007) 
and  the  EU  average  (71.5 %  in  Q3-2016).  Robust 
job  creation  has  been  underpinned  by  ongoing 
wage  moderation  and  the  labour  market  reforms 
years.  Full-time 
implemented 
previous 
equivalent  employment 
to  have 
expanded  by  2.9 %  in  2016,  and  is  expected  to 
grow further by 2.0% and 1.7% in 2017 and 2018 
respectively.  Wage  moderation  has  also  been 
facilitated  by  very  low  inflation.  However,  as 
inflation gradually picks up, wages are projected to 
increase. This, together with very low productivity 
growth, is likely to result in increasing unit labour 
costs (see Graph 1.3). 

is  expected 

in 

(1) ESA2010 
Source: AMECO 

Public finance 

indicate 

The general government deficit is declining, but 
the  debt  ratio  has  not  been  put  on  a  declining 
path.  The  general  government  debt  ratio 
is 
expected  to  stabilise  at  around  100 %  of  GDP,  as 
strong nominal GDP growth largely offsets the still 
large,  though  declining,  deficit  expected  until 
2018.  The  deficit  in  2015  was  5.1 %  of  GDP  and 
recent  data 
that  Spain’s  general 
government  deficit  only  narrowed  by  0.3%  in  the 
first  three  quarters  of  2016.  Whereas  expenditure 
has  grown  in  line  with  expectations,  significant 
shortfalls in income  tax revenue have weighed on 
revenue  growth.  According  to  the  Commission 
2017  winter  forecast,  this  should  lead  to  a  deficit 
of 4.7 % of GDP  in 2016. At unchanged  policies, 
the  deficit  is  expected  to  narrow  to  3.5 %  and 
2.9 % of GDP in 2017 and 2018. 

5 

-15-10-50510150102030405060708091011121314151617*18*% of GDPHouseholds and NPISHGeneral governmentCorporationsTotal economy 
 
1. Economic situation and outlook 

Graph 1.3: 

Breakdown of unit labour costs (ULC) 

Graph 1.4: 

Employment, unemployment and long-term 
unemployment 

Source: AMECO 

Social developments 

the 

improvement 

The 
labour  market 
in 
translated  into  a  small  decline  in  poverty  and 
social  exclusion  rates.  Despite  having  fallen 
rapidly,  the  unemployment  rate  and  the  share  of 
long-term  unemployment 
remain  very  high 
(18.6 %  and  45.9 %  in  Q4-2016  respectively,  see 
Graph  1.4  and  Section  4.3.1).  Improved  labour 
market  conditions  led  to  a  decline  in  poverty  and 
social  exclusion  rates  in  2015 (1).  However,  they 
remained  at  very  high  levels,  affecting  people  in 
working age and children in particular. In addition, 
the 
rates 
increased  significantly  during  the  crisis  and  is  the 
second highest in the EU (2). 

regional  variation 

in  employment 

(1)  EU-SILC 2015 data. Note that these data refers to the 2014 
situation  (first  year  of  recovery)  for  the  income  and  work 
intensity  components,  while  material  deprivation  refers  to 
2015. 

(2)  The  variation  coefficient  of  employment  rates  at  NUTS2 
regional level increased from 7.2 in 2007 to 10.8 in 2014. 

Source: Instituto Nacional de Estadistica, Eurostat 

to 

Income  inequality,  as  measured  by  the  income 
quintile  ratio (3),  widened during  the  crisis, and  is 
one  of  the  highest  in  the  EU.  This  trend  was 
largely  due 
soaring  unemployment  and 
segmentation (4),  which  mainly 
persistent 
increased inequalities at the bottom of the income 
distribution  (OECD  2015).  The  polarisation  of 
skills  between  a  high  share  of  low-skilled  and 
rather  high  share  of  tertiary  educated  is  another 
important  factor  (Eurofound  2014).  In  2014,  the 
overall  inequality  reduction  impact  of  the  tax  and 
benefit  system  —  as  measured  by  the  difference 
between  the  Gini  coefficients (5)  before  and  after 
taxes  and  transfers  —  remained  below  the  EU 
average  despite  an  increase  recorded  since  2007 
(European Commission 2016a, Chapter 1). Efforts 
to  improve  the  progressivity  of  the  system  in  the 
context  of  the  reforms  implemented  since  2008 
(De Agostini et al. 2016) have been weakened by 
the pressure on expenditure (and lower revenues). 

(3)  i.e.  the  ratio  of  total  income  received  by  the  20%  of  the 
population with the highest income to that received by the 
20% of the population with the lowest income. In Spain the 
S80/S20 increased from 6.2 in 2010 to 6.9 in 2015 

(4)  S50/S10  (2.7)  is  higher  and  increased  more  than  the 

S90/S50 (2.08) 

(5)  The  Gini  coefficient  is  an  indicator  with  value  between  0 
and  1.  Lower  values  indicate  higher  equality.  In  other 
words a value equal to 0 indicates everybody has the same 
income, a value equal to 1 indicates that one person has all 
the  income.  Note:  To  take  into  account  the  impact  of 
differences  in  household  size  and  composition,  the  total 
disposable household income is "equivalised". 

6 

-4-20246801020304050607080910111213141516*17*18*% y-o-yInflation (GDP deflator growth)Real compensation per employeeProductivity contribution (negative sign)Nominal unit labour costULC in Euro Area0102030405060010203040506070800001020304050607080910111213141516%%Employment 20-64 (lhs)Unemployment 15-74 (rhs)Share of long-term unemployment 15-74 (rhs) 
 
 
                                                           
 
                                                           
1. Economic situation and outlook 

Inequality  in  net  wealth (6)  was  within  the  range 
observed  in  other  EU  countries  for  which  data 
were  collected 
(ECB  2016). 
in  2013-2014 
Inequalities in access to healthcare have also risen 
significantly from low levels during the crisis (7). 

(6)  Difference between total assets and total liabilities. 
(7)  The  income  quintile  gap  in  self-reported  unmet  need  for 
medical examination increased from 0.2 pps in 2008 to 1.6 
in 2014. 

7 

 
                                                           
1. Economic situation and outlook 

Table 1.1: 

Key economic, financial and social indicators — Spain 

(1) Sum of portfolio debt instruments, other investment and reserve assets 
(2,3) domestic banking groups and stand-alone banks. 
(4) domestic banking groups and stand-alone banks, EU and non-EU foreign-controlled subsidiaries and EU and non-EU  
foreign-controlled branches. 
(*) Indicates BPM5 and/or ESA95 
Source: European Commission, European Central Bank 

8 

2004-20082009201020112012201320142015201620172018Real GDP (y-o-y)3.2-3.60.0-1.0-2.9-1.71.43.23.22.32.1Private consumption (y-o-y)2.9-3.60.3-2.4-3.5-3.11.62.93.02.11.8Public consumption (y-o-y)5.84.11.5-0.3-4.7-2.1-0.32.01.30.90.8Gross fixed capital formation (y-o-y)4.1-16.9-4.9-6.9-8.6-3.43.86.03.73.43.8Exports of goods and services (y-o-y)3.7-11.09.47.41.14.34.24.94.34.04.3Imports of goods and services (y-o-y) 5.6-18.36.9-0.8-6.4-0.56.55.63.23.54.3Output gap2.4-3.2-4.2-5.6-7.8-8.6-7.2-4.3-1.60.01.3Potential growth (y-o-y)3.40.91.10.4-0.6-0.8-0.20.00.50.60.8Contribution to GDP growth:Domestic demand (y-o-y)3.8-6.2-0.7-3.0-4.8-2.91.63.22.72.01.9Inventories (y-o-y)0.0-0.20.3-0.1-0.2-0.20.30.10.10.00.0Net exports (y-o-y)-0.72.80.52.12.21.5-0.5-0.10.40.20.1Contribution to potential GDP growth:Total Labour (hours) (y-o-y)1.4-0.40.0-0.3-1.0-1.0-0.5-0.4-0.10.00.0Capital accumulation (y-o-y)1.70.80.60.40.20.10.10.20.30.30.4Total factor productivity (y-o-y)0.30.50.50.30.20.10.10.20.30.30.4Current account balance (% of GDP), balance of payments-8.2-4.3-3.9-3.2-0.21.51.11.4...Trade balance (% of GDP), balance of payments-5.2-1.1-1.3-0.21.53.32.52.4...Terms of trade of goods and services (y-o-y)-0.25.1-2.3-3.7-1.91.0-0.80.70.6-0.7-0.2Capital account balance (% of GDP)0.60.30.50.40.50.60.50.7...Net international investment position (% of GDP)-68.4-93.5-88.6-91.9-89.9-94.3-97.5-89.9...Net marketable external debt (% of GDP) (1)-66.2-76.1-78.6-83.0-81.4-79.4-81.4-79.2...Gross marketable external debt (% of GDP) (1)116.5142.1137.3141.5146.4139.7146.7147.9...Export performance vs. advanced countries (% change over 5 years)4.7-1.3-4.4-0.2-8.4-2.6-5.4-1.48...Export market share, goods and services (y-o-y)-3.02.3-9.6-1.0-5.83.70.7-0.9...Net FDI flows (% of GDP)3.10.2-0.10.9-2.0-1.80.82.7...Savings rate of households (net saving as percentage of net disposable income)2.07.33.74.62.33.83.22.3...Private credit flow, consolidated (% of GDP)23.9-1.21.0-3.8-11.3-10.3-7.2-2.7...Private sector debt, consolidated (% of GDP)171.2201.4200.4196.2187.8176.7165.5154.0...of which household debt, consolidated (% of GDP)74.784.083.581.880.677.172.867.8...of which non-financial corporate debt, consolidated (% of GDP)96.4117.4116.9114.4107.299.692.786.2...Corporations, net lending (+) or net borrowing (-) (% of GDP)-4.74.24.74.18.35.14.24.64.73.83.3Corporations, gross operating surplus (% of GDP)21.224.923.623.323.923.924.124.124.223.924.0Households, net lending (+) or net borrowing (-) (% of GDP)-3.12.91.32.62.24.03.22.52.52.42.3Deflated house price index (y-o-y)6.7-5.8-3.7-9.8-16.8-10.10.23.8...Residential investment (% of GDP)11.38.16.95.74.94.14.34.4...GDP deflator (y-o-y)3.50.30.20.00.10.4-0.30.50.41.41.6Harmonised index of consumer prices (HICP, y-o-y)3.4-0.22.03.02.41.5-0.2-0.6-0.31.91.7Nominal compensation per employee (y-o-y)4.54.41.10.9-0.61.4-0.10.40.51.41.6Labour productivity (real, person employed, y-o-y)0.12.91.81.71.10.90.50.7...Unit labour costs (ULC, whole economy, y-o-y)4.01.6-1.6-0.9-2.6-0.5-0.40.20.21.11.2Real unit labour costs (y-o-y)0.51.4-1.8-1.0-2.7-0.8-0.1-0.3-0.3-0.3-0.4Real effective exchange rate (ULC, y-o-y)2.9-1.0-3.9-1.4-6.30.6-0.8-3.40.00.4-0.5Real effective exchange rate (HICP, y-o-y)1.40.5-3.10.2-2.41.9-0.5-4.20.6-0.4.Tax rate for a single person earning the average wage (%)20.219.821.621.922.922.923.021.5...Tax rate for a single person earning 50% of the average wage (%)10.1*8.79.110.411.611.812.09.7...Total Financial sector liabilities, non-consolidated (y-o-y)12.34.0-3.10.2-2.2-3.83.20.3...Tier 1 ratio (%) (2).9.39.610.29.711.711.712.6...Return on equity (%) (3).9.28.80.2-25.66.05.76.6...Gross non-performing debt (% of total debt instruments and total loans and advances) (4).3.64.15.26.47.96.75.3...Unemployment rate9.617.919.921.424.826.124.522.119.617.716.0Long-term unemployment rate (% of active population)2.24.37.38.911.013.012.911.4...Youth unemployment rate (% of active population in the same age group)20.437.741.546.252.955.553.248.344.4..Activity rate (15-64 year-olds)70.973.173.573.974.374.374.274.3...People at risk of poverty or social exclusion (% total population)24.124.726.126.727.227.329.228.6...Persons living in households with very low work intensity (% of total population aged below 60)6.87.610.813.414.315.717.115.4...General government balance (% of GDP)0.2-11.0-9.4-9.6-10.5-7.0-6.0-5.1-4.7-3.5-2.9Tax-to-GDP ratio (%)35.530.632.132.033.134.034.534.634.034.534.5Structural budget balance (% of GDP)..-7.1-6.4-3.3-1.9-1.8-2.6-3.8-3.6-3.6General government gross debt (% of GDP)40.352.760.169.585.795.4100.499.899.7100.099.7forecast 
 
 
 
2.  PROGRESS WITH COUNTRY-SPECIFIC RECOMMENDATIONS 

the 

implementation  of 

Progress  with 
the 
recommendations addressed to Spain in 2016(8) 
has to be seen in a longer term perspective since 
the  introduction  of  the  European  Semester  in 
2011.  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 
that 
in  a  challenging  economic  environment 
partially addressed some of the rigidities in labour, 
product and financial markets.  

to  strengthen 

Progress  has been  visible  in  the  policy areas of 
financial  sector,  labour  market  and  the  long 
term  sustainability  of  the  public  finances.  Over 
the  past  few  years,  Spain  has  made  substantial 
progress  in  restructuring  the  financial  sector.  The 
law  on  savings  banks 
their 
governance  and  reduce  controlling  stakes  held  by 
banking 
foundations  has  been  applied.  The 
implementation  of  plans  for  restructuring  State-
aided  banks  is  well  advanced.  The  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.  Spain 
has  also  made  progress  in  ensuring  long-term 
sustainability of public finances also thanks to the 
2011 and 2013 pension reforms. 

Spain  has  also  improved  its  fiscal  framework. 
The 2012 Stability Law, as amended, the creation 
of  an  independent  fiscal  institution  in  2013  and 
improvements  made  in  the  reporting  of  budgetary 
execution  are  cases 
the 
assessments  accompanying  the  Country  Specific 
Recommendations have frequently noted that there 
is  scope  for  a  more  automatic  implementation  of 
the  Stability  Law's  preventive  and  corrective 
mechanisms.  

in  point.  However, 

Progress made in implementing product market 
reform CSRs has been mixed. Over the past few 
years  the  CSRs  have  called  on  the  Spanish 
government to address regulatory fragmentation in 

(8)  For  the  assessment  of  other  reforms  implemented  in  the 

past, see in particular section 3.  

the 

limited  progress  made 

Spain's  internal  market.  The  law  on  the  guarantee 
of market unity has been in force more than three 
years.  However,  its  implementation  has  visibly 
slowed  down  since  the  last  quarter  of  2015, 
judging  from 
in 
adapting sector specific legislation to the principles 
of  the  law.  The  Council  has  also  recommended 
Spain  to  reform  professional  services.  However, 
since  2010,  no  horizontal  reform  of  regulated 
professions has been adopted other than in the area 
of  professional  board  certification  of  projects. 
Likewise,  the  benefits  of  the  2014  retail  sector 
reform adopted by Spain's central government still 
depend  on  regional  governments  adopting  the 
necessary  implementing  acts.  On  a  more  positive 
side,  the  Spanish  government  has  reformed  the 
corporate 
policy 
frameworks  and  has  taken  measures  to  ease 
business licencing procedures.  

insolvency 

personal 

and 

the 

levels  but 

some  progress 

there  has  been 

Overall, Spain has made limited (9) progress in 
addressing 
country-specific 
2016 
recommendations.  This  has  taken  place  against 
the  backdrop  of  a  government  without  full 
legislative  powers  until  November  2016.  On 
CSR1, 
in 
implementing  Spain's  Stability  Law  at  all 
government 
limited  progress  on 
strengthening  Spain's  public  procurement  policy 
framework.  The  Commission  finds  that  Spain  has 
made  some  progress  in  implementing  CSR2, 
following the adoption of a three-year action plan 
to strengthen the employment services' capacity to 
provide 
long-term 
unemployed  and  the  evaluation  made  of  the 
regional employment services. On CSR3, progress 
is  limited,  as  only  small  steps  have  been  taken  to 
increase  performance-based  funding  of  public 
research  organisations  and  universities  and  to 
combine vocational training with higher education. 
On  CSR4,  Spain  has  made  limited  progress, 
judging  from  the  slow  pace  of  implementation  of 
the law on market unity and the 2014 retail reform 
at regional level and as the reform of professional 
services has not yet been adopted. 

individualised  support 

for 

(9)  Information  on  the  level  of  progress  and  actions  taken  to 
address  the  policy  advice  in  each  respective  subpart  of  a 
CSR is presented in the Overview Table in the Annex. This 
overall  assessment  does  not  include  an  assessment  of 
compliance with the Stability and Growth Pact  

9 

 
 
                                                           
                                                           
2. Progress with country-specific recommendations 

Table 2.1: 

Summary table on 2016 CSR assessment 

(*) This overall assessment of CSR1 does not include an assessment of compliance with the Stability and Growth Pact. For 
more detail about fiscal surveillance see https://ec.europa.eu/info/business-economy-euro/economic-performance-and-
forecasts/economic-performance-country/spain/fiscal-surveillance-spain_en 
Source:  European Commission 

10 

Spain Overall assessment of progress with 2016 CSRs: Limited CSR 1:  Ensure a durable correction of the excessive deficit, in accordance with the relevant decisions or recommendations under the excessive deficit procedure, by taking the necessary structural measures and by using all windfall gains for deficit and debt reduction. 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. Limited progress (*)  Some progress in implementing the fiscal framework law at all government levels  Limited progress public procurement policy frameworks  CSR 2: Take further measures to improve labour market integration, by focusing on individualised support and strengthening the effectiveness of training 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 childcare and long-term care (MIP relevant) Some progress  Some progress in improving individualised support   Some progress in enhancing the capacity of regional employment services, but no significant progress in reinforcing their coordination with social services  Limited progress in addressing gaps and disparities in minimum income schemes and improving family support schemes CSR 3: Take further measures to improve the labour market relevance of tertiary education, including by incentivising cooperation between universities, firms and research institutions. Increase performance-based funding of public research bodies and universities and foster R&I investment by the private sector. (MIP relevant) Limited progress  Limited progress in improving labour market relevance of tertiary education  Limited progress in increasing performance-based funding and fostering R&I investment by the private sector CSR 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. (MIP relevant) Limited progress  Some progress in implementing the law on market unity at regional level  Limited progress in implementing the retail reform at regional level  No progress in adopting the reform on professional services    
 
 
 
 
 
2. Progress with country-specific recommendations 

11 

Box 2.1: Contribution of the EU budget to structural change in SpainSpain is the third largest beneficiary of European Structural and Investment Funds (ESI Funds) with an allocation of up to EUR 37.4 billion up till 2020. This is equivalent to around 0.5 % of annual GDP (over 2014-2017) or 16 % of national public investment (1) . Out of the EU financing, EUR 1.5 billion is planned to be delivered via financial instruments, which is about a 50 % increase compared to the 2007-2013 period. By 31 December 2016, an estimated EUR 7.1 billion, which represents about 19 % of the total allocation for ESI Funds, have already been allocated to concrete projects.  Financing under the European Fund for Strategic Investments, Horizon 2020, the Connecting Europe Facility and other directly managed EU funds is additional to the ESI Funds. By end 2016, Spain has signed agreements for EUR 900 million for projects under the Connecting Europe Facility. The EIB Group approved financing under EFSI amounts to EUR 3.4 billion, which is expected to trigger nearly EUR 23 billion in total investments (as of end 2016). ESI Funds helped implement a number of structural reforms in 2015 and 2016 via ex-ante conditionalities (2) and targeted investments. Examples of these reforms include improving the participative governance mechanisms to incentivise cooperation between universities, firms and research institutions and to increase research and innovation investment by the private sector (all this has been made possible through improving the quality of the RIS3 (3) for all regions). The transposition of the Energy Efficiency and Buildings Directives enabled more efficient and cost-effective investments in energy efficiency. These reforms have prepared the ground for better implementation of public investment projects in general, including those financed from national sources and from the other EU instruments mentioned above. The fulfilment of ex-ante conditionalities is on track, except in the area of water.  The Relevant CSRs focusing on structural issues were taken into account when designing the 2014-2020 programmes. These included strengthening research, technological development and innovation, increasing SMEs access to finance, fostering sustainable transport infrastructures, improving labour market access and promoting social inclusion. Spain has also received support from the Youth Employment Initiative to combat youth unemployment. Nearly 277 000 young people have participated in it of which 53 500 are in employment, education or training after the support from this initiative has ended.  In addition to the challenges reflected in past CSRs, the ESI Funds address wider structural obstacles to growth and competitiveness. The Funds contribute to increasing the share of R&D expenditure co-financed by the private sector with a view to reaching 60 % and to facilitating that 25 % of Spanish firms with more than ten employees incorporate technological innovation; improving the coverage of fast and ultrafast broadband for 100 % of households (30 Mbps internet) and 50% of the population (100 Mbps); fostering entrepreneurship and start-ups and making firms more competitive and better able to engage in higher added-value activities (including through ICT), with a view to ultimately increase their presence in international markets. And ease access to finance mainly by channelling EUR 1.5 billion through financial instruments. These funds will also contribute to increasing the employment rate, reducing early-school leaving and reducing the amount of people at risk-of-poverty or exclusion. https://cohesiondata.ec.europa.eu/countries/ES                                                             (1) National public investment is defined as the sum of gross capital formation, investment grants and national expenditure on agriculture and fisheries. (2) Before programmes are adopted, Member States are required to comply with a number of ex-ante conditionalities, which aim at improving framework and conditions for the majority of public investments areas. For Members States that did not fulfil all the ex-ante conditionalities by the end 2016, the Commission has the possibility to propose the temporary suspension of all or part of interim payments. (3) Smart Specialisation Strategies (RIS3) have been developed and had to be approved for all regions, aiming to merge research with business needs.  
 
 
 
 
 
3.  SUMMARY OF THE MAIN FINDINGS FROM THE MIP IN-

DEPTH REVIEW 

3.1. 

INTRODUCTION 

The  2017  Alert  Mechanism  Report  called  for 
further in-depth analysis to monitor progress in 
the  unwinding  of  the  imbalances  identified  in 
the 2016 MIP cycle. The selection was motivated 
by  the  fact  that  Spain  was  identified  to  have 
imbalances  in  spring  2016  after  the  last  In-Depth 
Review  (IDR)  analysis,  so  that  a  new  IDR  is 
needed to assess how these imbalances evolve. The 
identified  imbalances  related  to  the  high  levels  of 
external and internal debt, both private and public, 
in a context of high unemployment. 

This  Country  Report  provides  an  In-Depth 
Review into how the identified imbalances have 
developed.  In  particular  IDR  relevant  analysis  is 
found  in  the  following  sections:  high  government 
debt  is  analysed  in  Section 4.1.1;  private  sector 
indebtedness and its links with the financial sector 
are  discussed  in  Sections  4.2.1  and  4.2.2;  and 
is 
external  adjustment  and  competitiveness 
assessed  in  section  4.4.1.  An  additional  IDR 
relevant 
to  external 
sustainability  and  growth  is  that  of  productivity, 
also  analysed  in  Sections  4.4.1  and  4.4.2.  Labour 
market adjustment related aspects are dealt with in 
Section 4.3.1. Potential spillovers to the rest of the 
euro area are discussed in Box 3.1. 

through 

topic 

links 

its 

3.2. 

IMBALANCES AND THEIR GRAVITY 

Spain's  net  international  investment  position 
remains very negative, and is mostly composed 
of debt. The large stock of net external liabilities (-
88.7 %  of  GDP  in  Q3-2016)  is  mainly  composed 
of  net  marketable  debt  (about  80%  of  GDP)  (10), 
leaving  the  country  highly  exposed  to  adverse 
shocks  or  shifts  in  market  confidence.  Equity 
instruments  (foreign  direct  investment  /  portfolio 
equity)  do  not  imply  the  same  risks  as  debt  for 
that  dividend 
external 
payments  can  be  adjusted  during  economic 
downturns,  whereas  servicing  costs  related  to 
fixed-income  liabilities  are  less  sensitive  to  the 

sustainability  given 

(10)  Marketable  debt  is  composed  of  portfolio  debt,  other 

investment, reserves and financial derivatives 

cycle.  Although  much  of  the  debt  has  long-term 
maturity  and  does  not  pose  an  immediate  risk  in 
terms  of  liquidity,  it  may  pose  a  risk  in  terms  of 
sustainability.  

Private sector indebtedness is still high, but low 
interest  rates  reduce  the  associated  financial 
burden.  Private  sector  debt  amounted  to  167.5 % 
of GDP in Q3-2016 (65.2 % of GDP as household 
debt  and  102.3 %  of  GDP  as  non-financial 
corporation debt, hereafter, NFC). A high level of 
debt increases vulnerability to interest rate shocks, 
and  its  associated  financial  burden  constrains 
domestic  demand.  The  financial  position  of 
Spanish  households  has  strengthened  thanks  to 
improvements  in  the  labour  market  and  growing 
real  disposable  income,  partly  due  to  low  or 
negative 
taxes. 
Furthermore,  the  financial  burden  of  household 
debt  has  been  reduced  by  the  prevailing  low 
interest 
indebted  Spanish 
households  are  among  the  most  vulnerable  in  the 
euro area to interest rate increases (Ampudia et al., 
2014).  On  the  corporate  side,  the  net  financial 
wealth  of  firms  improved  in  2015  for  a  third 
consecutive year, but is still negative. 

rates.  However, 

inflation  and 

income 

lower 

Spain’s general government debt ratio remains 
high,  and  fiscal  sustainability  risks  are  high  in 
the  medium  term.  The  general  government  debt 
ratio  peaked  at  slightly  above  100 %  of  GDP  in 
2014,  a  sharp  increase  of  about  65  percentage 
points  above  its  trough  of  2007.  Under  normal 
economic conditions and with no change of fiscal 
policy  after  the  last  Commission  forecast  year 
(2018),  the  Spanish  general  government  debt 
would rise to almost 108 % of GDP by 2027 (see 
Section 4.1). 

The  unemployment  rate  is  still  very  high 
(18.9 %  in  Q3-2016),  particularly  among  young 
and low-skilled people. Besides, almost half of the 
unemployed have been without a job for more than 
one  year,  indicating  a  high  risk  of  long-term 
unemployment  becoming  entrenched  and  human 
capital  depreciation.  This 
turn  constrains 
potential growth and productivity.  

in 

12 

 
 
                                                           
3. Summary of the main findings from the MIP in-depth review 

in 

high nominal growth, have started to translate into 
a  slow  reduction  of  Spain's  net  international 
investment position (NIIP) – Graph 3.2. Valuation 
the 
effects,  which  played  a  strong  role 
deterioration of net external liabilities in 2013 and 
2014, have been  broadly neutral  since 2015. As  a 
consequence,  the  NIIP  has  been  improving  since 
2015, but at -88.7 % of GDP in the third quarter of 
2016  it  remains  sizeable.  In  the  short  term,  net 
external  surpluses,  strong  real  growth,  and  the 
pickup  in  inflation  projected  until  2018  should 
facilitate the further improvement of the NIIP.  

Graph 3.2: 

Breakdown of rate of change of net 
international investment position 

Source: Eurostat 

Spain  would  need  to  maintain  the  current 
account  surpluses  over  sustained  periods  of 
time  in  order  to  decisively  reduce  its  net 
external  liabilities.  Even  under  relatively  benign 
growth  and  inflation  scenarios,  Spain  would  need 
to  maintain  current  account  surpluses  over  a  long 
period of time in order to bring down decisively its 
NIIP  (See  Table 3.1).  In  this  context,  the  current 
account  surpluses  projected  over  the  next  two 
years  continue  to  be  partly  driven  by  transitory 
factors. Maintaining these surpluses over sustained 
periods of time may therefore be challenging. This 
underscores  the  importance  of  safeguarding  cost 
competitiveness, given that Spain is specialised in 
price-sensitive  market  segments.  While  cost-
competitiveness  gains  in  recent  years  have  been 
largely  achieved 
through  wage  moderation, 
supporting  productivity  growth  is  a  key  challenge 
going  forward.  Higher  productivity  growth  could 
also  attract  foreign  direct  investment  (FDI)  and 

3.3. 

EVOLUTION,  PROSPECTS,  AND  POLICY 
RESPONSES 

The  improvement  in  the  current  account  has 
been  due  to  structural,  cyclical,  and  transitory 
factors (see Section 4.4.1).  Spain has undergone a 
substantial  current  account  adjustment  in  recent 
years, amounting to 11 pps. of GDP between 2007 
and 2015. Much of this adjustment was due to an 
improvement in the trade balance of goods (about 
6  pps.  of  GDP),  initially  driven  by  a  collapse  of 
domestic  demand,  but    increasingly  reflecting  a 
structural  improvement  in  export  performance, 
such  as  the  expansion  in  the  number  of  regular 
exporters and cost competitiveness gains.  Some of 
the  improvement  in  the  current  account  was  also 
been  driven  by  non-cyclical,  transitory  factors, 
such  as  low  oil  prices,  low  interest  rates,  or  the 
depreciation  of  the  euro  (See  Section  4.4.1).  In 
cyclically  adjusted  terms,  the  current  account  has 
continued  to  improve  (see  Graph 3.1).  However, 
the  elasticity  of  imports  with  respect  to  final 
demand  remains  high,  and  no  significant  changes 
in  import  substitution  are  detected  yet  at  the 
aggregate  level.  In  addition,  after  years  of  cost-
competitiveness  gains,  unit  labour  costs  (ULC) 
have started to increase again and converge to the 
euro area average. 

Graph 3.1:  Non-cyclical current account and NIIP 

Source: AMECO, European Commission 

account 

surpluses 

Current 
finally 
translating into a slow reduction of Spain's net 
external  liabilities  (see  Graph 3.2).  The  external 
surpluses  registered  since  2013  and,  as  of  2014, 

are 

13 

-100-90-80-70-60-50-40-30-20-12-10-8-6-4-2024010305070911131517% of GDP% of GDPCurrent accountCyclically adjusted current accountNet international investment position-20-15-10-505101507Q408Q409Q410Q411Q412Q413Q414Q415Q416Q4Change in pp. of GDP (y-o-y)Valuation changesNet transaction effect (rest FA bal.)Investment income effectNominal growth effectChange in NIIP (y-o-y) 
 
 
3. Summary of the main findings from the MIP in-depth review 

Public  sector  debt  is  not  being  reduced.  The 
deficit  in  2015  was  5.1 %  of  GDP.  According  to 
the  Commission  2017  winter  forecast,  the  deficit 
should decline to 4.7 % of GDP in 2016. It is then 
expected to narrow to 3.5 % and 2.9 % of GDP in 
2017 and 2018. Since 2014, the slow reduction of 
the deficit has been relying to a large extent on the 
the 
positive  macroeconomic 
improving financing conditions. Public sector debt 
is  expected  to  remain  stable  at  around  100 %  of 
GDP,  as  strong  nominal  GDP  growth  largely 
offsets  the  still  large,  though  declining,  deficit 
expected  until  2018.  Thanks  to  the  relatively 
benign  macro-financial  situation, 
is  no 
immediate  risk  of  fiscal  stress.  However,  risks  to 
fiscal  sustainability  remain  significant 
the 
medium term (See Section 4.1.1).  

outlook 

there 

and 

in 

The  labour  market  has  kept  improving,  but 
high levels of long-term unemployment increase 
the  risk  of  human  capital  depreciation.  Strong 
job creation has continued throughout 2016, and is 
expected  to  slow  but  remain  robust  until  2018. 
Robust  job  creation  has  been  underpinned  by 
ongoing  wage  moderation  and  the  labour  market 
reforms  implemented  in  previous  years.  These 
include a reform of the wage bargaining system to 
promote  more  wage  bargaining  decentralization. 
Despite  this,  evidence  shows  that  firm  level 
bargaining  is not  picking  up.  The  minimum  wage 
has  increased  by  8%  in  2017,  but  the  immediate 
impact  on  job  creation  and  the  overall  wage 
distribution  is  likely  to  be  modest  (see  section 
that  high 
4.3.1).  There 
unemployment  becomes  entrenched.  Spain 
is 
taking measures to strengthen individual support to 
the  long-term  unemployed,  but  their  impact  relies 
on the capacity of the regional public employment 
services,  which  so  far  has  been  limited.  In 
addition,  addressing  the  education  gaps  is  critical 
to reduce structural unemployment and support the 
reallocation of resources towards more productive 
activities. 

is  however  a  risk 

reduce  import  dependence,  thereby  supporting 
external sustainability.  

is 

increasingly 
Private  sector  deleveraging 
driven  by  GDP  growth,  while  new  credit 
continues  to  grow.  Private  sector  debt  has  been 
reduced  by  more  than  50  pps.  of  GDP  since  its 
peak  in  2010.  A  large  part  of  this  reduction  has 
been due to a decline in NFC debt (about 30 pps. 
of GDP), but progress in households deleveraging 
(20  pps.  of  GDP)  was  also  remarkable.  Even  so, 
deleveraging  needs  remain  sizeable,  mainly  for 
households.  Although  the  outstanding  volume  of 
credit  to  the  private  sector  is  still  shrinking,  new 
bank lending to households and SMEs continues to 
grow.  As  new  credit  increases,  debt  reduction  is 
now  being  supported  by  real  GDP  growth, 
especially  for  households  (see  section  4.2.2). 
Although  NFC  deleveraging  has  been  mainly 
driven  by  negative  credit  flows,  it  is  also  now 
increasingly  driven  by  real  GDP  growth.  The 
projected  pickup 
inflation  should  further 
facilitate  deleveraging  in  the  private  sector,  even 
though consumption and investment are forecast to 
keep registering robust growth rates.  

in 

legacy  of  non-performing 

In 2016, Spanish banks furthered the process of 
balance sheet clean-up through the reduction in 
loans 
the  crisis 
(NPLs).  The  banking  system  has  ample  access  to 
liquidity  and  can  comfortably  meet  the  regulatory 
capital  requirements.  Solvency  levels  are  resilient 
to a stress scenario, and the quality of banks' assets 
has further strengthened. The stock of NPLs went 
further down to 9.4 % as of July 2016, and is now 
close  to  the  euro  area  average.  After  a  sharp 
adjustment since the crisis, the housing market and 
the  construction  sector  have  bottomed  out,  and 
housing  prices  have  been  rising  for  almost  three 
years  in  a  row.  Despite these  positive  signs,  there 
is still a large stock of unsold houses, especially in 
some areas. The evolution of the real estate market 
remains important for banks’ future profitability. 

Reforms  undertaken 
in  2014/2015  made 
corporate  and  personal  insolvency  and  out-of-
court  procedures  more  flexible.  Although  the 
number  of 
insolvency  cases  has  continued 
declining,  especially  for  corporate  insolvencies, 
this  has  been  to  a  large  extent  due  to  the 
improvement in economic conditions. 

14 

 
3. Summary of the main findings from the MIP in-depth review 

Table 3.1: 

Current account and net international investment position sensitivity analysis 

(1) The table above shows the current account balance needed to achieve different NIIP values by 2025, based on several 
nominal GDP growth scenarios 
(2) NIIP stabilisation implies a NIIP level of -92.5 % of GDP by 2025 
(3) These simulations do not take into account REER and valuation effects 
(4) Other assumptions are average yields (nominal effective) over the 2016-2025 of 3.0 % for domestic yield, and of 3.4 % for 
foreign yield 
(5) Domestic yield is the long-term interest rate (as in AMECO and long-term projections) 
(6) Euro area / foreign yield is the underlying long-term interest rate on foreign assets, and  the spread "external liability-
domestic yield" is based on the median 2004-2012 spread between returns of foreign liabilities and the long-term interest rates 
Source: European Commission calculations 

sector,  ensure  a  durable  reduction  of  the  general 
government deficit and resume structural growth. 

The share of temporary work is very high, with 
negative  impact  on  productivity  growth  and 
social  cohesion.  There  is  evidence  that  labour 
market 
affects 
productivity through various channels (see section 
4.3.1). The impact of the labour market reforms in 
reducing segmentation has been mildly positive.  

segmentation 

negatively 

3.4.  OVERALL ASSESSMENT 

Spain has undertaken a substantial adjustment 
in terms of flows, but significant vulnerabilities 
remain 
in  terms  of  stocks.  Private  sector 
deleveraging  has  continued  to  advance.  However, 
public sector debt has not been reduced on account 
of  large  but  declining  deficits,  resulting  in  a  slow 
reduction  of  the  very  high  level  of  net  external 
debt. In order to bring down decisively its stock of 
external  liabilities,  Spain  would  have  to  record 
large current account surpluses over a long period 
of  time.  Based  on  current  external  dynamics,  this 
appears  challenging.  Low  productivity  growth 
makes  competitiveness  gains  hinge  on  cost 
advantages,  also  affecting  working  conditions. 
Besides, 
the 
the 
improvement in the external balance have been of 
a  transitory  nature.  Although  unemployment  has 
been  declining  rapidly,  it  remains  very  high, 
especially 
long-term 
unemployed,  and  risks  becoming  entrenched. 
to  maintain  cost 
Measures  have  been 
competitiveness,  but  continued  efforts  are  needed 
to  further  strengthen  the  resilience  of  the  banking 

factors  behind 

some  of 

young 

taken 

and 

the 

for 

15 

Low nominal GDP growthMedium nominal GDP growthHigh nominal GDP growth (2% average 2016-25)(3,2% average 2016-25)(4.5% average 2016-25)NIIP Stabilisation-2.1-3.1-4.2NIIP at -65% of GDP0.4-0.5-1.4NIIP at -50% of GDP21.20.4NIIP at -35% of GDP3.72.92.2NIIP at -20% of GDP5.34.74 
 
 
 
3. Summary of the main findings from the MIP in-depth review 

Table 3.2: 

MIP assessment matrix — Spain 

(Continued on the next page) 

16 

 Gravity of the challenge Evolution and prospects Policy response Imbalances (unsustainable trends, vulnerabilities and associated risks) External position Spain has a high stock of net external liabilities (-88.7 % of GDP in 2016 Q3), mainly composed of debt instruments. In spite of the high proportion of public debt, this exposes Spain to adverse shocks or shifts in market sentiment.    The current account has been in surplus since 2013, and is expected to remain at or above 1.7 % until 2018. However, some of this improvement has been due to temporary factors, such as low energy prices and geopolitical tensions in other tourist destinations. After years of cost-competitiveness gains vis-à-vis the euro area, ULCs have started to increase again and are expected to converge to the euro are average. No major improvement in non-cost competitiveness can be evidenced yet. Nevertheless, the increase in the number of regular exporters confirms some structural changes drive exports positive performance  (see Section 4.4.1). The external surpluses registered since 2013 and, as of 2014, high nominal growth, have started to translate into a slow reduction of Spain's net external liabilities. The external surpluses, real GDP growth, and the pickup in inflation projected until 2018 should further facilitate the improvement of the NIIP over the medium term.  However, maintaining current account surpluses over sustained periods of time, not granted by current external dynamics, would be needed to bring down decisively the NIIP over the medium term.  Measures have been taken to restore and maintain cost competitiveness. These include a reform of the wage bargaining system — although evidence shows that firm level bargaining is not picking up.  No major improvement in non-cost competitiveness can be evidenced yet. Challenges are still present regarding R&D, innovation and technology level  Public debt Spain has a high level of public debt, which amounted to 99.8 % in 2015. It is forecast to drop to 99.7 % of GDP in 2016, before increasing to 100 % in 2017 and then decline again to 99.7 % in  2018 (see Section 4.1.1). A large stock of public debt is a burden on the economy and makes Spain vulnerable to changes in financial or economic conditions and increasing financing costs.  The country faces high debt- sustainability risks in the medium term (see Section 4.1.1).). The public debt ratio has been increasing, as a result of persistently large, though declining, headline deficits.  Standard debt sustainability analysis indicates that without further consolidation measures, debt would reach almost 108 % of GDP in 2027 (see Box 4.1.1). The Commission concluded that the updated Draft Budgetary Plan of Spain is broadly compliant with the provisions of the Stability and Growth Pact. The required fiscal effort is projected to be met in both 2017 and in cumulative terms over 2016 and 2017. While the fiscal policy measures taken so far have significantly increased the probability of meeting the 2016 headline deficit target, the 2017 headline deficit target is not projected to be met. The excessive deficit procedure is currently kept in abeyance.     
 
 
 
 
3. Summary of the main findings from the MIP in-depth review 

Table (continued) 

Source: European Commission 

17 

Public debt Spain has a high level of public debt, which amounted to 99.8 % in 2015. It is forecast to drop to 99.7 % of GDP in 2016, before increasing to 100 % in 2017 and then decline again to 99.7 % in  2018 (see Section 4.1.1). A large stock of public debt is a burden on the economy and makes Spain vulnerable to changes in financial or economic conditions and increasing financing costs.  The country faces high debt- sustainability risks in the medium term (see Section 4.1.1).). The public debt ratio has been increasing, as a result of persistently large, though declining, headline deficits.  Standard debt sustainability analysis indicates that without further consolidation measures, debt would reach almost 108 % of GDP in 2027 (see Box 4.1.1). The Commission concluded that the updated Draft Budgetary Plan of Spain is broadly compliant with the provisions of the Stability and Growth Pact. The required fiscal effort is projected to be met in both 2017 and in cumulative terms over 2016 and 2017. While the fiscal policy measures taken so far have significantly increased the probability of meeting the 2016 headline deficit target, the 2017 headline deficit target is not projected to be met. The excessive deficit procedure is currently kept in abeyance.   Private debt The total stock of private non-financial sector debt stood at 167.5 % of GDP in 2016 Q3 in non-consolidated terms, which constitutes a vulnerability and constrains demand and growth in light of deleveraging needs (see Section 4.2.2). Household debt remains high, at 65.2 % of GDP in 2016 Q3, whereas corporate debt stands at 102.3 % of GDP.   The debt stock of the private sector has been reduced by about 50 pps. of GDP since its peak (about 30 pps. for corporates and 20 pps for households); however, deleveraging needs are still present, especially for households.  Real GDP growth has become the main driver of private sector deleveraging as new credit hast started flowing again to the private sector.   While Spanish households remain vulnerable, they have strengthened their financial position, aided by the prevailing low interest rates and improved economic conditions. Banks have restructured their activity and cleaned up their balance sheets, and the non-performing loans (NPLs) ratio has continued to decrease and is now close to the euro area average (9.2 % in September 2016). The housing market has started to recover. Measures were taken in 2015 in the area of personal and corporate insolvency (see Section 4.2.3), which may have a positive impact on NPLs, as well as access to finance. The impact of those changes is still difficult to discern, as insolvencies have become less frequent due to improving economic conditions in general.  Adjustment issues Unemployment  The unemployment rate stood at 18.6 % in Q3-2016, with the youth unemployment at 41.9 %, and the share of long-term unemployment at 48.1 %, both rates among the highest in the EU (see Section 4.3.1). The persistence of high unemployment reflects frictions in the adjustment process to existing macroeconomic imbalances.  Labour market adjustment is key to prevent the risk of hysteresis, ensure a lasting competitiveness improvement and mitigate social distress. Unemployment has been declining rapidly, but it remains very high, especially for the youth and long-term unemployed. Wage moderation has continued, facilitated by negative inflation, but productivity growth has remained very modest.  High levels of labour market segmentation (permanent vs. temporary employment) continue to affect negatively productivity and working conditions. Preliminary estimates suggest that the 2012 labour market reform had a positive effect on job creation.  The latest proposal for a minimum wage increase is likely to have a limited impact on the overall wage distribution and job creation.  Challenges are still present, especially concerning the system the education system and enhancing the capacity of public employment services.  Conclusions from IDR analysis • Spain is characterised by a combination of large stock imbalances in the form of external and internal debt, both public and private. These constitute significant vulnerabilities as they expose Spain to adverse shocks or shifts in market sentiment which would have harmful implications for the real economy, especially given the context of still very high unemployment. • The current account balance and cost competitiveness have significantly improved since the crisis but net external liabilities have only started to slowly decrease. Private sector deleveraging is on track and the reduction of debt-to-GDP ratios is now supported by a favourable real and nominal GDP growth. Public debt keeps increasing, on account of persistently large though declining deficits. Despite recent improvements, unemployment remains very high.  
 
 
 
 
3. Summary of the main findings from the MIP in-depth review 

(Continued on the next page) 

18 

Box 3.1: Euro area spilloversGiven its relatively large size and openness, the Spanish economy is a potentially significant source of outward spillovers. These refer to Member States' exposure, through trade and financial ties, to adverse shocks hitting Spain. Portugal and Estonia are the most vulnerable to outward spillovers due to their large exports of goods to Spain. These were the countries with the largest exports to Spain as a share of their domestic GDP in 2014, with 5.8 % of Portuguese and 4.9 %, of Estonian GDP, (see Graph 1). Graph 1: Exports to spain as share of exporting country's GDP (top 15 EU trade partners) in 2014 Graph 2: Exposures of EU countries to Spanish foreign liabilities    Source: European Commission based on UN data. Gross foreign liabilities as a % of counterpart GDP Source: European Commission based on Hobza and Zeugner (2014) Ireland, the Netherlands, Portugal and France have the highest gross financial exposures to Spain (excluding Luxembourg). Spanish external liabilities amount to approximately 45 % of Ireland's GDP, more than 30 % of Dutch GDP, and more than 15 % of Portuguese and French GDP (see Graph 2). Overall, the euro area shows total financial exposures to Spain worth more than 15% of GDP. To illustrate spillover effects of policy changes in Spain to other countries, we model the impact of a growth-friendly increase in government expenditure offset by higher taxes. Using the Commission's QUEST model1, we simulate a rise of government spending equivalent to 0.5% of GDP which is distributed equally on public investment and consumption. This could be thought of as a combined increase in resources for higher education and training and support for private research and development. This expenditure is financed by a value added tax raise resulting in revenues of the same magnitude. Both changes are sustained over ten years, assuming a binding zero lower bound on ECB rates for the first two years. We consider the impact on real GDP and current account balance of selected countries as well as the rest of the euro area (see Graphs 3 and 4).                                                             1 QUEST is the global macroeconomic model DG ECFIN uses for macroeconomic policy analysis and research. Detailed information on the model and applications are available at: http://ec.europa.eu/economy_finance/research/macroeconomic_models_en.htm.  01234567% of trading partner GDPGoods05101520253035404550IENLPTFRMTBEDEUKITATDKSEFISICZ% of  counterpart GDPEquityDebt (excluding official) 
 
 
 
 
 
3. Summary of the main findings from the MIP in-depth review 

Box (continued) 

19 

 Graph 3: Simulation results: impact on real GDP Graph 4: Simulation results: impact on current account    REA: rest of euro area Source: European Commission REA: rest of euro area Source: European Commission The simulation shows small spillover effects on other Member States' real GDP, and a non-negligible initial impact on their current account balance. The fiscal stimulus initially boosts Spanish real GDP by about 0.2 %. Through positive supply effects building up over time, real GDP is further increased by up to 0.3 % over the rest of the simulated period (an example would be an increase in the stock of intangible assets due to the higher support to research and development). The impact on real GDP of the rest of the euro area is small (below 0.05 %) but persists over the simulation period (see Graph 3). Spain's current account turns negative after the first year before slowly rising and turning slightly positive after year 6. The spillover effect on other euro area countries' current account consists in an initial positive spike by around 0.025 % of GDP (see Graph 4). The effect levels off after year 2, except for Portugal, where it partially persists over the whole simulation period. This likely reflects Portugal's substantial trade exposure to Spain (see Graph 1).  
 
 
 
 
4.  REFORM PRIORITIES 

4.1.  PUBLIC FINANCES AND TAXATION 

also given the proportion of total public debt that is 
of  a  short-term  nature  (8.0 %)  or  held  by  non-
resident creditors (43.3%). 

Spain faces high fiscal sustainability risks in the 
medium term. Under normal economic conditions 
and  with  no  change  of  fiscal  policy  after  the  last 
Commission  forecast  year  (2018),  the  Spanish 
general  government  debt  would  rise  to  around 
108 % of GDP by 2027 (last projection year). The 
increase  of  around  8 pp  over  a  10-year  horizon  is 
driven by the persistent primary deficit throughout 
the  projection  period  and  a  growing  interest  rate-
growth  differential,  especially  in  the  latter  part  of 
the  projection  period  (see  Box 4.1.1  for  further 
details  and 
for  alternative  debt  projection 
scenarios). Furthermore, Spain's structural primary 
balance  would  need  to  improve  by  as  much  as 
4.6 % of GDP in cumulated terms over a five-year 
horizon  (from  2018  until  2023)  relative  to  the 
baseline  no-fiscal  policy  change  scenario  to  reach 
the 60 % public debt-to-GDP ratio reference value 
by 2031(12). 

(12)  The following thresholds apply: (i) for values lower than 0, 
the country is assigned low risk; (ii) for values lower than 
2.5  pp,  it  is  assigned  medium  risk;  (iii)  for  values  greater 
than 2.5 the country is assigned high risk.  

4.1.1.  PUBLIC SECTOR DEBT 

Spainʼs general government debt ratio remains 
high  and  is  not  yet  on  a  clear  declining  path. 
After  rising  sharply  in  the  years  following  the 
financial  crisis,  the  general  government  debt  ratio 
peaked  at  slightly  over  100 %  of  GDP  in  2014, 
about  65  percentage  points  above  its  trough  of 
2007.  The  Commission  2016  winter  forecast 
projects the debt ratio to stabilise at just below that 
peak  level  over  2016-18,  as  relatively  strong 
nominal GDP growth largely offsets the still large, 
though  declining,  expected  deficit.  As  the  private 
debt  ratio  has  declined  from  its  peak  levels, 
general  government  debt  now  makes  up  a  much 
larger  share  of  the  total  indebtedness  of  the 
economy  –  at  around  40%  in  2015  relative  to 
around 20% in 2010, the year in which private debt 
peaked (See Graph 4.2.4). 

Spain  does  not  appear  to  face  immediate  risks 
of  fiscal  stress.  (11)  This  is  mainly  thanks  to  the 
improved  macro-financial  situation,  in  particular 
strong real GDP growth, a positive current account 
balance and regained cost competitiveness, as well 
as  the  low  proportion  of  short-term  debt  among 
non-financial  corporations  and  households.  In  an 
assessment of the balance of risks stemming from 
the  macro-financial  situation,  these  favourable 
features  more  than  offset  Spainʼs  still  sizeable 
negative  net  international  investment  position  and 
low  household  savings  rate.  Short-term  risks 
related to the still high general government deficit 
and  the  financing  structure  of  public  debt  are 
mitigated  by  improved  investor  confidence  (as 
measured  by  the  decline  in  yield  spreads  since 
2012).  Nevertheless, 
the  still  high  general 
government deficit and debt ratios remain a source 
of  vulnerability  to  changes  in  market  sentiment, 

(11)  As  measured  by  the  S0  indicator,  which  is  an  ʽearly-
detection indicatorʼ, designed to highlight short-term fiscal 
risks stemming from either the macro-financial or the fiscal 
side  of  the  economy.  It  is  a  composite  indicator  using  a 
wide  range  of  variables  with  a  proven  track  record  of 
detecting  fiscal  stress.  For  an  overview  of  the  European 
Commissionʼs  fiscal  sustainability  risk  assessment  see 
ʽDebt  Sustainability 
European  Commission 
Monitor 2016ʼ, European Economy, Institutional Paper No. 
047.  

(2017), 

20 

 
 
                                                           
 
                                                           
4.1. Public finances and taxation 

In the longer term, risks to fiscal sustainability 
are  significantly  mitigated  by  savings  in  age-
related expenditure. These correspond to savings 
in  non-health  ageing  related  spending  (pensions, 
education and unemployment benefits), also due to 
the  recent  pension  reform.  By  contrast,  public 
expenditure  on  health  care  and  long  term  care  is 
projected  to  increase  slightly  above  the  average 
increase for the EU over the horizon till 2060 (by 
1.1 pp against 0.9 pp, respectively). The projection 
is  based  on  current  expenditure  trends  and  the 
expected demographic changes. 

The  persistent  deficit  of  the  social  security 
system 
is  receiving  policy  attention.  Two 
successive reforms of the pension system, in 2011 
and 2013, will help contain the increase in pension 
expenditure  in  the  long  term,  while  also  resulting 
in  lower  income  replacement  rates  at  retirement. 
However,  despite  these  reforms  social  security 
sector  has  been  running  widening  deficits  since 
2011.  Behind  this  development  lies  the  loss  of 
revenues  as  employment  fell  in  the  wake  of  the 
crisis  while  pension  expenditure  continued  to 
increase,  driven  by  demographic  trends  and  the 

21 

 Box 4.1.1: Long-term projections of general government debtThe public debt trajectory has been simulated under different scenarios. Under the baseline scenario, the general government debt is forecasted to increase throughout the projection period to reach about 107.8 % of GDP in 2027 (the end of the projection horizon). The baseline has been derived from the Commission’s 2017 winter forecast, consistent with the forecast implicit interest rate and the shares of short-term and long-term public debt. It has a number of technical assumptions. First, over the post-forecast horizon, the structural primary balance is set constant at the value projected for 2018. The cyclical component of the primary balance is calculated using (country-specific) budget balance sensitivities over the period until output gap closure is assumed (2021). Second, the long-term interest rate on new and rolled-over debt is assumed to be 3.0 % in real terms by the end of the projection horizon, while the short-term real interest rate reaches an end-of-projection value that is consistent with the 3.0 % long-term real interest rate and the value of the euro area yield curve. Third, the GDP deflator is assumed to change linearly until it reaches 2 % in 2021 and remain constant thereafter. Fourth, the stock-flow adjustment is set to zero after 2017. Finally, medium-term real GDP growth projections are based on the T+10 methodology agreed with the EPC and is assumed to average 1.7 % in the 2015-2021 period and to decelerate to 1.1 % on average in the 2022-2027 period. Graph 1: Gross debt, Spain  Source: European Commission More favourable assumptions on real growth would lead the debt ratio to follow a lower path to reach 102.2 % of GDP in 2027. By contrast, under more unfavourable assumptions on real GDP growth or interest rates, the debt ratio would increase, respectively, to 113.7 % or 117.8 % of GDP by 2027. 607080901001101202012201320142015201620172018201920202021202220232024202520262027% of GDPBaseline no-policy change scenarioStandardized (permanent) negative shock (-0.5p.p.) on GDP growthStandardized (permanent) positive shock (+0.5p.p.) on GDP growthEnhanced (permanent) positive shock (+2p.p./+1p.p) to the short- and long-term interest rates on newly issued and rolled over debt 
 
 
 
 
 
4.1. Public finances and taxation 

(15).  At  21 %,  Spain's  standard  VAT  rate  was  in 
line with the EU median in 2014. However, Spain 
has  relatively  low  VAT  revenues.  This  is  mainly 
due  to  Spain  extensively  applying  exemptions  or 
reduced  rates  (16)  on  various  goods  and  services. 
As  a  result,  Spain  recorded  the  largest  policy  gap 
in  the  EU  in  2014  (59 %  compared  to  the  EU 
average  of  about  44 %),  up  from  53.9 %  in  2013. 
In  contrast, 
the 
difference  between  the  theoretical  VAT  liability 
and  the  revenue  actually  received ̶  continued  to 
decrease and amounted to 9 % in 2014 (down from 
a  peak  of  14 %  in  2011),  significantly  below  the 
EU  average  of  about  14 %  (see  2016  country 
report  for  a  more  detailed  discussion  of  measures 
against fraud). 

the  VAT  compliance  gap ̶ 

A reduction of the policy gap in VAT is likely to 
bring 
in  higher  tax  revenues.  Simulations 
conducted  by  the  European  Commission  Joint 
Research  Centre  based  on  the  EUROMOD  model 
(See Box 4.1.2) show that reducing the actionable 
VAT  policy  gap  would  increase  revenues  by  0.2-
1.4 % of GDP, depending on the scope and extent 
of  the  reduction.  Any  negative  distributional 
effects  can  be  reduced  or  avoided  by  giving 
priority to items with little or no regressive effects 
or  compensated  through  other  means,  such  as 
social transfers. 

(15)  The  policy  gap  is  an  indicator  of  the  VAT  revenue 
theoretically  foregone  by  applying  non-standard  rates  to 
some goods and services, expressed as a share of revenues 
that  would  be  collected  if  everything  was  taxed  at  the 
standard rate and assuming full compliance. 

(16)  Spain  applies  a  super-reduced  VAT  rate  of  4 %  inter  alia 
on  foodstuffs,  pharmaceutical  products,  some  medical 
equipment, some books and newspapers and social housing 
and a reduced rate of 10 % inter alia on domestic transport, 
hotels,  take-aways,  bars  and  cafes,  agricultural  inputs, 
treatment  of  waste  and  waste  water  and  collection  of 
household waste. 

raised 

inflation,  and 

the  government 

fact  that  new  entrants  have  higher  pensions  than 
those  who  exit  the  system.  More  recently,  the 
rebound in employment is supporting contributions 
paid  into  the  system,  but  the  0.25%  minimum 
annual revaluation of pensions in a context of low 
or  even  negative 
the  various 
employment  incentive  schemes  in  the  form  of 
contributions'  rebates,  have  weighed  on  social 
contributions' revenues. To strengthen revenues, in 
December  2016 
the 
maximum  contributory  base  by  3%.  (13)  This  is 
expected to bring in EUR 300 million in additional 
revenues  in  2017.  On  22  November  2016,  the 
Toledo Pact parliamentary committee (14) launched 
a  discussion  on  the  possible  further  revisions  of 
Spain's  pension  system, 
the 
persistent social security deficit but also as part of 
a 
the  sustainability  and 
sufficiency  of  the  pension  system  against  the 
backdrop  of  the  increase  in  life  expectancy  and 
low  fertility  rates.  The  Committee  will  look  into 
measures to be adopted in the short term to reduce 
that deficit (e.g., through the allocation of existing 
tax  revenues  to  the  funding  of  social  security 
rebates and/or survivors' pensions). 

review  of 

light  of 

regular 

the 

in 

4.1.2.  TAX  AND  GOVERNMENT 

SPENDING 

STRUCTURE 

Spain raises less tax revenue as a share of GDP 
than  the  EU  or  euro  area  average.  In  2015, 
Spain's tax burden accounted for 34.6% of GDP in 
2015  compared  to  an  EU  average  of  about  40% 
and  euro  area  average  of  41.4%.  Spain  raises 
roughly  equal  shares  of  revenues  from  indirect 
taxes,  direct  taxes  and  social  contributions  (see 
2016  country  report  for  details).  Measured  by  the 
implicit tax rates on labour or the tax wedge on the 
average wage, Spain ranks low in the league table 
of EU countries. The scope for higher taxation on 
labour  income  is  however  limited,  given  the  need 
to bring down the high unemployment rate. 

The  low  share  of  consumption  tax  revenues  is 
linked  to  a  relatively  high  policy  gap  in  VAT 

(13)  Royal Decree Law 3/2016 of 2 December 2016. 
(14)  This parliamentary committee is a forum for the follow up 
and  evaluation  of  the  Toledo  Pact  agreement,  which  laid 
out  the  reform  of  the  Spanish  social  security  system  that 
was approved by the Spanish parliament on 6 April 1995.  

22 

 
                                                           
                                                           
4.1. Public finances and taxation 

Environmental  taxes  are  still  below  the  EU 
average,  despite 
in  recent  years. 
increases 
Environmental  taxes  in  Spain  amounted  to  about 

1.8 % of GDP in 2014, compared to an EU average 
of  about  2.5 %  of  GDP.  In  particular,  taxes  on 
transportation  only  yield  half  as  much  revenue  in 

23 

 Box 4.1.2: EUROMOD simulations for narrowing of the actionable policy gap in VATSpain has one of the largest policy gaps in VAT in the EU. This box presents the fiscal and distributional impacts of four reform scenarios for the Spanish VAT rate structure that would reduce the VAT actionable policy gap (1). The reform scenarios vary from an increase in the super-reduced VAT rate (Scenario no 1) to increases in both the super-reduced and reduced VAT rates (Scenario no 2 and 3). Scenario no 4 considers the elimination of both the super-reduced and the reduced rate rates. Table 1 summarizes the results of the various simulations compared to the 2015 baseline scenario. The estimated impact on tax revenue varies from around 0.2 % of GDP in Scenario no 1 to about 0.4-0.5% of GDP in Scenario no 2 and 3 and about 1.4% of GDP in Scenario no 4. Income inequality measured by the Gini coefficient increases in all scenarios compared to the baseline, especially in scenario no 4. Table 1: VAT simulations performed Source: European Commission, Joint Research Centre, based on the EUROMOD model  Graph 1 shows the effect of direct taxes, social security contributions (employee and self-employed) and indirect taxes by deciles, as a percentage of disposable income. There is a clear regressive pattern of indirect taxes (with a very large impact in the first decile), and a mostly progressive pattern of direct taxes and contributions (except in the first three deciles, due to contributions). Comparing the VAT scenarios, the ranking observed in aggregate terms is also observed here across deciles, the effect of scenarios 1 to 3 having only a relatively limited impact on income inequality compared to scenario no 4. (2) Graph 1: Taxes as a % of disposable income, by deciles of disposable income  Source: European Commission, Joint Research Centre, based on the EUROMOD model                                                            (1) The simulations have been conducted by the Joint Research Centre of the European Commission, using EUROMOD. (2) The rates in the lower income deciles are higher than the maximum VAT rate, as expenditures exceed income for various reasons, such as measurement error, dependence on the frequency of expenditures, length of the period. In a life cycle perspective we would expect this to vanish or become much less important. Rates %ScenarioSuper-reducedReducedStandardΔ gov't revenueGini coefficient(% of GDP)Baseline4102100.345Scenario 11010210.20.346Scenario 2814210.50.348Scenario 31212210.40.348Scenario 42121211.40.354 
 
 
 
 
 
4.1. Public finances and taxation 

GDP  higher  in  2018  than  the  average  for  2000-
2007. 

Graph 4.1.1:  Evolution of expenditure ratios for various 

categories 

Source: European Economic Forecast - Autumn 2016 

Some  ongoing  and  planned  policy  initiatives 
aim  to  increase  efficiency  of  spending,  but 
weaknesses  in  public  procurement  remain  an 
obstacle.  Efforts  to  implement  the  CORA  reform 
continued, a programme for administrative reform 
launched in 2012 including a broad set of measures 
to  enhance  efficiency  and  effectiveness  in  the 
public  sector  at  all  general  government  levels. 
According  to  the  latest  implementation  report, 
87 % of the 222 concrete measures included in the 
reform  had  been  implemented  by  June  2016(17). 
These  measures  include  i)  reducing  duplicated 
the  central 
structures  within 
administrative 
government  and  between  central  and  regional 
governments; ii). reducing administrative burdens; 
iii)  streamlining  overheads;  and  iv)  rationalising 
the 
‘institutional’ 
government’s 
central 
also 
administration.  The 
announced  that  it  will  ask  the  independent  fiscal 
body,  AIReF,  to  undertake  a  general  spending 
review  to  identify  further  areas  of  potential 
public 
efficiency 
procurement  policies  (see  Section  4.5)  limit  the 
potential  efficiency  gains  from  some  of  these 
measures. 

Inefficiencies 

government 

gains. 

has 

in 

(17)  http://transparencia.gob.es 

Spain  as  the  EU  average,  reflecting  a  relatively 
low level of excise duties on both unleaded petrol 
and diesel. As a share of total tax revenues, Spain 
also relies less on environmental taxes than its EU 
peers (5.5 % vs 6.3 %). 

In property taxation, Spain relies to a relatively 
low  extent  on  recurrent  taxes.  While  overall 
revenues from property taxation in Spain are close 
to the EU average, the recurrent element is below 
the  EU  average  (1.3 % of GDP  v 1.6 %  in  2014). 
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. 

government 

reduced.  However, 

On the expenditure side, the crisis-induced rise 
in  the  expenditure  ratio  has  been  partly 
reversed.  General 
expenditure 
reached 43.8% of GDP in 2015, compared with an 
EU  average  of  48.8%  and  a  euro  area  average  of 
49.6%.  In  the  years  following  the  crisis,  the 
expenditure  ratio  rose  sharply,  as  GDP  fell, 
unemployment  benefits  rose  sharply  and  other 
government  expenditure  continued  to  rise,  but  it 
has subsequently declined as economic growth has 
resumed,  the  interest  burden  has  decreased  and 
some 
investment  been 
expenditure  ratios  are  expected  to  be  at  higher 
levels  in  2018  than  during  the  years  prior  to  the 
crisis, also when measured against potential GDP. 
Graph 4.1.1  shows  the  evolution  of  the  main 
expenditure  items  from  2000  to  2018  (with  2016-
2018  based  on  the  Commission  2016  autumn 
forecast). Compared to the average for 2000-2007, 
total expenditure is expected to be about 1.9 % of 
potential GDP higher in 2018, despite a halving of 
gross  fixed  capital  formation  as  a  percentage  of 
potential  GDP  during  the  crisis.  Although  there 
might have been some excessive investment in the 
years leading up to the crisis, the subsequent steep 
decline  has  left  the  former  at  historically  low 
levels.  Both  compensation  of  employees  and 
intermediate  consumption  have  ratios  above  the 
pre-crisis period and this is expected to remain the 
case  in  2018  (at  15.6  %  of  potential  GDP,  their 
aggregate ratio is expected to be 1.0 % of potential 

24 

02468101214161800010203040506070809101112131415161718% of potential GDPCompensation of employeesIntermediate consumptionSocial transfers in kindSocial transfers other than in kindInterestSubsidiesGross fixed capital formationOther expenditure (residual) 
 
                                                           
4.1. Public finances and taxation 

Graph 4.1.2:  General government revenue, expenditure and balance by subsector 

(1) Regional government sub-sector corresponds to ESA category S.1312 (i.e., State government). 
Source: Eurostat, own calculations. 

4.1.3.  FISCAL FRAMEWORKS 

Graph 4.1.3:  Expenditure structure of regional governments, 

2014 

is  also  considerable  on 

regional  and 
(as  percent  of 

Spain is a highly decentralised country. In 2015, 
consolidated 
local  government 
total  general 
expenditure 
government spending) stood at a level comparable 
to  that  in  federal  Belgium,  at  around  42%. 
Decentralisation 
the 
revenue  side,  although  as  in  other  countries,  less 
intense  than  on  the  expenditure  side:  the  share  of 
total  general  government  revenues  owned by  sub-
central  governments  amounted  to  around  27%.  In 
2015,  the  sub-central  government  subsector  in 
Spain  recorded  a  higher  share  in  the  general 
government  deficit  than  in  other  countries  with  a 
regional dimension and in the EU28 (Graph 4.1.2). 

Source: Eurostat. Cofog data 

Despite  not  being  de  iure  a  federal  country, 
Spain has a strong regional dimension. Regional 
governments in Spain are responsible for a variety 
of  expenditure  functions,  mostly  geared  towards 
the provision of public services such as healthcare, 
education,  and  social  protection  policies.  Spain 
stands out together with Italy for the importance of 
the  healthcare  function  relative  to  Austria  and 
Switzerland,  and  above  all,  to  Germany  and 
Belgium,  where  healthcare  spending  is  to  a  large 
extent  centralised  (Graph 4.1.3).  Over  time,  the 
share  of  taxes  in  Spain's  regional  revenue  has 
become more important than the share of transfers 
from  other  government  levels,  namely  the  central 
government.  In  2015  the  share  of  own  taxes  – 
excluding 
regional 
governments have no normative powers, which are 

taxes  on  which 

shared 

25 

024681012141618BEDEESATCHIT% of GDPGeneral public servicesHealthEducationSocial protectionEconomic affairsothers010203040506070DKCHSEBEESFIDENONLEU 28AT% of general government expenditureConsolidated general government expenditure, 2015RegionalLocal0102030405060CHDESEFIESDKISEU 28BECZIT% of general government revenueConsolidated general government revenue, 2015RegionalLocal-6-5-4-3-2-1012ESFIITBEEU28DKISCZSEDECH% of GDPNet lending/borrowing by general government subsector, 2015RegionalLocalCentralGeneral government 
 
 
 
4.1. Public finances and taxation 

treated  as  transfers  in  revenue  statistics  -  was 
slightly  smaller  than  in  Germany  and  Switzerland 
(Graph 4.1.4).  

Graph 4.1.4:  Revenue structure of regional governments, 

2015 

Regional governments play an important role in 
shaping  policies  in  Spain.  There  is  more  to  the 
role  of  government  than  managing  resources  and 
providing  services.  The  regional  authority  index 
(Hooghe  et  al.,  2016),  a  composite  indicator 
measuring  the  powers  of  regional  governments 
across  ten  dimensions,  including  law  making  and 
policy scope (see Graph 4.1.5), also place Spain in 
the  group  of  most  decentralised  countries  in  the 
world. The graph also shows that over the past few 
decades,  Spain  has  reached  comparable  levels  of 
decentralisation 
federal 
countries.  

long-established 

than 

The  regional  financing  system  is  based  on  the 
constitutional principles of autonomy, solidarity 
and  coordination  with  the  government's  fiscal 
policy.  There  are  two  regional  financing  systems 
in  Spain:  the  common  and  the  foral  system.  The 
former, which is the object of this section, applies 
to  all  regions  other  than  Navarre  and  the  Basque 
Country.  It  is  regulated  via  Organic  Law  8/1980 
and  ordinary  law  22/2009  (as  amended).  In 
addition  to  the  above-mentioned  principles,  it  is 
based  on  the  principle  of  sufficiency.  It  aims  at 
ensuring sufficient homogeneity in the provision of 
essential  public  services  throughout  Spain  while 
allowing  for  different  spending  patterns  across 
regions. The latter, applies to the Basque Country 
and  Navarre.  Under  this  system,  both  regions 
enjoy  a  considerably  higher  level  of  revenues  per 
capita than the common financing system regions, 
thus creating a visible asymmetry in funding.(18)   

Source: OECD. Fiscal Federalism database.  

of  OECD 

To implement the principle of co-responsibility, 
the tax autonomy of regions has increased over 
time. Spanish regions have considerable discretion 
over  their  own  taxes  (De  la  Fuente  et  al.,  2016). 
Their  tax  autonomy,  as  measured  by  the  OECD 
taxing  power  index,(19)  is  the  highest  among  the 
relevant EU countries and among the highest in the 
group 
(see 
Graph 4.1.6),  even  though  tax  sharing  agreements 
in  which  regions  have  no  normative  powers 
account  for  a  considerable  part  of  regional  tax 
revenue.  In  2011,  the  share  of  regional  tax 
revenues with full or partial discretion amounted to 
around  23%  of  total  general  government  tax 
revenues.  Regions'  tax  autonomy  allows  them  to 
make  spending  decisions  in  the  margin  through 
increases in the taxes they control.   

countries 

federal 

(18)  In addition, in the foral system, the collection of most taxes 
is done at the regional level, unlike in the common system, 
which  is  mostly  done  centrally.  In  exchange,  the  foral 
regions make an annual payment to the central government 
for the services rendered by it. 

(19)  The  OECD  tax  autonomy  or  taxing  power  index  captures 
various aspects of the freedom of sub-central governments 
have over their own taxes, such as their right to introduce 
or to abolish a tax, to set tax rates, to define the tax base, or 
to grant tax allowances or reliefs to individuals and firms.  

26 

0102030405060708090100ATBEDEESCH%TaxesTransfers between public administrationsFees 
                                                           
 
                                                           
4.1. Public finances and taxation 

Graph 4.1.5:  Evolution of the Regional Authority Index since 

Graph 4.1.6:  Taxing power of the regional government 

1980 and level in 2010 

sector (as % of general government tax 
revenue) 

(1) The ten dimensions of the regional authority index are the 
following: institutional depth, policy scope, fiscal autonomy, 
borrowing autonomy, representation, law making, executive 
control, fiscal control, borrowing control, constitutional 
reform. 
(2) In red, countries with state government sector.  
Source: European Commission based on the Regional 
Authority Index. Hooghe et al. (2016). 

in 

indicators  across 

Differences  in  regions'  initial  tax  capacity  call 
for  equalisation  transfers  under  the  solidarity 
principle.  There  are  considerable  differences  in 
regions. 
various  economic 
Disparities  in  income  per  head  across  regions 
translate into differences in regions' tax capacity, a 
measure  of  the  tax  revenues  regions  would  get  if 
they  applied  the  same  tax  rates  and  were  all 
equally  efficient 
they  collect. 
the 
Equalisation  transfers  are  carried  out  namely 
through the Guarantee Fund, which aims to ensure 
that  each  region  receives  the  same  resources 
relative  to  its  population  (adjusted  for  differences 
in relevant demand and cost factors) to finance the 
basic  public  welfare  services  (i.e.,  education, 
healthcare and social services), as well as through 
redistribute 
the  Convergence  Funds,  which 
resources  based  on  regions'  ranking  in  variables 
such  as  income  per  head,  population  density  and 
population growth.   

taxes 

(1) Regional government sub-sector corresponds to ESA 
category S.1312 (i.e., State government).  
(2) 2011 data. 
Source: OECD. Fiscal Federalism database.  

The  regional  financing  system  is  also  based  on 
the  principle  of  sufficiency  of  resources.  This 
principle,  however,  does  not  give  right  of  an 
unlimited  coverage  of  regions'  spending  needs  by 
the  system.  Rather,  it  aims  at  ensuring  that  all 
to  provide 
regions  have  sufficient  resources 
services that have been transferred to them by the 
central government at a minimum level of quality - 
it therefore does not apply to quality improvements 
in  the  provision  of  those  services  or  to  new 
services by regions, whose funding would have to 
rely  on  the  use  of  the  regions'  tax  autonomy 
(Herrero Alcalde et al., 2011). Moreover, it implies 
that  the  allocation  across  regions  of  the  total 
amount of available resources at each point in time 
should  be  done  with  respect  of  the  principles  of 
solidarity  and  coordination  (Constitutional  Court 
Judgement,  2016).  This  puts  this  principle  in 
relation  with  the  fairness  dimension  and  the 
financing  needs  of 
the  general  government. 
Ultimately,  sufficiency  of  resources  is  measured 
against  the  level  of  taxation  the  society  is  willing 
to support to cover spending needs.  

The financial autonomy of regions is carried out 
within the framework of the government's fiscal 
policy.  To  that  end,  the  reforms  to  the  regional 
financing  systems  have  been  accompanied  with 
reforms to Spain's fiscal framework. The adoption 
its 
in  2001  of 

the  first  Stability  Law  and 

27 

AUATBECADKFIFRDEELIEITJPLUMTNLNZNOPTESSECHTRUKUSIL0510152025303540-10-505101520Regional  authority index 2010Change in Regional Authority Index over 1980-2010051015202530354045ATMXBEUSDEESCHCA% of general government tax revenue 
 
 
4.1. Public finances and taxation 

of  Finance  activated  for  the  first  time  some  such 
provisions,  such  as  the  requirement  for  several 
regional  governments  to  adopt  spending  cuts 
(acuerdos  de  no  disponibilidad)  to  reach  the 
regional  2016  deficit  target,  although  the  actual 
response  by  regional  governments  (EUR  40 
million;  AIReF,  2016a)  was  considerably  below 
what the Ministry of Finance called for.    

There are limits to further devolving tax powers 
to  regions.  Further  increases  in  regions'  tax 
autonomy would have to rely on the devolution of 
powers over the large taxes and / or the creation of 
new taxes. In practice, some taxes are ill-suited to 
be shared with regional governments. For example, 
the  high  sensitivity  to  the  economic  cycle  of 
corporate income tax would not ensure stability of 
financing sources for the regions, and in addition it 
would  be  difficult  to  allocate  revenues  from  this 
tax to each region. There are also limits to further 
increasing  the  share  of  personal  income  taxes 
devolved  to  regions,  as  this  could  impair  the 
central  government's  ability 
its 
functions. 
stabilisation 
for 
Moreover,  EU 
differentiated  regional  VAT  rates.  Lastly,  on  the 
expenditure side, higher co-responsibility could be 
achieved  through  increases  in  the  powers  of 
regional  governments  over  the  setting  of  co-
payments  (Tax  experts'  report,  2014),  with  due 
consideration  to  their  distributional  impact,  in 
terms  of  access  by  low  income  households  to  the 
services subject to co-payment.   

redistribution 
law  does  not 

to  carry  out 

allow 

and 

Equalisation transfers go some way in reducing 
dispersion  in  revenue  per  head  across  regions, 
but  raise  issues  of  fairness.  This  is  because  they 
result  in  a  final  distribution  of  revenues  that  does 
not preserve the ranking of regions in terms of tax 
capacity. Specifically, the Guarantee Fund reduces 
the dispersion in regions' revenues per head, while 
keeping  the  initial ordering of regions  in  terms  of 
capacity.  However,  three  other  funds  -  i.e.,  the 
Sufficiency, (22) Competitiveness and Cooperation 
funds  -  come  into  action  after  the  redistribution 
made by the Guarantee Fund. The end result is an 

(22)  The sufficiency fund for each region aims to grant enough 
resources to fund the powers taken on in their statutes. The 
value of the sufficiency fund for each region was calculated 
such  that  their  total  resources  would  not  fall  below  the 
amount  that  they  would  have  received  under  the  previous 
financing system. 

amendment  in  2012  is  a  case  in  point,  to  ensure 
that  the  increasing  tax  and  spending  autonomy  of 
sub central governments is carried out consistently 
with the annual general government fiscal targets.  

The  use  of  the  tax  autonomy  has  varied  across 
taxes  and  regional  governments.  Over  2003-
2014,  regions  have  made  low  use,  in  aggregate 
terms, of their normative powers to raise personal 
income tax. They have relied more on other taxes, 
such as stamp duty tax, to get additional resources 
during the crises years. There are also considerable 
differences  across  regions  in  the  use  of  their  tax 
powers (AIReF 2016b).   

Several  elements  have  weakened  regions' 
incentives  to  use  their  tax  autonomy,  thus 
reducing fiscal co-responsibility.   

Firstly,  to  date,  each  revision  of  the  financing 
system has been carried out under the premise that 
no  regional  government  would  lose  revenues 
relative 
the  status  quo  and  has  been 
accompanied  by  additional  monetary  transfers 
from  the  central  government,  thus  reducing  the 
need for regions to use their taxing powers.   

to 

Secondly,  while  the  Regional  Liquidity  Fund 
(RLF),(20) as amended in 2014, further reduces the 
cost  of  debt  for  regional  governments,  it  could 
weaken  incentives  to  keep  borrowing  in  check. 
And  while  access  to  the  RLF  is  subject  to 
conditionality, the regions' adjustment plans under 
the RLF are subject to less strict requirements than 
the  economic  and  financial  plans  required  by  the 
Stability  law  in  case  of  non-compliance  with  the 
fiscal  targets.(21).  A  gradual  return  of  region's 
to  market  conditions  can 
financing  schemes 
therefore  contribute  to  reduce  moral  hazard  and 
increase fiscal prudence at the regional level. 

Thirdly, until recently, Spain has made little use of 
the corrective and preventive tools in Spain's fiscal 
framework 
to  ensure  fiscal  discipline  at  all 
government levels. However, in 2016, the Ministry 

(20)  The RLF is a financial facility created in July 2012, so that 
adhering regions / local entities can borrow money from it 
at favourable interest rates relative to market conditions.  
(21)  E.g.  no  ex-ante  assessment  by  AIReF,  no  approval  by  the 
Financial  and  Fiscal  Policy  Council  and  less  detailed 
periodic  monitoring  by  the  Ministry  of  Finance  compared 
with the Stability law's economic and financial plans.  

28 

 
                                                           
                                                           
4.1. Public finances and taxation 

level  of  regional  expenditure  per  capita  in  real 
terms  was  very  close  to  the  2006  level.  While 
some  expenditure  categories,  such  as  economic 
affairs, were considerably lower (on account of the 
fall in gross fixed capital formation, investment aid 
and  subsidies 
to  production)  others,  namely 
healthcare and spending on social protection, were 
above.  The  application  of  the  Stability  Law's 
expenditure rule, whose implementation details are 
(European 
still 
Commission,  2016d),  can  help  underpin 
the 
sustainability of expenditure growth, especially for 
regions for which the annual headline deficit target 
may not be overly demanding.    

sufficiently 

specified 

not 

could 

policy 

A  reform  of  the  regional  financing  system  is 
scheduled  for  2017.  A  revised  regional  financing 
system  along  the  principles  of  co-responsibility, 
the  central 
solidarity  and  coordination  with 
government's 
increase 
fiscal 
incentives  for  fiscal  compliance  at  regional  level. 
Other  policy  settings,  which  are  related  to  this 
reform, are also believed to play a role in fostering 
fiscal  discipline  at  this  government  level.  For 
example,  regions  have  received  so  far  uniform 
public  deficit  and  debt  targets,  regardless  of  their 
initial  budgetary  position,  with  the  exception  of 
2013.  It  has  been  suggested  that  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  (AIReF, 
2016b).  Moreover,  it  has  been  noted  that  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.  This 
lowers in turn, regions' incentives to adjust in bad 
economic  times  and  makes  it  more  difficult  for 
regions  to  comply  with  deficit  targets  in  good 
times,  as  revenue  slowdowns  /  recoveries  are  felt 
with  a  two  year  lag  (Hernández  de  Cos,  2015). 
Furthermore, 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 
(Hernández  de  Cos,  2015).  Lastly,  the  spending 
review  announced  in  the  2017 DBP,  to be carried 
out by AIReF, is a step in the right direction, as it 

increased  dispersion  of  revenues  per  head  across 
regions  relative  to  the  distribution  post-Guarantee 
Fund  (although  a  decrease  compared  with  the 
initial  one)  and,  above  all,  a  ranking  of  regions' 
revenues  per  head  that  is  uncorrelated  with  the 
initial  ranking  based  on  the  tax  capacity  (de  la 
Fuente,  2016;  Zubiri,  2016).  Thus,  regions  with 
comparable  tax  capacity  per  head  may  end  up 
having  different  revenues  per  head  as  a  result  of 
the operation of the above-mentioned three funds; 
similarly,  regions  with  relatively  low  tax  capacity 
may end up getting higher revenues per head than 
regions with a higher tax capacity.  

from 

Regions  with  higher  revenues 
the 
financing  system  are  not  necessarily  the  ones 
with  lower  deficits.  There  are  differences  in 
revenues from the financing system across regions. 
In  2016,  there  was  a  difference  of  36%,  between 
the  region  with  highest  and  lowest  revenues  per 
head from the financing system, measured in terms 
of  EUR  per  head.  A  priory,  regions  with  higher 
revenues  from  the  regional  financing  system 
should record, all other things equal, lower deficits 
compared  with  regions  with  lower  revenues. 
However,  the  deficit  is  a  matter  of  revenues  and 
expenditure and while variations in revenues show 
some correlation with variations in the deficit, over 
time  the  change  in  primary  expenditure  shows  a 
higher degree of correlation with the change in the 
deficit  than  the  change  in  the  level  of  revenues 
(Table 4.1.1). 

to 

The  cooperation  of  regional  governments  is 
crucial for Spain to reach its fiscal consolidation 
targets. Over 2003-2015, the average deviation of 
regional governments from their deficit target (0.7 
the  central 
%  of  GDP)  has  been  close 
government's  (0.8  %  of  GDP).  Over  the  past  few 
years,  regional  governments  have  contributed  to 
fiscal consolidation. The regional deficit peaked at 
5.1%  of  GDP  in  2011,  was  more  than  halved  in 
2012 and has been hovering around 1.6% of GDP 
since  then.  However,  the  pace  of  consolidation 
went  down  considerably  in  2015,  at  both  central 
and  regional  level,  despite  a  pick-up  in  revenues 
from  the  financing  system  and  a  considerable 
reduction  in  regions'  interest  expenditure.  This 
slowdown  has  hampered  Spain's  deficit  reduction 
in 2015.  

Regional  expenditure  is  regaining  its  pre-crisis 
levels.  Graph 4.1.7  shows  that  in  2015,  the  total 

29 

 
4.1. Public finances and taxation 

Table 4.1.1:  Correlation between (1) changes in regional revenues and (2) changes in expenditure with changes in regions' 

deficits 

Correlation of (1) and (2) with the % change in primary deficit 
Source: European Commission 

can  help  identify  areas  where  spending  needs  can 
be met with a more efficient use of resources. 

Graph 4.1.7:  Regional governments: real expenditure in EUR 

per capita by COFOG function. Differences 
2015-2006 

(1) Excludes transfers between public administration and 
interest expense. 
Source: European Commission from IGAE and INE (padrón 
continuo) 

30 

-180-130-80-302070HealthcareEducationSocial protectionPublic administration services (1)Economic affairsPublic order and safetyEnvironmental protectionHousingLeisure, culture and religionTotalEUR per head (real terms)2004-152005-152006-152007-152008-152009-152010-152011-152012-15% change in revenues net of transfers to other public administrations 0.090.060.040.00-0.03-0.80-0.83-0.76-0.71% change in primary expenditure net of transfers to other public administrations-0.34-0.38-0.47-0.54-0.660.480.560.780.96 
 
 
 
 
 
4.2.  FINANCIAL SECTOR AND PRIVATE SECTOR DELEVERAGING 

4.2.1.  FINANCIAL SECTOR 

The  Spanish  financial  sector  has  continued  to 
show a high degree of stability, supported by its 
ongoing  restructuring,  low  funding  costs  and  the 
the  economic  recovery (23).  The 
strength  of 
banking  system  further  strengthened  its  capital 
buffers  and  all  six  Spanish  banking  groups  that 
were  subject  to  the  EBA  stress  tests  of  July  2016 
comfortably  met  capital  requirements  under  this 
exercise.  As  elsewhere  in  Europe,  sustaining 
profitability  over  the  medium  term,  against  the 
background of low interest rates and still negative 
growth  of  business  volumes,  remains  the  main 
challenge (24).  

(NPLs) 

further  dropped 

crisis legacy loans. Amid robust economic growth 
over  the  past  two  years,  the  stock  of  non-
performing-loans 
in 
September  2016.  The  overall  NPL  ratio  (share  in 
total loans) went down to 9.23 % as of November 
2016,  from  10.12 %  at  the  end  of  2015  (see 
Graph 4.2.1).  However,  the  share  of  legacy  assets 
is  not  uniform  across  banks.  For  Q1-2016,  the 
ratio_(25)  of  Spanish  banks 
aggregate  NPL 
remained  only  just  above  the  euro  area  average 
(EBA,  2016).  The  divestment  of  SAREB's 
portfolio  has  been  progressing,  even 
though 
SAREB  has  continued  to  post  consistent  negative 
financial  results  before  tax  since  its  start  of 
operations. 

Graph 4.2.1:  Non-performing loans 

Graph 4.2.2:  Financing the Spanish economy 

Source: BdE, own calculations. 

Source: European Commission, own calculations based on 
AMECO, ECB and Invest Europe. 

In  2016,  Spanish  banks  continued  to  clean  up 
their  balance  sheets  and  reduce  the  share  of 

(23)  The European Commission conducts the monitoring of the 
Spanish 
Post-Programme 
sector 
Surveillance (PPS), in conjunction with the ECB and ESM. 
The latest PPS report is, available at: 

financial 

under 

https://ec.europa.eu/info/publications/post-programme-
surveillance-report-spain-autumn-2016_en  

(24)  On 21 December 2016, the Court of Justice of the EU ruled 
about the full retroactivity of the nullity of floor clauses for 
variable-interest mortgage contracts beyond May 2013. As 
a  result  of  the  ruling,  Spanish  banks  may  have  to 
compensate  the  affected  consumers.  This  puts  additional 
pressure  on  banks'  profitability.  A  law  has  been  recently 
passed  introducing  a  free,  voluntary  and  speedy  out-of-
court procedure for settling refund requests regarding floor 
clauses.  Additionally,  negative  pressures  on  profitability 
are compensated by the fact that some of the affected banks 
have already built up provisions for litigation risks. 

is  still 
The  outstanding  volume  of  credit 
decreasing,  but  new  bank  lending  to  firms  and 
households  has  been  growing.  The  Spanish 
economy still relies heavily on the banking sector. 
In 2015, bank loans represented 50 % of GDP vs. a 
EU  average  of  around  36  %  (see  Graph  4.2.2), 
while non-bank financial intermediation via equity 
markets, debt issuance and venture capital is below 
the EU average (see Section 4.5). Credit standards 

(25)  The EBA (2016) study relies on the harmonised European 
definition  of  NPLs  for  supervisory  purposes  (under 
FINREP).  The  denominator  of  the  ratio  only  covers 
thus  excluding  debt 
exposures  qualifying  as 
to 
securities  or  off‐balance  sheet  exposures.  Due 
differences in scope and definition, the EBA figures do not 
often overlap with the figures provided by BdE. 

loans, 

31 

0369121518212427303336394207080910111213141516%TotalProductiveactivitiesConstructionReal estateactivitiesHousehold loansHome andmortgage loans0.000.010.010.020.020.030.030102030405060ListedsharesDebtsecuritiesMFI loansGrossoperatingsurplus:corporationsVenturecapital (rhs)% of GDPESEU 
 
 
                                                           
 
                                                           
4.2. Financial sector and private sector deleveraging 

Graph 4.2.4:  Indebtedness by sector 

for  approving  loans  were  further  relaxed  in  Q1-
2016 for households, while the  average terms and 
conditions  for  loans  continued  to  ease  for  both 
households and non-financial corporations (NFCs) 
(Banco  de  España,  2016).  Also  supported  by  the 
robust  economic  recovery,  new  bank  lending  to 
firms  and  households,  in  particular  to  small  and 
medium  enterprises  (SMEs)  and  households  for 
other than real estate purposes, continues to grow, 
in 
(see 
turn 
Graph 4.2.3). 

supporting  economic  activity 

Graph 4.2.3:  Bank loans to the private sector 

Source: Eurostat, own calculations. 

Real  GDP  growth  has  become  the  main  driver 
of  households’  deleveraging.  As  the  household 
sector  moved  from  a  net  borrowing  to  a  net 
lending  position  in  Q1-2011  (see  Graph 4.2.6),  it 
actively  reduced  its  high  debt,  from  84.7 %  of 
GDP in Q2-2010 to 65.2 % in Q3-2016. This trend 
was  driven  by  the  negative  net  credit  flows. 
However,  the  decrease  in  household  borrowing  is 
currently 
household 
deleveraging  process  has  been  more  gradual  than 
for  the  corporate  sector,  as  most  household  loans 
are  long-term  housing  mortgage  loans,  which  are 
written  off  by  banks  less  often  than  corporate 
loans.  With  nominal  growth  gaining  momentum, 
the  deleveraging  is  likely  to  accelerate  (see 
Graph 4.2.5),  while  sustainability  analyses  reveal 
persistent household deleveraging needs. 

decelerating. 

The 

The decrease in the stock of loans observed in late 2012 and 
early 2013 was due to the transfer of assets to SAREB. 
Source: BdE, own calculations. 

4.2.2.   PRIVATE SECTOR DELEVERAGING 

since  mid-2014, 

Although  declining 
the 
indebtedness  of  the  Spanish  economy  remains 
high, the stock of private non-financial sector debt 
amounting 
to  167.5 %  of  GDP,  Q3-2016. 
Mirroring the net external liabilities, the high level 
of  debt  remains  a  macroeconomic  imbalance,  the 
associated  financial  burden  constraining  domestic 
demand and increasing vulnerability to interest rate 
shocks. In the wake of the crisis, the debt-to-GDP 
ratio  significantly  increased,  but,  since  then,  its 
composition  has  been  shifting  from  the  private  to 
the  public  sector,  in  line  with  the  deleveraging 
process 
(see 
in 
Graph 4.2.4). 

undertaken 

former 

the 

32 

-30-20-1001020304007080910111213141516% y-o-yTotal non-MFI private sectorNon-financial corporatesHouseholds & NPISH05010015020025030035040004q105q106q107q108q109q110q111q112q113q114q115q116Q1% of GDPFinancial corporationsGovernmentHouseholdNon financial corporationsPrivate non-financial sector 
 
 
4.2. Financial sector and private sector deleveraging 

Graph 4.2.5:  Breakdown  of y-o-y changes in households’ 

Graph 4.2.7:  Breakdown of y-o-y changes in NFCs’ debt-to-

debt-to-GDP ratio 

GDP ratio 

Source: Eurostat, own calculations. 

Source: Eurostat, own calculations. 

to 

in 
interest 

The  financial  position  of  Spanish  households 
2016 
strengthen 
continued 
(see 
Graph 4.2.6).  With 
rates  and 
low 
adjustable  rate  loans  prevailing  in  the  Spanish 
mortgage  market,  the  financial  burden  borne  by 
households has been falling rapidly. Together with 
labour  market  improvements  and  growing  gross 
disposable 
to 
the 
households  has  been  declining  since  the  peak  of 
7.1 %  in  Q1-2014  to  5.3 %  in  Q3-2016  (see 
Graph 4.2.1).  

ratio  of  NPLs 

incomes, 

Graph 4.2.6:  Households’ financial assets acquisition 

to  a  net 

Deleveraging  in  the  corporate  sector  is  being 
compatible  with  an  increase  in  investment.  In 
2009,  the  corporate  sector  in  Spain  turned  from  a 
net  borrower 
lender  position  (see 
Graph 4.2.7),  and,  since  2012,  negative  credit 
flows  have  been  the  main  driver  of  the  fall  in 
corporate  debt-to-GDP  ratio,  clearing  of  debt 
occurring  at  a  faster  pace  than  new  lending. 
is  now 
the  deleveraging  process 
However, 
increasingly  driven  by  real  growth,  as 
the 
improvement  of  economic  conditions  have  gone 
hand-in-hand  with  an  increase  in  new  credit.  As 
investment continues to grow, the corporate sector 
can  be  expected  to  move  back  to  a  net  borrower 
position.  

The  financial  position  of  the  corporate  sector 
has been steadily improving since 2013. The net 
financial  wealth  of  firms  increased  for  a  third 
consecutive  year,  although’  still  remaining  in  the 
negative territory, from  -133.4 % of GDP in 2013 
to  a  forecast  -108.6 %  in  2016  (see  Graph 4.2.8). 
The  improvement,  consistent  with  the  sustained 
deleveraging process, was driven by the decreases 
on the liabilities side which countervailed the ones 
on  the  assets  side.  While  the  overall  decrease  on 
the assets side was reflected across almost all asset 
classes,  the  total  drop  in  liabilities  is,  to  a  great 
extent, supported by reductions in corporate loans. 

Source: Eurostat, own calculations. 

33 

-10-505101506Q107Q108Q109Q110Q111Q112Q113Q114Q115Q116Q1y-o-y changeCredit flowReal growthInflationOther changesD/GDP, change-10-505101501Q102Q103Q104Q105Q106Q107Q108Q109Q110Q111Q112Q113Q114Q115Q116Q1% of GDPnet other accountsmiscellaneous assetssecurities & equityother insurancepension & life insurancedepositstotal fin asset acq (ex F8)new loans borrowed-20-15-10-505101520253006Q107Q108Q109Q110Q111Q112Q113Q114Q115Q116Q1y-o-y changeCredit flowReal growthInflationOther changesD/GDP, change 
 
 
 
 
4.2. Financial sector and private sector deleveraging 

for  SMEs 

remains  higher 

Graphs 4.2.9  &  4.2.10(29)).  The  probability  of 
bankruptcy 
in 
construction,  as  compared  to  manufacturing  or 
other  sectors.  In  the  period  2008-2014,  between  a 
quarter  and  a  half  of  SMEs  in  construction  had 
difficulties  generating  sufficient  cash  flow  to  pay 
their interest obligations.  

Graph 4.2.9:  The interest coverage ratio for Spanish 

construction SMEs 

Source: BACH-ESD database, own calculations 

(29)  Moving  upwards  on  the  y-axis  illustrates  the  increased 
ability of the SMEs to service their debt, while moving into 
increased  possibility  of 
negative 
bankruptcy; 
the 
calculated ratios for the SMEs.   

the  corresponding  values 

territory  suggests 

represent 

Graph 4.2.8:  NFCs’ balance sheet and financial position 

Source: Eurostat, own calculations. 

4.2.3.  INSOLVENCY REFORM 

The number of insolvencies has been decreasing 
since  2013,  reflecting  the  ongoing  economic 
recovery. Reforms undertaken in 2014/2015 made 
corporate  insolvency  and  out-of-court  procedures 
more  flexible.  The  corporate  insolvency  law  (26), 
adopted  in  2015,  reformed  the  in-court  debt 
scope  of 
expanding 
restructuring  by 
agreements.  Although  the  number  of  insolvency 
cases continued  to  fall  (27),  the  declining recourse 
to  insolvency  can  be  explained  by  the  improving 
ability  of  Spanish  firms  to  meet  their  interest 
payments.  

the 

The  ability  of  Spanish  SMEs  to  meet  their 
interest  payments  has  improved.  The  ability  to 
service debt is determined by the level of earnings 
and  debt  and  by  the  paid  interest.  Improving 
earnings and lower interest rates made it easier for 
firms to service their debt. Since 2012, the interest 
coverage ratios (28) have been increasing for SMEs 
operating  in  manufacturing  or  construction  (see 

(26)  Law 9/2015 on urgent measures in the area of insolvency. 
(27)  As INE's Q3-2016 Insolvency Statistics bulletin reveals. 
(28)  Interest  coverage  ratio  is  defined  as  earnings  before 
interest, taxes, dividend payments and cost of amortisation 
(EBITDA)  divided  by  interest  expenses  of  accumulated 
financial  debt.  It  measures  how  many  times  a  business 
could make interest payments on its debt with its EBITDA. 
The lower the ratio, the more a business is vulnerable to an 
increase in interest rates. 

34 

-400-200020040001020304050607080910111213141516*% of GDPL, fin. deriv. & employee stock op. (F7)A, fin. deriv. & employee stock op. (F7)A, currency and deposits (F2)L, other accounts (F8)A, other accounts (F8)L, insurance, pensions & s.g. (F6)A, insurance, pensions & s.g. (F6)L, equity and inv. fund shares (F5)A, equity and inv. fund shares (F5)L, loans (F4)A, loans (F4)L, debt securities (F3)A, debt securities (F3)Net financial assets-1500-1000-5000500100015002000250000020406081012141st quartilemedian3rd quartileWeighted mean 
 
                                                           
 
 
                                                           
 
4.2. Financial sector and private sector deleveraging 

Graph 4.2.10: The interest coverage ratio for Spanish 

manufacturing SMEs 

Source: BACH-ESD database, own calculations 

The  number  of  personal  bankruptcy  cases  is 
increasing. The reform of the personal insolvency 
framework, adopted in 2015(30), set provisions for 
full  debt  relief  for  individuals  and  extended  the 
number  of  beneficiaries  entitled  to  mortgage  debt 
restructuring.  Although  the  new  legislation  came 
into  force  when  the  economy  was  experiencing  a 
strong rebound, the number of personal bankruptcy 
cases started increasing at a fast pace in the course 
of 2016. 

(30)  Law 25/2015 on second chance. 

35 

-500050010001500200000010203040506070809101112131st quartilemedian3rd quartileWeighted mean 
 
 
                                                           
4.3.  LABOUR MARKET, EDUCATION AND SOCIAL POLICIES 

4.3.1.  LABOUR MARKET 

and 

segmentation 

labour  market  keeps 

improving,  but 
The 
remain 
unemployment 
important  challenges.  Previous  labour  market 
reforms,  wage  moderation  and  economic  growth 
are  supporting  job  creation  and  contribute  to 
reducing the job destruction rate, leading to falling 
unemployment.  Still,  at  18.9 % 
in  Q3-2016 
unemployment  remains  very  high,  especially  for 
the  young  (41.9 %,  15-24  years  old)  and  low-
skilled workers (27 %, ISCED levels 0-2). Almost 
half of the unemployed have been without a job for 
more than one year (2.1 million people or 9.1 % of 
the  labour  force)  and  17.8 %  for  more  than  four 
years. Wages are expected to increase as inflation 
gradually picks up, which may affect job creation. 
Moreover,  Spain  has  one  of  the  highest  shares  of 
temporary employment in the EU. Unemployment 
and  labour  market  segmentation,  together  with 
ageing  and  gaps  in  education,  contribute  to  low 
potential  growth  and  one  of  the  highest  levels  of 
inequality in the EU.  

Measures  to  step  up  the  specific  support  for 
young people are beginning to bear fruit. After a 
slow start, implementation of the Youth Guarantee 
(YG) improved in 2016, partly thanks to reinforced 
outreach  mechanisms (31).  A  reform  adopted  in 
December  2016  will 
increase 
coverage  as  it  envisages  that  all  young  people 
registered  as  unemployed  with 
the  Public 
Employment  Services  (PES)  are  automatically 
eligible  for  support  from  the  YG  as  from  2017. 
The  quality  of  the  offers  proposed  to  the  YG 
beneficiaries  will  depend  on  the  capacity  of  the 
PES  to  meet  the  increased  demand  for  services 
resulting from this reform. 

significantly 

for 

support 

to 
the 

taking  measures 

strengthen 
Spain 
is 
individual 
long-term 
unemployed.  Previously  adopted  measures  (e.g. 
the PREPARA plan for professional reskilling and 
the employment activation programme, PAE) have 
not  yet  helped  to  significantly  improve  individual 
support  for  the  long-term  unemployed.  In  2016, 
Spain  allocated  EUR 515 million  over  three  years 

(31)  In  December  2016 400 000  young  people  not 

in 
employment, education or training (NEETs) had registered 
in the YG, while the share of NEETs registered in the YG 
had already improved from 2 % in 2014 to 10.7 % in 2015.  

to  a  new  joint  action  plan (32)  to  support  the 
employment  services  in  providing  assistance  to 
one million long-term unemployed until 2018. The 
plan envisages profiling and individual integration 
pathways,  for  which  a  profiling  tool  is  being 
developed, and an upper limit of 120 cases handled 
per counsellor. The success of the plan will depend 
on the capacity of the regional PES, as well as on 
the stability of funding. 

to 

job  placement  (2 %  of 

Indicators  point  to  a  still  weak  performance  of 
the PES in providing services to both employers 
and  jobseekers.  The  share  of  vacancies  handled 
by  the  PES  is  very  low,  as  well  as  their 
contribution 
total 
vacancies  against  10 %  on  average  in  the  EU, 
based on Labour Force Survey data). The share of 
the unemployed having contacted the PES to seek 
work  is  the  lowest  in  the  EU  (27.5 %  in  2015 
against  48.3 %  in  the  EU-28).  This  is  reflected  in 
Spain's relatively low expenditure on active labour 
(ALMPs) (33).  Moreover,  a 
market  policies 
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. 

The  new  government  has  announced  further 
labour market measures. In particular, it intends 
to  promote  an  integral  agenda  on  employment 
quality. It has also announced an upcoming law to 
support  the  self-employed,  including  through  the 
extension  of  the  social  contribution  flat  rate 
scheme  (tarifa  plana)  of  EUR 50  from  six  to 
twelve months. At the same time, the government 
has  increased  the  upper  threshold  for  income 
subject  to  social  contributions  by  3 %  from  2017 

(32)  Programa  de  acción  conjunta  para 

la  atención  a 
desempleados  de  larga  duración.  For  comparison,  the 
national budget allocated to active employment policies in 
2016  was  EUR 5.2  billion  (including  EUR 129  million 
allocated  to  the  new  joint  action  plan),  according  to  the 
annual plan of employment policies. 

(33)  Between 2008 and 2013 expenditure on ALMP per person 
willing to work decreased by 66 %, the strongest decrease 
in  the  EU.  The  share  of  the  unemployed  benefiting  from 
ALMPs decreased from more than 80 % in 2008 to 20 % in 
2013  and  less  than  1 %  of  the  low-skilled  unemployed 
(0.29 %  of  low-skilled  long-term  unemployed)  benefited 
from 
(2016).  Since 
2014 Spain has increased the budget allocated to ALMPs. 

training  programmes. 

Jansen 

36 

 
 
                                                           
                                                           
4.3. Labour market, education and social policies 

Graph 4.3.1:  Share of temporary employees, transition rates 
from temporary to permanent, wage premium 
for permanent and full-time temporary 
employed at risk of not being entitled to 
unemployment benefits. 

(1) Share of temporary employees in total employees (15-64, 
LFS, 2015) 
(2) Share of workers moving to a contract of up to 3 months 
in total transitions from unemployment to employment 
(LFS,2015) 
(3) Transition from temporary employee to permanent 
employee (Eurostat, 2014) 
(4) Wage premium for permanent workers (A. Turrini and A. 
Dias da Silva, 2015), expressed as log points multiplied by 
100. 
(5) Full-time temporary employed at risk of not being 
covered by unemployment benefits 
Source: Eurostat, Turrini and Dias da Silva (2015), Research 
note Non-standard employment and access to social 
security benefits (2015). 

The  widespread  use  of  temporary  contracts 
might be explained by multiple factors. The use 
of 
to 
temporary  contracts  allows  companies 
respond flexibly to fluctuations in demand, but the 
use of temporary contracts may reveal rigidities in 
wage  structures  or  a  too  short trial  period. Higher 
costs  for  permanent  workers  are  related  to  higher 
dismissals  costs,  aggravated  by  uncertain  and 
cumbersome  dismissal  procedures,  and  to  less 
flexible  working  conditions.  The 
labour 
reforms  addressed  some  of  these  issues.  The 
sectoral  composition  of 
the 
dominance  of  small  companies  or  uncertainty 
about  future  economic  developments  may  also 
play a role. 

the  economy, 

last 

(see  section  4.1) (34).  This  will  contribute  to 
reducing  the  deficit  of  the  social  security  system, 
but might entail adverse employment effects.  

After  years  of  almost  complete  freeze,  the 
minimum  wage  has  increased  by  8 %  in  2017. 
The  new  minimum  wage  is  set  at  EUR 707.6  a 
month  (14  payments  a  year).  This  comes  after  a 
very limited nominal increase (2.2 % in cumulated 
terms)  between  2011  and  2016,  below  cumulated 
inflation  (2.8 %)  and  productivity  growth  (5 %). 
The minimum wage in force until 2016 was one of 
the  lowest  in  the  EU (35),  although  the  share  of 
employees receiving it was also low. This suggests 
that  the  immediate  impact  of  the  increase  on  in-
work  poverty,  job  creation  and  the  overall  wage 
distribution  will  be  modest.  In  addition,  the 
Parliament is due to discuss a proposal that would 
increase  the  minimum  wage  significantly  and 
envisages full indexation to inflation. 

The share of temporary work, most of which of 
short  duration,  is  still  very  high.  The  share  of 
temporary  employees  of  total  employees  dropped 
during  the  first  years  of  the  crisis,  as  they  bore 
most of the adjustment, but increased after 2013 to 
reach  26.5 %  in  Q4-2016,  still  the  second  highest 
share  in  the  EU  (Graph 4.3.1).  While  temporary 
work  is  most  frequent  among  the  young  (15-24 
years  old)  and  the  low-skilled,  it  also  affects 
medium-  and  high-educated  workers  more  often 
than  in  the  rest  of  the  EU  (Graph 4.3.2).  This, 
together with very low yearly transition rates from 
temporary to permanent contracts (10.2 % in 2015 
compared  to  an  EU  average  of  23 %  in  2014) 
suggests  that  temporary  jobs  are  not  a  stepping 
stone  to  stable  careers.  In  addition,  around  one 
third of temporary workers have contracts of up to 
three  months.  This  is  larger  than  the  20 %  EU 
average and national data indicates that one fourth 
of  the  contracts  signed  in  2016  had  a  duration  of 
up to seven days. 

(34)  The  8 %  increase  in  the  minimum  wage  discussed  below 
also  implies  an  automatic  increase  in  the  lower  threshold 
for income subject to social security contributions. 

(35)  As  a  proportion  of  median  and  mean  wages  (European 

Commission, 2016a). 

Several forms of atypical employment coexist in 
Spain.  The  most  frequent  types  of  fixed-term 
contracts  are  those  used  to  respond  to  production 
needs  or  to  carry  out  a  specific  task  or  service 

37 

0102030405060SharetemporaryTransitionto veryshort termTransitiontopermamentWagepremiumforpermanentRisk nocoverageUBsEU28ES 
                                                           
 
4.3. Labour market, education and social policies 

implications due to lower contributions and higher 
expenditure on benefits. 

Segmentation also contributes to inequality and 
has  significant  social  consequences.  Many 
workers  alternate 
fixed-term  contracts  with 
unemployment  spells.  The  wage  gap  between 
permanent  and  temporary  workers  is  estimated  at 
between 10 % and 19 % (Dias da Silva, A. and A. 
Turrini,  2015  and  OECD,  2015),  and  rises  with 
age. Together with higher probabilities of repeated 
unemployment  spells  and  of  working  part-time, 
this  results  in  lower  annual  earnings  and  higher 
poverty  risks  among  temporary  workers  (23.3 % 
against 5.9 % for permanent workers in 2015) (37). 

firms’ 

reforms 

increased 

from  unemployment 

The  impact  of  recent  reforms  in  reducing 
segmentation  has  been  mildly  positive.  The 
2010-2012 
internal 
flexibility  and 
introduced  a  new  permanent 
contract for full-time workers in small companies, 
with  an  extended  probation  period  of  12  months 
(entrepreneurs’  contract).  There  are  indications 
that  the  reforms  have  increased  the  probability  of 
into  permanent 
moving 
employment  from  1.7 %  to  2.6 %,  while  the 
probability  of  moving  from  unemployment  to 
temporary employment is still 4.6 times higher (it 
the  crisis), 
times  higher  before 
was  seven 
suggesting  a  positive  but  small  effect  in  reducing 
segmentation 
and  Mestres 
(García  Pérez 
Domenech, 2016). A plan for fighting employment 
tripartite 
segmentation  agreed  upon 
agreement  of  29 July  2014  has  not  been  further 
developed (European Commission, 2016e). 

the 

in 

in  case  of 

The  remaining  gap  in  firing  costs  between 
temporary  and  permanent  contracts,  and 
uncertainty 
legal  dispute  may 
incentivise  fixed-term  hiring.  The  2012  reform 
increased  severance  payments 
temporary 
workers,  while  it  reduced  those  for  permanent 
contracts, namely in case of unfair dismissal (from 
45 to 33 days’ pay per year of service, with a cap 
at  24  months  instead  of  42).  According  to  OECD 
summary  indicators  on  employment  protection 
legislation (38), the gap between overall protection 

for 

(37)  This  gap  is  much  higher  than  for  the  EU  average:  15.4 % 

against 5.6 %. 

(38)  Spain  does  not  stand  out  as  having  particularly  stringent 
rules and procedures to hire and fire workers compared to 

(45 %  and  40 %  of  temporary  contracts  in  2016 
respectively) (36).  Other  forms  of  atypical  work 
include  discontinuous  permanent  contracts,  which 
are frequent in seasonal jobs, as well as temporary 
agency  contracts.  There  are  also  concerns  about 
the  use  of 
‘bogus’  self-employment  as  a 
replacement  for  standard  employees.  In  addition, 
while  part-time  work  is  less  widespread  than  in 
other  Member  States,  a  large  share  of  it  is 
involuntary  (in 2015  more  than  60 %  of part-time 
workers  could  not  find  a  full-time  job  and  this 
percentage  has  almost  doubled  in  the  last  ten 
years). Almost three quarters of part-time workers 
are women. 

Graph 4.3.2:  Shares of temporary employees by age and 

education level (2015) 

Source: Eurostat 

The  widespread  use  of  temporary  work  may 
harm productivity growth. There is evidence that 
high  shares  of  temporary  work  harms  total  factor 
productivity  growth  through  various  channels. 
These  include  limited  incentives  for  workers  to 
acquire firm-specific knowledge, lower on-the-job 
training  opportunities  (e.g.  Cabrales  et  al,  2014), 
smaller  workers’  effort  (Dolado  et  al,  2011)  and 
concentration  of  temporary  jobs  in  production 
opportunities with short-expected durations (Cahuc 
et al, 2016). This may bias the production structure 
towards less productive activities. Moreover, short 
fiscal 
employment 

negative 

spells 

have 

(36)  There  are  also  fixed-term  contracts  to  replace  workers  on 
leave (8 % of temporary contracts) as well as apprentice or 
training contracts and traineeships. 

38 

0102030405060708015-2425-4950-64Loweduc.Mediumeduc.Higheduc.EU28ES 
 
                                                           
                                                           
 
4.3. Labour market, education and social policies 

termination  of  a 

for 
temporary  replacement 
contract  (contrato  de  interinidad).  Following  on 
from  the  latter  CJEU  judgment,  the  competent 
Spanish  court  ruled  that  the  worker  in  question 
should  receive  compensation  equivalent  to  that  of 
a permanent worker. The Government has set up a 
panel  of  experts  with  government  and  social 
partner  representatives  to  analyse  the  rulings  and 
make  a  proposal  to  translate  them  into  Spanish 
legislation. 

to 

at 

aimed 

transform 

incentives 

Hiring 
reducing 
segmentation  are  not  always  well  targeted.  At 
the  national  level,  there  are  a  wide  variety  of 
incentives, including rebates in social contributions 
or lump-sum subsidies to hire on a permanent basis 
into  open-ended 
temporary 
and 
contracts.  In  2015,  10.9 %  of  subsided  contracts 
were  to  hire  workers  with  permanent  contracts 
(mainly for young or older workers in small firms). 
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.  Moreover,  research 
shows  that  subsidies  entailed  deadweight  and 
substitution  effects,  i.e.  they  either  were  not 
effective,  or  incentivised  the  replacement  of  non-
subsidised workers. 

4.3.2.  EDUCATION 

High  early  school  leaving  (ESL)  rates  and  a 
high  share  of  low-skilled  people  among  the 
adult  population  remain  major  challenges.  The 
ESL  rate (41)  further  declined  to  reach  19 %  in 
2016,  but  remains  among  the  highest  in  the  EU. 
ESL  rates  vary  greatly  across  regions,  due  to  the 
high  demand  for  low-skilled  workers  in  given 
areas  but  also  linked  to  students’  socio  economic 
or  migrant  background.  Spain  also  has  the  third 
highest share of low-skilled people (ISCED 0-2) in 
the  adult  population  (42.6 %  in  2015),  which 
hardly  declined  in  the  last  10  years  among  the 
younger  age  group 
(25-29).  This  hampers 
productivity growth and fuels inequalities. 

Student’s  performance  at  school  is  stable  and 
around  the  EU  average,  but  varies  greatly 

(41)  18  to  24  year  old  who  have  at  most  lower  secondary 
education and are not in further education and training. 

of  permanent  and  temporary  workers  has  not 
changed significantly, and severance payments for 
permanent  workers  remain  comparatively  high  in 
case of fair dismissals, at long tenures. The gap in 
severance  payments  between  different  types  of 
contracts  might limit  the  incentives for  employers 
to  hire  on  permanent  contracts.  Incentives  may 
also be reduced by potentially higher costs in case 
of  dispute  (if  the  dismissal  of  a  permanent 
employee is judged ‘unfair’ in court, the employer 
would  need  to  pay  a  higher  severance  payment). 
According  to  Jimeno  et  al.  (2015)  during  1984-
2010  about  70 %  of  dismissal  cases  resolved  in 
court  were  declared  ‘unfair’,  and  this  percentage 
has  increased after  the  crisis.  Spain  stands out for 
having  a  high  number  of  labour  law  cases 
compared  to  the  number  of  employees  (European 
Commission, 2015a). 

limiting 

the  abuse  of 

The  reinforcement  of  labour  inspections  is 
showing  positive  results  in  reducing  the  abuse 
of  temporary  contracts.  Weak  enforcement  of 
regulations 
temporary 
contracts  had  been  identified  as  an  issue  in  Spain 
(e.g.  Bentolila  et  al.,  2012).  In  this  regard,  labour 
inspections  have  been  improved  by  targeting 
action towards those areas where abuse appears to 
be  more  widespread  and  by  increasing  staff  and 
improving  their  expertise  regarding  temporary 
work.  Between  2012  and  October  2016,  the 
number  of  yearly  inspections  has  increased  by 
more  than  60 %  and  230 000  temporary  contracts 
were  transformed  into  permanent  ones.  In  2015, 
in 
more 
than  20 %  of 
temporary  contracts  being 
into 
permanent contracts. 

inspections  resulted 

transformed 

The  Court  of  Justice  of  the  EU  (CJEU)  in 
September  2016  issued  three  rulings  related  to 
the  use  of  fixed-term  contracts  in  Spain (39). 
These 
renewal  of 
successive  fixed-term  contracts  when  needs  were 
permanent (40)  and  the  payment  of  compensation 

judgments  concerned 

the 

other  Member  States,  but  severance  payments  at  longer 
tenures are high in international comparison.  

(39)  De  Diego  Porras  (C-596/14),  Martínez  Andrés  (joined 
cases C-184/15 and C-197/15) and Pérez López (C-16/15). 
(40)  Firms have to provide objective reasons for the renewal of 
fixed-term  contracts  and  certain  rules  apply  on  the 
maximum  duration  of  successive  temporary  contracts  and 
the  number  of  renewals  allowed,  in  line  with  Directive 
1999/70/EC on Fixed-Term Work. 

39 

 
                                                                                   
                                                           
4.3. Labour market, education and social policies 

discussion).  The  planned  yearly  nation-wide 
students’  evaluations  have  been  substituted  by 
sample-  based  studies  without  academic  effects. 
Several  regions  are  also  introducing  bilingual 
teaching in primary and secondary schools. A first 
study related to science teaching conducted in one 
of  the  Spanish  regions  suggests  that  the  lack  of 
foreign  language  proficiency  of  teachers  and 
parents  may  have  a  negative  impact  on  students’ 
learning  especially  in  science  (Anghel,  Cabrales, 
Carro 
funding 
(EUR 11.7 million)  has  been  earmarked  to  hire 
assistants  and  support  teachers’  language  courses, 
but its impact is not clear at this stage. It should be 
mentioned that the upcoming Pact for Education is 
expected to improve the initial training of teachers 
and  include  performance-based  remuneration  in 
their career paths to improve the quality of school 
education. 

Additional 

2016). 

its 

increase 

Spain  is  making  efforts  to  strengthen  basic 
vocational  education  and  training  (VET)  but 
enrolment rates are low so far. The strengthening 
of  VET  is  intended  to  be  the  cornerstone  of  the 
national  strategy  to  reduce  ESL.  The  government 
approved  27  new  qualifications  of  the  basic 
VET (44)  in  2016,  which  should  enrich  the  offer 
and 
attractiveness.  However, 
enrolment  rates  are  low,  which  might  be  partly 
explained by  the  slow  roll out of  the  programmes 
in  some  regions  or  the  limited  relevance  of  the 
degrees for the local economies. In several regions 
transitions  from  the  first  to  the  second  year  and 
promotions  from  basic  to  medium  VET  (upper 
secondary) 
to 
implementation  flaws  and 
lack  of  resources 
(European  Commission,  2016).  In  addition,  the 
number  of  students  enrolled  in  medium  VET 
programmes  decreased  in  2015-2016  for  the  first 
time since 1990. 

probably 

low, 

due 

are 

Reforms of vocational training for employment 
are being implemented. In 2015, Spain completed 
the  reform  of 
training  for  employment 
subsystem  (Subsistema  de  Formación  para  el 
Empleo) as part of the broader reform of the VET 
system  to  increase  its  attractiveness  and  improve 
young  people’s  skills.  In  the  new  governance 

the 

(44)  Formación Profesional Básica, FPB 2-year alternative path 
for students in lower secondary education to reach medium 
vocational education and training qualification 

across  regions.  According  to  the  2015 OECD 
Programme  for  International  Student  Assessment 
(PISA), pupils’ performance in Spain improved in 
low 
reading  and  maths.  The  proportion  of 
achievers is lower than the EU average in all three 
tested  fields.  However,  differences  between  well 
performing  regions  and  low  performing  ones  can 
exceed 40 points (equivalent to one school year) in 
the three fields, reflecting differences in the socio-
economic conditions of their populations and gaps 
in the effectiveness of their education system. The 
impact of socio-economic status is close to the EU 
average (42),  while  the  performance  gap  between 
non-immigrants and first-generation immigrants is 
relatively  small  (OECD,  2016).  The  results  of  the 
2015  Trends  in  International  Mathematics  and 
Science  Study  show  that  fourth  grade  students  in 
Spain  have 
their  mathematics  and 
improved 
science performance from 2011 to 2015.  

increase 
High  rates  of  grade  repetition 
inequality  and  education  costs.  In  2015,  more 
than  31 %  of  pupils  had  repeated  a  grade  during 
compulsory education in Spain, the second highest 
rate in the EU, even if slightly improved compared 
to  2012.  Rates  vary 
from  53 %  among 
disadvantaged  students  to  less  than  9 %  among 
advantaged  ones  (PISA  2016).  Grade  repetition 
increases  the  risk  of  school  drop-out,  lowers 
(OECD  2012)  and 
attainment  expectations 
increases 
affecting 
professional  achievement  and  wages.  The  cost  of 
grade repetition in Spain accounted for 8 % of the 
total education budget in 2012 (OECD 2013). 

inequalities, 

education 

to 

Spain  has 
improve 
taken  measures 
performance and basic skills with mixed results. 
Most  of  the  measures  set  out  in  the  Organic  Law 
for  Improvement  of  the  Quality  of  Education 
(LOMCE)  adopted  in  2013  are  now  implemented, 
but  their  continuation  depends  on  the  outcome  of 
the  Pact  for  Education (43) 
(currently  under 

(42)  Rates  of  low  achievers  are  below  10 %  among  the  upper 
social quarters while they overpass 30 % among the lower 
social quarters. 

(43)  Pacto  de  Estado  social  y  politico  por  la  educacion. 
Agreeing on this Pact was an electoral commitment shared 
by  all  political  parties.  The  process  was  launched  in 
November  2016.  A  dedicated  parliamentary 
sub 
commission  is  due  to  report  on  the  current  state  of  the 
education  system  in  Spain  and  make  proposals  for  a  new 
legal framework for education based on a wide social and 
political agreement. 

40 

 
                                                           
                                                           
4.3. Labour market, education and social policies 

4.3.3.  SOCIAL POLICIES 

in  the 

In  2014,  poverty  started  to  decrease  thanks  to 
labour 
improvement 
the  emerging 
market,  but  not  all  groups  were  benefiting. 
Based  on  2015  SILC  data(47),  the  share  of  people 
at  risk  of  poverty  or  social  exclusion  declined 
slightly  to  28.6 %,  but  remained  far  above  the 
2008  rate  and  the  EU  average.  It  was  especially 
high for the working age population and children. 
The at-risk-of-poverty gap (48) increased, reflecting 
the worsening situation of those who remain out of 
work, such as the long-term unemployed and their 
households. 

In-work  poverty  was  still  on  the  rise.  In  2014, 
13.1 % of Spanish employed people were at risk of 
poverty.  In-work  poverty  was  especially  high  and 
rising  for  people  on 
temporary  contracts  or 
working  part-time  (Graph 4.3.3).  Other  drivers  of 
in-work poverty in  Spain  were  low hourly wages, 
and 
level 
(European Commission, 2016b). 

intensity  at  household 

low  work 

(47)  Note that 2015 SILC data refers to the 2014 situation (first 
year  of  recovery)  for  the  income  and  work  intensity 
components, while material deprivation refers to 2015. 

(48)  Between  2014  and  2015 

the  at-risk-of-poverty  gap 
increased from 33% to 35% for the working age population 
and  from  35%  to  40%  for  children.  It  measures  the 
difference  between  the  median  equivalised  disposable 
income  of  people  at-risk-of-poverty  and  the  poverty 
threshold. 

through 

the  system 

for  Training 

model,  the  role  of  social  partners  focuses  on 
strategic  planning  and  monitoring  while  the  PES 
the  new  State 
manages 
in  Employment 
Foundation 
(Fundación  Estatal  para  la  Formación  en  el 
Empleo). The reform also introduced the right to a 
twenty-hour  period  of  training  leave  for  workers 
with at least one year of seniority and the option of 
introducing  an  individual  training  account  for 
workers.  This  should  contribute  to  improving 
participation  in  lifelong  learning  activities  (9.9 % 
against 10.7 % in the EU). 

Employability of tertiary graduates remains an 
issue.  Spain’s  tertiary  educational  attainment  rate 
is still above the EU average, but the employment 
rate  of  recent  tertiary  graduates (45)  is  one  of  the 
lowest in Europe at 68.7 % in 2015, far below the 
EU  average  of  81.9 %.  Spain  also  has  the  highest 
share  (37 %)  of  tertiary  graduates  working  in 
occupations considered as not requiring university 
education (46). In 2015, a graduate tracking system 
to  raise  awareness  about  future 
was  set-up 
employment 
university 
among 
applicants. 

prospects 

Spain  is  taking  measures  to  foster  cooperation 
between universities and business. Spain had the 
highest  number  of  applications  to  the  Knowledge 
Alliance  EU  grants  in  2016,  which  shows  the 
interest  of  education  and  research  institutions  for 
university-business  cooperation.  However, 
the 
reduced  mobility  of  students  and  academic  staff, 
lack  of  incentives  to  engage  with  businesses  in 
teachers’  career  progression  schemes  and  the 
remain 
rigidity 
significant 
and 
innovation.  The  government  has  approved  a 
number  of  fiscal  incentives  to  help  businesses  to 
expand 
innovation  capacity  by 
encouraging them to hire research staff and to offer 
apprenticeships  to  university  and  VET  students. 
The  government  envisages  expanding  the  dual 
model  to  higher  education  and  some  universities 
have already signed agreements with companies to 
develop dual training in engineering programmes. 

cooperation 

governance 

university 

obstacles 

limited 

their 

of 

to 

(45)  People aged 20-34 who left tertiary education between one 

and three years before the reference year. 

(46)  37 % of tertiary graduates worked in occupations classified 
under ISCO categories 4-9 (EU:23 %), considered by ILO 
(2007) as not requiring a tertiary degree (LFS). 

41 

 
                                                           
                                                           
4.3. Labour market, education and social policies 

Graph 4.3.3:  In-work-poverty rate, groups, Spain 

2015),  suggesting  barriers  to  access  to  childcare 
for low-income parents. 

old 

except 

functions, 

Social  expenditure  stabilised  in  2014  after  four 
years  of  decline  and  has  low  effectiveness.  In 
2014, total social protection expenditure stabilised 
in real terms, after significant reductions affecting 
benefits 
all 
(Graph 4.3.4).  The  drop  of  expenditure  on 
unemployment  benefits  was  compensated  by  a 
further increase of spending on pensions, and by a 
slight increase on health care, for the first time  in 
five  years.  Overall,  the  redistributive  impact  of 
both  taxes  and  social  transfers  remains  below  the 
EU  average 
in  European 
(see  chart  1.45 
Commission, 2016b). 

age 

In-work-poverty rate (% of employed). Employed who have 
an equivalised disposable income below 60 % of the 
national equivalised median income. 
Source: Eurostat, EU-SILC. 

Child poverty remained high mainly because of 
parents'  labour  market  situation  and  weak 
family support. Though declining, a high share of 
children  (12%  in  2014)  still  lived  in  jobless 
households.  Children  whose  parent(s)  work  faced 
the  highest  risk  of  poverty  in  the  EU28  (22.6 %), 
in  particular  if  living  in  single  earner  families 
(39.5 %). This also reflects the weakness of family 
support,  in  cash  and  in  kind (49).  In  2013,  family 
expenditure  per  child  represented  7.6 %  of  GDP 
per head against 13 % on average in the EU (Chart 
1.28  in  European  Commission,  2016b).  Family 
benefits  are  also  poorly  targeted (50)  (European 
Commission,  2015)  and  when  taking  into  account 
the impact of tax credits, the tax-benefit system is 
overall  slightly  regressive (51)  (Canto,  2012).The 
impact  of  social  transfers  on  reducing  child 
poverty further deteriorated and was lower than the 
EU average (21.1 % in comparison to 39 % in the 
EU). In addition, there is a strong social gradient in 
the  uptake  of  childcare  (European  Commission, 

(49)  Spain  also  spends  relatively  little  on  family  expenditure, 
housing and social exclusion which are especially relevant 
for poor families with children. 

(50)  In  2014,  the  share  of  family  benefits  in  household 
disposable  income  for  children  in  the  lowest  income 
quintile was below 2 % in comparison to 20 % in the EU. 
(51)  Despite  the  tax  reductions  for  working  mothers  with 
dependent  children  under  3  years  of  age  envisaged  by  the 
Integrated  Plan  for  Family  Support  (PIAF).  Canto  et  al., 
2012.  

Graph 4.3.4:  Changes in social protection expenditure in 

real terms, and contributions by function 

Social protection expenditure refer to income maintenance 
or support in cash or kind in connection to  
UNEMPLOY: unemployment 
OLDSURVIV: old age or the death of a family member 
FAM: family or children 
SICKDISAB: sickness and disability 
HOUSEEVCLU: housing and social exclusion 

Source: European Commission calculations based on 
ESSPROS and Price Statistics 

for  unemployment  benefits 

Spain's  income  support  schemes  have  limited 
coverage  and  effectiveness.  While  adequate 
indicators 
and 
minimum  income  are  slightly  below  the  EU 
average 
(Chart  1.41,  European  Commission, 
2016b), survey data reveal gaps in coverage. While 
the effective coverage of unemployment benefits is 
around  the  EU  average  (34%),  only  61 %  of  the 
jobless  poor  receive  income  support  (all  benefits 

42 

051015202530101112131415% of employedTotalTemporaryPart-time-6-4-202468101202030405060708091011121314% y-o-yFAMHOUSEEXCLUOLDSURVIVSICKDISAUNEMPLOY 
 
                                                           
 
 
4.3. Labour market, education and social policies 

other than old age) against 80 % in the EU (Charts 
1.34  and 1.36:  European  Commission, 2016b).  At 
the  same  time,  pensions  play  an  indirect  role  in 
supporting the working age people through family 
solidarity  mechanisms  such  as  inter-household 
transfers and multigenerational households. 

knowledge  on  the  role  and  working  methods  of 
their  counterparts;  operational  structures  that  do 
not  take  into  account  the  need  to  cooperate  with 
local  players;  and 
other  services  and  other 
entitlements  to  services  that  are  not  linked  to  an 
assessment of needs. 

Fragmentation and large regional disparities in 
income  guarantee  schemes  could  explain  their 
low  average  effectiveness.  Ayala  et  al.  (2106) 
highlight great disparities in the level of protection 
provided  by  different  schemes,  as  well  as 
disparities  in  eligibility  conditions  and  in  the  link 
between  activation  and  protection  across  regions 
and  schemes (52).  The  study  also 
identifies 
loopholes  in  the  coverage  of  certain  categories  of 
households.  The  government  will  analyse  the 
findings of the study and work with the regions to 
improve the effectiveness of the schemes. In doing 
so  they  will  build  on  good  practices  identified  at 
the regional level, such as combining employment 
with  income  support  up  to  a  certain  level  of 
earnings. 
the 
income  guarantee  schemes 
fragmentation  of 
to 
introduces  discontinuities 
beneficiaries  and  hampers 
the  delivery  of 
integrated pathways. To better coordinate national 
and 
the  government  has 
announced  the  introduction  of  a  personal  ‘social 
card’  that  will  register  all  benefits  granted  by 
different public administrations. 

regional  schemes, 

Jansen (2016) 

the  support 

suggests 

that 

in 

Coordination  between  employment  and  social 
services  at  regional  level  remains  a  challenge. 
Measures  to  reinforce  the  PES  (Section  4.3.1)  are 
likely to improve their capacity to support welfare 
to  work 
lack  of 
coordination  between  employment  and  social 
services  hampers 
the  provision  of  extended 
services  that  jobseekers  need  to  overcome  the 
face. 
multiple 
Identified 
they 
weaknesses (53) 
lack  of  mutual 

transitions.  However, 

barriers 

include 

the 

the 

(52)  The  study  includes  estimates  of  the  poverty  reduction 
effects  of  contributory  and  welfare  social  benefits.  They 
show  great  regional  disparities,  and  significantly  lower 
impact on children. The added effect of individual benefits 
not classified as pensions is also limited.  

(53)  National and regional authorities in charge of employment 
and  social  services  met  in  October  2016  in  Brussels  to 
reflect  on  measures  to  enhance  the  coordination  between 
employment  and  social  services  in  Spain.  Conclusions: 
http://ec.europa.eu/social/BlobServlet?docId=16749&langI
d=en.  

The  provision  of  long-term  care  services  is 
improving,  but  it  differs  across  regions  and 
current needs are still not met. Although in 2016 
there  has  been  a  9%  increase  in  the  number  of 
people  receiving  services (54),  in  December  2016 
about one third of people recognised as dependent 
(348.240  out  of  1.21  million)  were  on  a  waiting 
list (55).  Wide  inequalities  in  access  to  long-term 
care  services (56)  persist  across  regions,  due  to 
large disparities in the number of places available, 
services  offered  and  prices.  In  addition,  regions 
bear an increasing share of the expenditure (57). 

The cost of energy weighs on some categories of 
poor  households.  In  2015,  the  burden  of  energy 
costs  for  Spanish  households  started  to  decrease, 
after  the  large  increases  recorded  between  2008 
and  2014.  However,  it  continued  to  increase  for 
low  income  households  with  children,  as  one  in 
four  still  experienced  difficulties  in  paying  utility 
bills  and  keeping  their  home  warm  (EU-SILC 
2015).  This  trend  may  reflect  the  fact  that  the 
social tariff for vulnerable consumers introduced in 
2009 (58) did not reach all low-income households, 
such as the working poor who were not eligible. In 
December  2016,  the  criteria  of  the  social  tariff 
were  amended (59)  with  a  view  to  better  targeting 

(54)  The  provision  of  services  includes  dependence  prevention 
services, remote care, home care, day and night centres and 
residential  care,  as  well  as  financial  support  to  cover  the 
cost of purchasing personal care services or to compensate 
the provision of home care by family members. 

(55)  SAAD  statistics  (System  for  Autonomy  and  Care  for 

Dependency)  

(56)  The  share  of  people  recognised  as  disabled  receiving 
benefits  varies  per  region  from  less  than  70%  to  nearly 
100% for grades 2 and 3, and from less than 20% to nearly 
100% for grade 1 (SAAD).  

(57)

http://www.directoressociales.com/images/documen

tos/dictamenes/doc-
dependencia/Informe%20%20Dependencia%207-
16%201%201.pdf  

(58)  Electricity  pricing  system  implying  a  25%  discount  for 
household  residential  consumers  with  contracted  power 
less  than  3  kW,  pensioners  receiving  minimum  benefits, 
large families or jobless households. 

(59)  Royal Decree in Law 7/2016, 23rd December 

43 

 
                                                           
                                                           
 
4.3. Labour market, education and social policies 

of 

low  income  households  and  strengthening  the 
protection 
consumers.  The 
participation  of  all  stakeholders,  such  as  regional 
and  local  governments  and  social  services  will  be 
key in implementing  

vulnerable 

44 

 
Finally,  as  the  scope  for  further  interest  rates 
reductions in the future appears limited, additional 
improvements  in  the  balance  of  primary  income 
seem unlikely. 

Graph 4.4.2:  Trade balance of goods (Jan-Nov), total and 

non-energy products 

4.4. INVESTMENT 

4.4.1.  EXTERNAL 

SUSTAINABILITY 

AND 

COMPETITIVENESS 

in  deficit,  but  has 

Much  of  the  current  account  adjustment  in 
recent years has been driven by improvement in 
the trade balance of goods. The trade balance of 
goods  remains 
improved 
considerably since 2007, accounting for more than 
half  of  the  adjustment  in  the  current  account  (see 
Graph 4.4.1). The trade surplus in services has also 
increased,  partly  due  to  an  increase  in  exports  of 
tourist  services,  but  also  of  other  services  with 
higher  value  added  (i.e.  such  as  consultancy, 
construction  services,  engineering  and  technical 
activities), which already constitute more than half 
of  Spanish  exports  of  services.  The  primary 
the 
income  balance  has  been 
reduction of investment income paid abroad due to 
the fall of interest rates and rates of return to equity 
during the crisis years.  

improved  by 

Graph 4.4.1:  Breakdown of external position 

Source: European Commission 

Source: Datacomex 

However,  the  current  account  adjustment  also 
reflects  a  structural  improvement  in  export 
performance.  In  cyclically  adjusted  terms,  the 
current  account  has  also  continued  to  improve, 
initially driven by a collapse of domestic demand, 
but increasingly 
structural 
reflecting 
improvement in export performance. However, the 
elasticity  of  imports  with  respect  to  final  demand 
remains high, and no significant changes in import 
substitution are detected yet at the aggregate level. 
Also,  after  years  of  cost-competitiveness  gains, 
Unit Labour Costs (ULC) have started to increase 
again  in  2015  and  converge  to  the  euro  area 
average. 

a 

improvement 

in  the  current 
Some  of  the 
account  has  been  due  to  transitory  factors.  
Some  of  the  improvement  in  the  trade  balance  of 
goods  has  been  driven  by  low  oil  prices,  and  in 
fact the non-energy trade balance, which recorded 
a  surplus  between  2012  and  2015,  turned  into  a 
deficit  between  January  and  November  2016  (see 
Graph 4.4.2). Moreover, exports of tourist services 
in 
have  benefitted 
competing  destinations  in  the  Mediterranean  and 
are  thus  vulnerable  to  a  reversal  of  this  situation. 

from  political 

tensions 

Export strength has been supported by a rise in 
the number of exporters, but the small average 
firm  size  limits  their  export  capacity.  The 
number  of  exporting  firms  rose  by  35 %  and  that 
of  regular  exporters  by  23%  between  2010  and 
2015  (European  Commission,  2016e).  Given  the 
fixed costs associated with establishing a presence 
in 
the 
internationalization  of  Spanish  firms  is  unlikely, 
and  can  be  considered  a  structural  improvement. 
However,  75%  of  the  increase  in  exported  value 
between 2010 and 2015 was realised by very large 

foreign  markets, 

reversal 

of 

a 

45 

-14-12-10-8-6-4-202468990001020304050607080910111213141516*% of GDPCapital account (KA)Secondary income balancePrimary income balance  Trade balance - services  Trade balance - goodsTrade balanceCurrent account balance (CA)Net lending/borrowing (CA+KA)-100-80-60-40-20020409597990103050709111315bn EURNon-energy trade balanceTrade balance goods 
 
 
 
4.4. Investment 

Graph 4.4.3:  Density function of Spanish export value per 

quality rank 

Source: European Commission, based on Orbis data 

Recent  cost-competitiveness  gains  resulted 
mostly  from  wage  moderation  rather  than 
productivity  growth.  The 
contribution  of 
productivity 
to  cost-competitiveness  has  been 
positive,  but  small  (see  Graph 4.4.4).  Wage 
moderation,  partly  a  consequence  of  the  labour 
market reforms in recent years, was also facilitated 
by real wage increases due to low or even negative 
imported inflation. However, as inflation gradually 
picks up, nominal wages are expected to increase. 
Together with very low productivity growth this is 
likely  to  raise  unit  labour  costs,  which  already 
started picking up in 2015.   

exporters  (with  exports  above  50  million  EUR; 
Ministry  of  Economy,  2016).  Unit  labour  cost 
developments  in  the  largest  firms  have  also  been 
more favourable than in smaller ones due to higher 
productivity growth. In this regard, the large share 
of small enterprises in the Spanish economy limits 
their  export  capacity  (see  section  4.4.2  and 
European Commission, 2016). 

specialisation 

Spain's 
in  medium-high 
technology  and  medium-low  quality  exports 
with high price sensitivity implies a dependence 
on  cost-competitiveness.  Apart  from  the  large 
share of food and primary products, Spanish goods 
exports  consist  mainly  of  intermediate  goods, 
especially  chemical  products,  equipment  goods, 
and  motor  vehicles,  the  latter  accounting  for 
around  20 %  of  total  exports.  Although  these 
products are characterised by medium to medium-
high 
technological  content,  Spanish  exporters 
specialise in medium-low quality, more exposed to  
competition  from  emerging  economies  (European 
Commission, 2015b), even more so as the average 
quality of Spanish exports to the EU decreased in 
terms  between  2010  and  2015  (see 
relative 
Graph 4.4.3).  Furthermore,  the  price  elasticity  of 
Spanish  exports  is  comparatively  high  (European 
Commission 2016e, 2015b).  

At  the  same  time,  Spanish  imports  are  rather 
inelastic  to  price  changes.  Import  intensity, 
especially  in  manufacturing,  is  higher  in  Spain 
than  in  other  large  euro  area  economies.  Besides, 
the  average  technological  content  of  imports  is 
relatively high, which contributes to their low price 
elasticity.  This  can  be  partly  explained  by  the 
specialization  of  Spanish  exports  in  activities 
highly  integrated  in  global  value  chains  (GVC). 
Accordingly, Spain shows by far the highest stock 
of  foreign  direct  investment  relative  to  GDP 
amongst 
large  euro  area  economies.  The 
combination  of  price-sensitive  exports  and  price-
insensitive  imports  in  Spain's  economic  structure 
underscore  the  reliance  on  cost-competitiveness 
for  gaining  export  market  shares  in  absence  of 
strong productivity growth (see Section 4.4.2). 

46 

0.00.20.40.60.81.01.21.41.61.82.00.00.20.40.60.81.020102015 
 
4.4. Investment 

Graph 4.4.4:  Breakdown of rate of change of unit labour 

costs 

During  the  crisis  productivity  growth  slightly 
recovered. This trend reversal was however mainly 
due  to  low-productive  firms  exiting  the  market 
(European Commission, 2016e). 

Graph 4.4.5:  Total factor productivity of small firms for 

selected sectors in Spain, France and Italy 

(1) CoE: Cost of employment; TFP: Total factor productivity 
(2) A negative sign implies a reduction in ULC and thus a 
positive contribution to cost-competitiveness. 
Source: European Commission 

upon 

productivity 

Faster  productivity  growth  and  rebalancing 
towards  higher  value  added  sectors  could  help 
to  sustain  export  growth,  but  also  moderating 
import  growth.  With  cost  advantages  hinging 
increasingly 
increases, 
promoting innovation and supporting research and 
development is becoming more central to ensuring 
competitiveness of the Spanish economy. It would 
furthermore  pave  the  way  towards  higher  quality 
levels  and  a  shift  to  higher  technology  content  of 
to  compete 
products, 
primarily  on  costs.  Lastly,  it  might  also  support 
import  substitution  to  a  certain  extent,  improving 
also the other side of the current account balance. 

the  pressure 

reducing 

4.4.2.  PRODUCTIVITY 

returns, 

low  marginal 

Labour  and  capital  misallocation  held  back 
productivity growth before the crisis. Investment 
was  largely  concentrated  in  non-tradable  sectors 
with 
in  particular 
construction  and  real  estate.  This  was  fuelled  by 
cheap  and  easily  available  credit,  which  allowed 
low-productive  firms  to  continue  operating.  Low 
efficiency  of  labour  allocation  contributed  further 
to  a  decrease  in  total  factor  productivity  (TFP) 
in 
growth.  Misallocation  was  more  severe 
industries  characterised  by  strong  regulation  that 
impeded competition (García-Santana et al., 2016). 

(1) Y-axis shows average log TFP. Firm size class: 0-9 
employees. 
Source: European Commission, based on Orbis data 

limiting 

their  absorptive  capacity 

Low productivity is partly explained by Spain's 
large  share  of  small  companies  and  their  low 
productivity  compared  to  other  large  MS.  In 
2013,  95%  of  Spanish  companies  were  micro 
enterprises  (below  10  employees),  13  percentage 
points  more  than  in  Germany.  Small  companies 
tend to exhibit lower productivity than large ones, 
mainly due to scale effects and lower investment in 
R&D 
for 
innovation.  The  productivity  gap  between  large 
(above 250 employees) and small (below 10) firms 
in  Spain  is  55%,  considerably  more  pronounced 
than in other large EU economies (OECD, 2016a). 
As firm-level micro data reveal, the productivity of 
Spanish small companies is moreover much lower 
than  in  other  Member  States.  Whereas  large 
companies  (above  250  employees)  are  actually 
somewhat  more  productive  than  their  French  and 
Italian  counterparts, 
is 
negative  for  smaller  companies  and  gets  larger 
when  moving  down  size  classes,  with  the  gap 

the  productivity  gap 

47 

-4%-2%0%2%4%6%8%020304050607080910111213141516*17*18*y-o-y %nominal CoE per hourlabour (hours worked)TFP contributioninvestment contrib.nominal ULC growth13.413.613.81414.214.414.614.815ManufacturingConstructionWholesail /retailInformation /communicationESFRIT 
 
 
4.4. Investment 

four times higher than Spain (with the exception of 
Italy). 
In  professional  services  France  and 
Germany  again  show  higher  allocative  efficiency 
levels (even though in the latter case it is negative 
as  well),  and  a  more  positive  trend  than  Spain. 
These  discrepancies  point  to  a  comparatively  low 
level  of  competition  in  Spain,  slowing  down  the 
reallocation of labour towards the most productive 
firms in those sectors. 

Graph 4.4.6:  Allocative efficiency in selected sectors in 

Spain, France, Germany and Italy 2013 

(1) Manufacturing value for Italy (-0.002) not visible due to 
scale. 
Source: European Commission 

Restrictive  business  regulation  and  weaknesses 
in innovation policy 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. 
Only  some  of  those  have  been  reduced  by  recent 
reforms  (European  Commission  2016e).  Firms' 
inter-regional  expansion  is  hampered  by  a  still 
somewhat fragmented national market (see section 
4.4.3).  Liberalisation  of  professional  services, 
whose  regulation  in  Spain  is  relatively  restrictive 
(see  next  section),  has  also  been  shown  to  have 
positive  effects  on  allocative  efficiency  and  thus 
within-sector productivity. Given the interlinkages 
of this sector with the rest of the economy, knock-
on  effects  on  other  sectors  are  also  likely  to  be 
significant (Canton et al., 2014). Finally, business 
R&D  is  relatively  weak  (see  section  4.5.1), 
limiting  not  only  firm-internal 
to 
enhance  productivity,  but  also  their  absorptive 

innovation 

towards  France 
particularly large.(60) 

for  micro  enterprises  being 

The  size  of  the  TFP  gap  between  Spain  and 
other  Member  States  for  small  companies 
varies  across  sectors.  Compared  to  France,  the 
largest gap can be observed in the information and 
communication  sector.  However,  TFP  is  also 
considerably  lower  in  the  Spanish  manufacturing 
and  wholesale/retail  sectors,  which  represent  the 
largest sectors in terms of share of value added in 
the  Spanish  economy  (see  Graph 4.4.5).  This 
the 
productivity  gap 
significantly slower growth of small firms in Spain 
(European Commission 2016e). 

compounded  by 

is 

The efficiency of labour allocation in most large 
sectors  has  deteriorated.  Allocative  efficiency  is 
a  measure  for  the  extent  to  which  labour  is 
allocated  towards  the  most  productive  companies 
within  a  sector.  Negative  allocative  efficiency 
essentially  means  that  resources  are  allocated  less 
efficiently  than  by  a  random  distribution  with 
uniform  probability.  Among  the  larger  sectors  in 
in 
terms  of  share  of  value  added,  only 
manufacturing  (13.2%  of  total  value  added  in 
2014) allocative efficiency is positive (61). Having 
improved  since  2009,  it  is  however  still  below  its 
pre-crisis peak. Construction, wholesale and retail, 
accommodation,  real  estate,  and  professional 
services  all  display  negative  allocative  efficiency 
levels that have been deteriorating for years. 

Levels and trends of allocative efficiency in key 
sectors  do  not  compare  favourably  to  other 
large  MS.  In  manufacturing  most  other  large  MS 
outperform  Spain,  in  particular  Germany  and 
France  (see  Graph 4.4.6).  Manufacturing  in  those 
countries did not experience a decline in allocative 
efficiency  as  steep  as  in  Spain  before  the  crisis, 
and  they  improved  more  decisively  afterwards, 
leaving them on efficiency levels between two and 

(60)  European Commission calculations based on ORBIS firm-

level data 

(61)  European Commission calculations based on Eurostat data. 
The estimate for Allocative Efficiency is interpreted as the 
%-increase  in  industry  productivity  connected  with  the 
actual  allocation  of  employment  across  firm  size  classes, 
relative  to  a  baseline  scenario  in  which  employment  is 
allocated 
firm  size 
categories. A positive (negative) number for AE means that 
resources  are  allocated  in  a  more  (less)  efficient  way 
relative to the baseline. 

randomly  across 

the  different 

48 

-0.30-0.20-0.100.000.100.200.30ManufacturingWholesale/retailProf. servicesESFRDEIT 
                                                           
 
4.4. Investment 

of  writing,  around  170  complaints  had  been 
evaluated,  the  majority  of  which  were  related  to 
the  presumed  transgression  of  the  law's  principles 
of  proportionality  and  necessity,  thus  hinting  to  a 
possible need to simplify licensing procedures.  

low.  Spain's 

industrial  structure 

Firms'  innovation  activity  is  still  below  pre-
crisis  levels,  and  the  share  of  high-growth 
innovative  enterprises  (HGIE)  in  the  economy 
remains 
is 
characterised by a high share of SMEs operating in 
low-tech  sectors  (Fernández-Zubieta  et  al.,  2016), 
and the number of enterprises active in innovation 
has  decreased  from  35 000  to  around  15 000 
between  2008  and  2015  (COTEC,  2016).  HGIEs 
tend  to  have  higher  total  factor  productivity  than 
average  SMEs  (Hölzl,  2016)  Although  HGIE 
growth rates in terms of turnover and employment 
have  picked  up  in  recent  years,  fewer  companies 
experience  high-growth  periods  in  Spain  than  on 
average in the EU (0.08 % vs. 0.16 %; Costa et al., 
2016). 

a 

in 

slightly 

Science, 

improved 

Progress 
integrating  digital  technologies 
throughout the economy is slowed down by the 
low use of internet and scarcity of digital skills. 
Overall,  Spain  has 
its 
performance  in  this  area  (European  Commission, 
2017b).  Several  Industry  4.0  initiatives  have  been 
put  in  place  at  national  and  regional  level,  and 
Spain  is  above  the  EU  average  in  number  of 
graduates  with 
Technology, 
Engineering and Mathematics (STEM) degree (21 
vs 19 per 1 000 population).(62) However, the low 
percentage  of  people  with  basic  digital  skills  and 
the  low  share  of  ICT  specialists  in  the  workforce 
(2.4 %  of  total  individuals  employed  vs  3.5 %  on 
EU average) remains a challenge whose gravity, if 
not  addressed,  may  increase  if  new  cohorts  with 
low  digital  skills  enter 
labour  market. 
Furthermore,  the  National  Coalition  for  Digital 
Skills  and  Jobs,  which  aims  to  enhance  digital 
skills at all government levels, has not yet been set 
up.  

the 

Competition in product and service markets 

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

(62)  Figures  refer  the  number  of  STEM  graduates  per  1,000 

inhabitants aged 20-29 years.  

capacity  to  benefit  from  R&D  spillovers  (e.g. 
Griffith et al. 2003). 

4.4.3.  BUSINESS ENVIRONMENT 

Business environment 

to  underperform 

The 2017 Doing Business Indicators rank Spain 
32nd  in  the  ease  of  doing  business,  (17th 
amongst  EU  Member  States).  This  is  one  place 
higher than in the 2016 edition of Doing Business, 
owing  to  improvements  in  the  'payment  taxes', 
'enforcing  contracts'  and  'resolving  insolvency' 
indicators,  which  compensate  the  deterioration  in 
other  indicators  such  as  'starting  a  business'  and 
'getting  electricity'.  Other  areas  where  Spain 
continues 
to  most 
Member  States  are  late  payments  and  time  and 
costs  to  obtain  permits  and  licenses  (European 
Commission,  2015e).  The  latter  is  especially 
cumbersome  for  newly-incorporated 
industrial 
companies,  also  in  view  of  the  large  regional 
divergences.  For  example,  starting  an  industrial 
SME  takes  about  60  days  in  the  Canary  Islands 
compared  to  250  days  in  Murcia,  and  costs  range 
between 6 % (Andalusia) and 23 % (Catalonia) of 
income  per  capita  (World  Bank  Doing  Business 
Subnational, 2015). 

relative 

burden. 

firm  growth  and 
However, 

Progress in enhancing the business environment 
has  been  modest  in  2016.  Far-reaching  reforms 
have  been  introduced  in  recent  years  to  facilitate 
reduce 
business  creation, 
administrative 
the 
implementation  of  flagship  reforms,  such  as  the 
law  on  market  unity,  has 
slowed  down 
considerably  in  2016,  including  at  regional  level, 
judging from the lack of progress made in adapting 
sector  specific  legislation  to  the  principles  of  the 
law.  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 
the  Services 
Directive  (CNMC,  2016).  Against  this  backdrop, 
on  17  January  2017,  the  central  and  regional 
governments  agreed  to  foster  mutual  cooperation 
with  a  view  to  guaranteeing  market  unity  and 
better  regulation  in  Spain.  Lastly,  the  law  also 
introduces  a  complaint  mechanism  offering  the 
possibility for economic agents to seek redress on 
barriers  to  market  unity  within  shorter  deadlines 
than  ordinary  administrative  appeals.  At  the  time 

transposing 

laws 

49 

 
                                                           
4.4. Investment 

liberalisation 

competition  by  facilitating  market  entrance,  and 
lower  consumer  prices. 
It  could  moreover 
contribute  to  increasing  labour  productivity  (see 
section  4.4.1).  The  draft  professional  services  law 
envisaging 
professional 
association membership and reduction of reserved 
activities  has  not  been  adopted.  The  Spanish 
national  action  plan  on  regulated  professions, 
which 
towards 
liberalisation,  covers  only  a  limited  number  of 
professions. 

possible 

steps 

sets 

out 

of 

approach 

regulatory 

regions. A high number of collaborative economy 
start-ups have been created, and some have scaled-
(PWC, 
up  and 
internationalised  successfully 
towards 
2016).  The 
collaborative  economy  firms,  especially  regarding 
market  access,  diverges  from  region  to  region,  in 
some  cases  preventing  the  collaborative  economy 
from realising its growth potential and foreclosing 
market  opportunities  both  for  consumers  and 
entrepreneurs. In context of the implementation of 
(see  above),  Spain's 
the  market  unity 
competition  authority 
invited 
national  and  regional  governments  to  ensure  that 
sectorial  legislation  respects  the  principles  of 
necessity  and  proportionality,  and  has  challenged 
some  regulations  and  administrative  acts  in  court 
(CNMC, 2017). 

(CNMC)  has 

law 

rights 

as  protectionist 

Restrictions to competition remain, especially in 
the  services  sector.  Spain  is  among  the  ten 
Member States with the most restrictive regulation 
in  retail  trade  (European  Commission,  2015d). 
Only  limited  progress  has  been  achieved  at 
regional  level  on  the  implementation  of  the  2014 
retail  sector  reform.  Not  all  regions  have  adopted 
measures  to  implement  it,  although  conformity  of 
regional  legislation  with  corresponding  national 
law is being monitored systematically. Restrictions 
also  remain  in  the  regulation  of  professional 
services, 
("reserved 
activities") are granted selectively to some services 
providers,  excluding  others  with  relevant  similar 
restrictions 
qualifications. 
significantly  exceeds 
for 
architects,  civil  engineers,  and  tourist  guides (63). 
Moreover,  for  a  large  number  of  professions 
membership in professional colleges is mandatory. 
Law  25/2009,  transposing  the  Services  Directive, 
tried  to  address  this  issue  by  calling  on  the 
government to submit a draft law to Parliament to 
spell out which professions require membership in 
the  relevant  professional  bodies.  However,  this 
legal  mandate  has  not  been  fulfilled  to  date.  One 
observable  economic  consequence  of 
such 
restrictions  is  the  relatively  high  service  sector 
mark-ups  (Thum-Thysen  and  Canton,  2015). 
Reducing  those  barriers  would  likely  intensify 

of 
level 
the  EU  average 

The 

(63)  The European Commission has developed a new composite 
indicator on restrictiveness of most existing barriers to the 
access to and exercise of professional services. It is based 
on  data  collected  from  Member  States,  complemented  by 
desk research. Cf. SWD(2016) 436 final. 

50 

 
                                                           
4.4. Investment 

51 

 Box 4.4.1: Investment challenges and reforms in SpainMacroeconomic perspective Investment started growing again in 2014 and was strong during 2015, mainly driven by investment in equipment. Investment’s contribution to GDP growth slowed slightly in 2016 due to a moderation in final demand curbing incentives to expand production capacities. It is expected to remain at broadly similar levels during 2017 and to pick up slightly in 2018. Private sector deleveraging still dampens investment, although this effect is receding. Public investment levels have dropped far below the EU average since 2012 and are expected to remain stable due to fiscal consolidation requirements. For more information on investment trends in Spain see Section 1. Assessment of barriers to investment and ongoing reforms  Whereas the macroeconomic outlook for investment is broadly favourable, the framework conditions for investment in Spain suffer from various barriers to investment (European Commission 2015c). Some reforms and support measures are being implemented or have been adopted, e.g. on access to finance, but other issues remain to be addressed. Main barriers to investment and priority actions underway 1. Restrictive regulation and obstacles to doing business continue to discourage investment. The sluggish implementation of the market unity law leaves regulatory fragmentation still insufficiently addressed. Some regional regulation potentially even runs contrary to the law’s principles. Restrictive regulation of professional services has not been reformed, keeping entry barriers high and discouraging investment in those industries (Section 4.4.2). Demand-side policies to induce investment are weak due to long payment delays by public authorities and lack of transparency in public procurement (Section 4.6.1). Other aspects of the business environment not conducive to investment are lengthy judicial proceedings and high time and monetary costs for obtaining permits (Section 4.4.2). 2. Tax rates and regulation, as well as low equity supply, hamper investment in innovation and a move towards higher value added activities. Spain continues to have one of the highest effective marginal corporate tax rates in the EU. The debt bias in the taxation of corporate financing discourages equity investment and the deepening of equity markets. Although the venture capital industry is becoming increasingly dynamic, venture capital supply levels are still far below those in other large EU Member States (Section 4.5.1). This hinders investment in high and medium-high tech innovation, as such business projects depend on equity capital due to their often high-risk nature. Tax incentives for hiring research staff have been introduced, which may boost companies’ innovation capacity. Regulatory/ administrative burdenCSRTaxationPublic administrationAccess to financePublic procurement /PPPsCSRCooperation btw academia, research and businessCSRJudicial systemFinancing of R&D&ICSRInsolvency frameworkBusiness services / Regulated professionsCSRCompetition and regulatory frameworkRetailCSREPL & framework for labour contracts ConstructionWages & wage settingDigital Economy / TelecomEducation CSREnergyLegend:TransportNo barrier to investment identifiedCSRInvestment barriers that are also subject to a CSRSome progressNo progressSubstantial progressLimited progressFully addressedPublic administration/ Business environmentFinancial Sector / TaxationR&D&ISector specific regulationLabour market/ Education 
 
 
 
 
 
4.5. SECTORAL POLICIES 

4.5.1.  INNOVATION 

growth 

Maintaining 

Low  investment  in  research  and  innovation 
(R&I)  is  contributing  to  low  levels  of  total 
factor productivity. The Spanish economy started 
growing  again  in  2015.  However,  the  increased 
external  competitiveness  which  is  partly  driving 
this upturn is based largely on cost advantages (see 
Section 3.4). 
and 
competitiveness  will  require  raising  productivity, 
which  since  the  onset  of  the  financial  crisis 
primarily  improved  through  low-productive  firms 
(see  Section 4.4.1).  For 
exiting 
sustained  productivity  as  well  as  employment 
growth,  boosting 
is 
essential.  One  way  to  do  this  is  to  reinforce  R&I 
investment  (see  Section 4.4.1),  an  area  where 
Spain trails behind. This would also accelerate the 
transformation 
towards  a  knowledge-intensive 
economy (European Commission, 2016g). 

total  factor  productivity 

the  market 

and 

(the 

‘moderate 

innovator’ 

innovation 

Spain’s  innovation  performance  continues  to 
decline relative to the EU average. Spain remains 
a 
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 (Hollanders 
et  al.,  2016a).  Spain’s  relative  performance  is 
weakest  in  the  following  dimensions:  business 
R&D 
investment;  SMEs' 
innovation  activity;  and  knowledge  transfer  and 
collaboration.  Both  business  and  public  R&D 
expenditure  decreased  continuously,  from  1.35 % 
of  GDP  in  2010  to  1.22 %  in  2015.  Reaching  the 
2 % national R&D intensity target by 2020 overall 
appears  highly  unlikely.  The  public  budget  for 
R&D  (GBAORD)  has  dropped  by  30 %  between 
2010  and  2014.  However,  indirect  support  in  the 
form  of  tax  credits  has  gained  importance,  both 
domestically  and  compared 
to  other  OECD 
countries  (OECD,  2015).  The  2016  public  R&D 
budget also indicates a trend reversal. Nonetheless, 
budgets  have  not  surpassed  2006  levels.  The  low 
innovation  performance  outlined  above  coincides 
with a level of private R&D expenditure far below 
the  EU  average  (0.65 %  of  GDP  v  1.3 %),  which 
has moreover been slowly declining since 2008. 

Regional  administrations  play  an  important 
role  in  Spanish  R&I  policy,  and  differences  in 
performance  are 
innovation 
capacity varies strongly on some dimensions. This 
in  higher-
is  most  evident  for  employment 

large.  Regional 

and 

regional 

technology  manufacturing 
knowledge-
intensive services, and sales of innovative products 
and services by SMEs, where there are innovation 
leaders  as  well  as  modest  innovators  among 
Spain's  regions  (Hollanders  et  al.,  2016b).  Some 
R&I  policy  responsibilities  are  devolved 
to 
regional  governments  and 
funding 
accounts for around 60 % of public R&D funding 
(ERAC, 2014). Regional R&I policy consists of a 
wide  range  of  tools  and  incentives  to  promote 
business-driven  innovation,  technology  transfer 
and  knowledge  circulation.  Spanish  regions  have 
specialisation 
designed 
strategies in the context of the programming of the 
European Structural and Investment Funds (ESIF). 
However,  national  and  regional  policies  for  R&I 
are  not  operating  in  full  synergy.  While  some 
regional  strategies  focus  on  the  development  of 
genuine regional strengths, others merely replicate 
national-level  priorities,  carrying  a 
risk  of 
duplication (ERAC, 2014 p. 59).  

adopted 

smart 

and 

realising 

those  potential 

Weaknesses 
in  Spain’s  R&I  governance 
framework,  especially  on  the  regional  level, 
hamper the effectiveness of public R&I support. 
The complexity of the R&I governance framework 
and  the  lack  of  coordination  persisting,  despite 
efforts  made,  between  regional  initiatives  as  well 
as  between  central  and  regional-level  actions 
prevent 
synergies. 
Nevertheless,  there  are  examples  of  successful 
coordination,  such  as  the  agreements  between 
central  and  regional  administrations  on  Scientific 
and  Technological  Infrastructures  (ICTS),  and  on 
joint  innovative  public  procurement  initiatives. 
The  participation  of  some  Spanish  regions  in 
transnational  smart  specialisation  initiatives  may 
also  benefit  inter-regional  coordination.  Another 
critical aspect of Spain's weak R&I governance is 
the  lack  of  systematic  evaluations  at  national  and 
regional level of the effectiveness of R&I support 
tools,  as  it  impedes  the  development  of  more 
effective R&I programmes (ERAC, 2014). 

Public-private  cooperation 
in  research  and 
innovation  remains  weak.  In  2014,  the  level  of 
business-financed  public  R&D  declined  further, 
reaching  0.034 %  of  GDP  (compared  to  an  EU 
average  of  0.052 %),  and  the  number  of  public-
private  scientific  co-publications  per  million 
population dropped to 16.3 (EU average: 34). The 
Offices  for  the  Transfer  of  Research  Outcomes 
(‘OTRIs’) lack institutional support and experience 

52 

 
 
4.5. Sectoral policies 

in knowledge management. Excessive bureaucracy 
and  heterogeneity  hamper  effective  knowledge 
transfer.  Inter-sectoral  mobility  of  researchers  is 
low  due  to  weak  incentives  for  public  sector 
research  personnel  to  engage  in  public-private 
cooperation  activities,  the  low  number  of  firms 
carrying out R&D, and the rigidity of universities’ 
administrative  procedures  in  this  respect.  These 
circumstances  are  reflected  in  the  low  share  of 
researchers  in  total  staff  employed  by  private 
companies  (2 %  compared  to  an  EU  average  of 
3.6 %).  The  government  has  approved 
tax 
incentives for hiring research staff and is exploring 
the  combination  of  vocational 
training  with 
university  education  (see  Section  4.3.2).  An 
industrial  PhD  scheme  has  been  established  in 
2014 and should soon produce the first graduates. 
A  comprehensive  national  policy  on  knowledge 
transfer  is  however  still  missing.  In  2016,  the 
government  announced  measures  to  boost  the 
contribution of the private sector to public research 
through sponsorship and patronage. 

Venture  capital  has  a  large  potential  in  Spain 
innovation.  ICT  and  digital 
for  supporting 
projects accounted for 81 % of new venture capital 
investments in Spain in 2015. The largest recipient 
sectors  were  life  sciences,  communications,  and 
computer/consumer  electronics.  There  has  been  a 
noticeable  increase  in  the  number  of  new  venture 
capital entities, with 30 new venture capital funds 
entering  the  Spanish  market  in  2015  (ASCRI, 
2016).  This  growth  is  driven  by  the  ongoing 
economic 
recovery  as  well  as  government 
initiatives  to  foster  venture  capital,  most  notably 
through the establishment of a public fund of funds 
("Fond-ICO  Global").  Since  2013,  Fond-ICO  has 
committed to invest EUR 1 104 million in private 
venture  capital 
turn  have 
funds,  which 
committed  to  invest  EUR  4.1  billion  in  Spanish 
companies.  From  the  fund's  total  volume  of  EUR 
1.5 billion, EUR 125 million is guaranteed by the 
European  Fund  for  Strategic  Investments  (EFSI). 
Other  direct  venture  capital  support  schemes, 
including  by  the  Centre  for  the  Development  of 
Industrial  Technology  (CDTI),  have  continued  in 
parallel.  Most  portfolio  companies  are  active  in 
innovation, above all in the ICT sector. 

in 

Despite  sound  growth  since  2013,  venture 
capital  supply  is  still  underdeveloped.  Despite 
sound  growth 
since  2014,  venture  capital 
investment  in  Spain  remains  below  its  pre-crisis 

level,  and  is  very  low  compared  to  most  Member 
States in terms of GDP share (0.014 %, compared 
to  an  EU  average  of  0.024 %).  In  particular, 
Spanish  venture  capital  funds  stand  out  by  their 
(EUR 38 million  on  average 
small  volumes 
compared 
to  EUR 71 million  EU-wide).  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.  

improvement 

in  setting 
There  was  some 
priorities  for  the  allocation  of  public  R&I 
funding,  but  the  use  of  performance-based 
criteria  remains  limited.  Funding  programmes 
such as the ‘María de Maeztu’ and ‘Severo Ochoa’ 
initiatives  under  the  ‘institutional  strengthening’ 
pillar  of  the  national  R&I  plan  provide  for  a 
funding  increase  to  reward  scientific  excellence 
and  proven  impact.  These  programmes  can  be  a 
stepping  stone  for  a  wider  use  of  performance-
based funding. A further positive development (in 
line  with  the  2014  ERAC  peer  review  of  Spain's 
R&I  system)  is  the  prioritisation  of  available 
public  funding  towards  global  societal  challenges 
in  the  2016  calls  for  proposals  under  the  national 
R&I  plan.  Having  been  legally  incorporated  in 
2015,  the  State  Agency  for  Research  responsible 
for managing the allocation of central government 
R&I funding is expected to be fully operational in 
2017. 

4.5.2.  ENERGY,  CLIMATE  CHANGE  AND 

ENVIRONMENT 

Energy 

Insufficient  interconnection  capacity  between 
Spain and rest of the EU is a major obstacle for 
the  creation  of  the  internal  energy  market 
(European Commission, 2016e p. 63ff.). In 2015, 
the  High  level  Group  for  South-West  Europe  on 
interconnections  set  objectives  for 
integrating 
Spain  into  the  internal  energy  market  by  ensuring 
the  swift  implementation  of  the  priority  projects 
identified  in  the  Madrid  Declaration  signed  in 
March  2015  by  the  leaders  of  France,  Spain  and 
Portugal  and 
the  European 
the  President  of 
Commission.  The  projects  listed  in  the  Madrid 
Declaration comprise: the Bay of Biscay electrical 
super  highway  via  a  subsea  cable;  two  lines 

53 

 
4.5. Sectoral policies 

more  effort  to  reach  the  EU  recycling  target  of 
50 % of municipal waste by 2020.  

Better water management, more efficient use of 
water  supply  infrastructures  and  better  water 
governance  would  improve  water  efficiency. 
Certain areas of Spain are water-stressed, meaning 
that  water  demand  exceeds  the  available  water 
resources  under 
sustainable  conditions.  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.  Finally, 
flooding  is  a  recurrent  problem,  but  prevention 
measures are sometimes disregarded, despite being 
cheaper than the costs of flood recovery. 

4.5.3.  OTHER NETWORK INDUSTRIES 

Digital economy 

least  30 Mbps)  and 

More  than  three  quarters  of  households  have 
access to fast broadband but there is still a gap 
between  urban  and  rural  areas.  81 %  of 
households have access to fast broadband networks 
(at 
infrastructure-based 
competition  is  developing  in  dense  urban  areas. 
However,  in  rural  areas, only 28 %  of  households 
have  fast  broadband  network  access,  indicating 
that  there  is  still  a  gap  between  urban  and  rural 
areas.  By  2020 Spain  aims  to  cover  100 %  of  the 
population  with  30 Mbps  internet  and  provide 
50 %  of  households  with  access  to  100 Mbps 
the  support  of  European 
internet, 
Structural  and  Investment  Funds (64).  In 
the 
context  of  the  Digital  Agenda (65),  the  plan  for 
telecommunications and high-speed networks also 
contains  actions  to  boost  demand.  If  vigorously 
implemented,  all  these  policies  can  effectively 
improve  the  take  up  of  high-speed  broadband 
connections.  Spain  currently  plans  to  publish  a 
new Digital Agenda 4.0. for 2017-2020 with more 
ambitious targets. 

thanks 

to 

is 

increasingly  benefitting  from  the 
Spain 
digital  economy  on  the  supply  side.  There  is  an 

(64)  http://www.dgfc.sepg.minhap.gob.es/sitios/dgfc/es-

ES/ipr/fcp1420/p/pa/Documents/20141022_AA_spain_201
4_2020.pdf  

(65)  http://www.agendadigital.gob.es/digital-

agenda/Documents/digital-agenda-for-spain.pdf  

through  the  Pyrenees;  and  the  completion  of  the 
eastern  gas  axis  pursuing  the  Midcat  and  Val  de 
Saône projects. In September 2016, the High Level 
Group  agreed  on  the  Implementation  Plan  of  the 
Madrid Declaration. 

the 

slowdown 

counteract 

Spain  is  on  track  to  meet  its  2020  target  for 
consumption  of  renewable  energy,  even  if  the 
share  of  renewables 
is  estimated  to  have 
decreased from 16.2 % in 2014 to 15.6 %. Some 
to 
measures 
in 
renewables 
the  recent 
investment  caused  by 
reforms to address the electricity tariff deficit have 
been  agreed.  The  tenders  organised  in  2015  for 
allocating support to renewable electricity projects, 
as  well  as  the  announced  plans  for  organising  a 
new tender for 3 000 MW in the first half of 2017, 
are  seen  as  a  good  step  forward  to  fostering 
investment  in  renewables  and  meeting  the  2020 
target.  The  government  has  also  started  to  apply 
biofuels  sustainability  criteria  in  2016  which  will 
make  it  possible  to  count  biofuels  towards  the 
renewable  energy  targets  and  has  passed  an 
increased mandatory blending mandate to promote 
biofuels. 

While  declining  since  2005,  Spain's  energy 
dependency  rate  is  still  above  the  EU  average. 
Almost  three  quarters  of  energy  needs  —  72.8 % 
in 2015 — are covered by imports compared to the 
EU average of 53.5 %. 

Spain  is  on  track  towards  its  emissions  target. 
Under the EU 2020 strategy, Spain committed to a 
non-ETS  emission  target  in  2020  of  a  10 % 
reduction  compared  to  2005  levels.  Since  2005, 
emissions  have  been  decreasing.  According  to 
national  projections,  it  is  forecast  that  non-ETS 
emissions  will  be  reduced  by  12.4 %  by  2020. 
With  the  economic  recovery,  the  challenge  is  to 
keep  emissions  decoupled 
increasing 
economic  activity,  to  stay  on  track  towards  the 
2020 targets.  

from 

Environment 

Spain is still far from the 2020 recycling target. 
The main challenges in the waste sector remain to 
increase  waste 
recycling. 
prevention 
According to 2014 data, 55 % of municipal waste 
is  still  landfilled  (much  above  the  EU  average  of 
28 %). At the current rate of 33 % (17 % recycled 
and  16 %  composted),  Spain  would  need  to  make 

and 

54 

 
                                                           
4.5. Sectoral policies 

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

fulfilment  of 

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.  This  has 
the 
development of a strategic plan for the deployment 
of  UIC  gauge  throughout  the  Iberian  Peninsula, 
including trans-shipment terminals. 

to  go  along  with 

to 

Although the port system in Spain is profitable, 
the  high  cost  of  certain  port  services  and  high 
port  charges  are  an  obstacle 
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 (67). 
The  national 
for  port 
term 
development  could  contribute  to  better  prioritise 
investments  for  ports  according  to  their  roles  and 
functions  and  promoting  more  efficient  pricing 
policies.  There  is  also  potential  for  developing 
better  links  between  ports  and  the  hinterland 
(European Court of Auditors, 2016). 

strategy 

long 

(67)  Case C-576/13: Judgment of the Court (Sixth Chamber) of 

11 December 2014   

is 

activities,  which 

increase in the number of enterprises which make 
use of specific applications of digital technology in 
above  EU 
business 
2017b). 
average (European 
Concerning 
companies' 
turnover is in line with EU average (9.4 % of total 
turnover).  Positively,  the  share  of  Spanish  SMEs 
selling  online  (19 %)  is  above  the  EU  average 
(17 %). 

Commission, 
SME 

e-commerce, 

Transport  

Transport  plays  an  essential  role  in  ensuring 
territorial cohesion and economic development. 
Spain  is  the  second  largest  Member  State  after 
France  and  it  supports  the  international  traffic 
connections  of  Portugal  and  of  the  Maghreb  with 
the EU. However, in the last decade, Spain seems 
to  have  given  priority  to  increasing  geographical 
cohesion,  rather  to  improving  the  efficiency  of 
investment in transport infrastructure. 

The  recent  extension  of  motorway  and  high-
speed  rail  networks  in  Spain  has  not  been 
followed  by  an  increase  in  traffic.  As  stated  in 
the  2016 country  report  (European  Commission, 
2016e), the building up of an extensive high-speed 
rail network and certain toll motorways, combined 
with  a  reduction  of  traffic  flows  during  the 
economic  crisis  period,  has  created  liabilities  for 
public 
finances.  The  authorities  have  been 
exploring ways to minimise the negative impact of 
unprofitable  motorways  on  public  finances  and  it 
is expected that the Ministry of Development will 
take  over  the  operation  and  management  of  such 
motorways. 

transport 

The  Spanish  authorities  are  trying  to  use  the 
existing 
infrastructures  more 
efficiently.  The  process  of  opening  railway 
passenger services to competition was launched in 
2015 (66) but the effects are not yet fully tangible. 
Recent  developments  indicate  that  this  ministerial 
order  might,  however,  remain  without  effect,  and 
that market opening will be postponed until 2020. 
In  2015,  the  government  completed  privatising 
airport infrastructures and 49 % of AENA’s shares 
are  currently 
the  Madrid  stock 
exchange.  The  costs  of  airport  services  at  airports 

floated  on 

(66)  Order  FOM/1977/2015,  allowing  a  licensed  provider  to 
compete  with  the  incumbent  operator  RENFE  on  the  line 
between Madrid and Levante area.  

55 

 
                                                           
                                                           
4.6. PUBLIC ADMINISTRATION 

4.6.1.  PUBLIC PROCUREMENT 

leave 
space 
Commission, 2016d). 

for  wrongdoings 

(European 

Several  factors  limit  the  efficiency  of  Spain's 
public  procurement.  Sub-national  governments' 
procurement accounts for the lions' share in terms 
of  number  of  contracts  and  their  value.  However, 
there  has  been  little  coordination  of  procurement 
policy  between  the  different  government  levels, 
other than to promote the use of the public sector's 
procurement  platform  and  the  convergence  of  the 
criteria  governing 
regional 
government's  official 
registers  of  bidders. 
centralised  public 
Moreover, 
procurement  is  not  widely  spread.  (68)  Spain  also 
stands  out  for  a  relatively  high  use  of  the 
negotiated procedure without prior publication, (69) 
which  translates  into  an  absence  of  call  for 
competition  at  EU  level  and  frequently  leads  to  a 
direct award.  

the  central  and 

the  use  of 

flow  of 

the  high 

There  is  scope  for  enhancing  ex-ante  and  ex-
post controls on contracting authorities. This is 
evidenced  by 
judicial 
investigations  concerning  alleged  wrongdoings  in 
public  procurement,  as  well  as  by  the  number  of 
complaints  lodged  at  the  European  Commission 
that  result  in  investigations  and  infringement 
procedures (European Commission, 2016d). While 
legal  remedies  done  by  specialised  independent 
review  bodies  appear  to  function  well  (European 
Commission,  2017c),  they  are  only  applied  if  an 
economic operator (e.g. a competitor firm) alleges 
a breach of procurement legislation. 

There  is  no  consistent  public  procurement 
policy  in  Spain.  In  a  broader  perspective,  Spain 
lacks  a  consistent  public  procurement  policy  that 
targets  all  administrative  levels  and  that  ensures 
transparency  and  coordination  and  guarantees 
economic  efficiency  and  a  high 
level  of 
competition.  In  particular,  the  absence  of  an 
independent body in charge of ensuring efficiency 
in  public  procurement 
and 
throughout 
the  proper 
the  country  hampers 
implementation  of  procurement  rules  and  may 

legal  compliance 

(68)  In  2016  centralised  procurement  represented  1%  of  the 
total, in comparison with the EEA average of 9%. Source: 
EU Tenders Electronic Daily (TED). 

(69)  The  share  of  the  negotiated  procedure  in  all  public 
procurement  was  11%  in  2016,  the  8th  highest  in  the  EU 
(TED). 

in 

to 

Spain's 

strengthen 

Against  this  backdrop,  some  measures  are 
planned 
public 
procurement  policy  framework.  Two  draft  laws 
were  submitted  to  Parliament  in  November  2016 
for  fast-track  adoption  to  transpose  the  2014  EU 
directives  on  public  procurement.  The  measures 
are  a  step 
the  right  direction,  although 
shortcomings  remain.  Firstly,  in  response  to  the 
August  2016  Council  Decision  on  deficit 
reduction,  the  draft  laws  eliminate  the  current 
unrestricted  capacity  of  contracting  authorities  to 
use 
the  negotiated  procedure  without  prior 
publication for low-value contracts (i.e. below the 
thresholds  for  the  application  of  EU  directives), 
although  it  does  not  address  the  frequent  use  of 
this  procedure  for  public  procurement  subject  to 
the  EU  directives  relative  to  the  EU  average. 
Secondly,  the  draft  laws  reinforce  the  powers  of 
the  central  government's  advisory  council  on 
public  procurement  (the  Junta  Consultiva  del 
Estado)  to  supervise  ex-post  control  activities  at 
central level and coordinate ex-post controls (e.g., 
interpretation of rules, methodology) at sub-central 
level.  However,  the  provisions  do  not  provide 
details  about  the  operational  aspects  of  these 
controls,  or  give  additional  potential  enforcement 
powers  of  the  advisory  council  (such  as  imposing 
sanctions  and/or  lodging  legal  actions).  Thirdly,  a 
new agency (Oficina Nacional de Evaluación) not 
yet operational is to carry out non-binding ex-ante 
controls  albeit  limited  to  the  central  and  local 
government's  works  and  services'  concessions. 
Lastly, the measures do not seem to strengthen ex-
ante controls, as they fail to address the shortage of 
staff  in  the  relevant  bodies  performing  ex-ante 
controls  at  the  various  general  government  levels, 
and the independence of the relevant bodies at sub-
central level carrying out those controls. Moreover, 
the  draft  laws  do  not  envisage  the  promotion  of 
joint purchasing by contracting authorities. 

4.6.2.  FIGHT AGAINST CORRUPTION 

Spain has made progress in enacting legislation 
on  transparency  of  party  financing,  asset 
disclosure  and  conflicts  of  interest.  With  all 
legislative  measures  of 
the  September  2013 
package  for  democratic  renewal  now  in  place 
(covering  the  above-mentioned  areas),  the  focus 

56 

 
 
                                                           
4.6. Public administration 

relative  to  the  situation  before  the  reform.(72) 
Regarding  the  efficiency  of  justice,  the  2017  EU 
Justice Scoreboard shows that the disposition time 
in courts remained almost unchanged compared to 
the  previous  year  despite  efforts  to  balance  the 
workload  between  courts.  As  to  the  quality  of 
justice,  Spain  has  recorded  some  positive  results, 
e.g.  regarding  the  availability  of  IT  for  case 
management 
for  online 
publication  of  judgments.  There  is  also  room  for 
improving  the  qualitative  aspects  of  justice,  for 
example,  relating 
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. 

to  compulsory 

arrangements 

and 

(72)  Consultative  Council  of  European 

Judges 

(CCJE) 

G/Inf(2016)3rev of 24 March 2016, para. 88. 

of 

the 

degree 

employees-, 

shifts to their implementation. However, despite a 
surge  in  corruption  investigations  involving  cases 
at  the  local  and  regional  levels  (Fiscalía  General, 
tailor-made 
2015,  Hay  Derecho,  2015)  no 
preventive  strategies  to  mitigate  corruption  risks 
have been developed at this government level nor 
is 
there  a  shared  preventive  strategy  across 
government  levels.  Moreover,  other  shortcomings 
flagged  in  last  year's  country  report  (i.e.,  lack  of 
legislation  to  protect  whistle-blowers  -  other  than 
in the areas of unfair dismissal and discriminatory 
treatment 
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.  In  2016, 
Spain's  competition  authority  (CNMC)  created  a 
lobbyists registry, with participation by companies 
done on a voluntary basis. To date it contains over 
300  companies,  but  the  country’s  top  businesses 
are  underrepresented (70).  Another  issue  in  Spain 
has  been  the  protracted  judicial  procedure  for 
corruption  cases.  While  the  Criminal  Procedure 
law  was  amended  in  2015  to  limit  the  time 
allocated to investigations and reduce undue delays 
in criminal procedures, this measure could result in 
impunity  in  complex  corruption  cases  for  which 
the time limits would not be sufficient for building 
cases. 

4.6.3.  JUDICIAL REFORM 

independence 

Spain  has  improved  in  terms  of  perceived 
independence  of  justice.  According  to  the  2017 
EU  Justice  Scoreboard,(71)  Spain  has  made 
progress  on  how 
is 
judicial 
perceived by businesses, coming, however, from a 
relatively low level (Spain now ranks 17 and used 
to  rank  23  in  2016  within  the  28  EU  member 
states). However, concerns have been expressed by 
the  Consultative  Council  of  European  Judges 
regarding the 2013 reform of the General Council 
of  the  Judiciary.  The  reform  sets  out  that  all 
members  of  this  body  are  to  be  appointed  by 
Parliament through a quota agreement between the 
main political parties, this change being considered 
as  a  potential  threat  to  judicial  independence 

(70)  https://rgi.cnmc.es/ 
(71)  World  Economic  Forum  data  contained  in  the  2017  EU 

Justice Scoreboard (to be published). 

57 

 
                                                           
                                                           
4.6. Public administration 

58 

 Box 4.6.1: Selected highlights "FOND-ICO Global" is the first State-owned venture capital "Fund of Funds" created in Spain. It was set up to promote the creation of privately managed venture capital funds that primarily invest in Spanish companies, at all stages of their development. Seven funding rounds have been completed since 2013, committing EUR 1,104 million to 48 newly created funds, which in turn have committed to invest EUR 4.1 billion in Spanish companies. From the fund's total volume of EUR 1.5 billion, EUR 125 million is covered under the European Fund for Strategic Investments (EFSI) guarantee.  Digital Public Services. Spain's eGovernment strategy aim at digitising all public administration communications by 2018. The Government adopted the ICT Strategic plan for 2015-2020 (1) which sets out the global strategic framework to make progress in the transformation that will deliver eAdministration. This plan is needed as a continuation of the Digital Agenda in order to speed up the digital transformation of the Administration. Yearly revisions will be undertaken by the Commission on ICT Strategy. This new strategy is expected to strengthen Spanish position on Public Service Digitisation by setting ambitious goals for the digitisation of the public sector. This will facilitate a "digital by default" strategy for the most used citizen’s public services, boosting the number of eGovernment users.                                                            (1) Plan de Transformación digital de la Administración General del Estado y sus Organismos Públicos:  http://administracionelectronica.gob.es/pae_Home/pae_Estrategias/Estrategia-TIC-AGE.html  
 
 
 
 
 
 
 
ANNEX A 

Overview table 

Commitments 

Summary assessment (73) 

2016 country-specific recommendations (CSRs) 

CSR 1: 

in  accordance  with 

  Ensure  a  durable  correction  of  the  excessive 
deficit, 
the  relevant 
decisions  or  recommendations  under  the 
excessive  deficit  procedure,  by  taking  the 
necessary structural measures and by using all 
windfall gains for deficit and debt reduction. 

 

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.  

Note:  in  the  summer  2016,  the  Council  decided 
that  Spain  had  not  taken  effective  action  in 
response  to  its  recommendation  to  correct  the 
excessive general government deficit, and set out 
a  new  fiscal  adjustment  path  for  Spain  with  an 
extended  deadline  for  the  correction  in  2018.  It 
also  required  Spain  to  adopt  measures  to 
strengthen 
framework  and  public 
procurement  policy.  This  Council  decision,  which 

fiscal 

its 

Spain  has  made  limited  progress  in  addressing 
CSR 1  (this  overall  assessment  of  CSR1  does  not 
include  an  assessment  of  compliance  with  the 
Stability and Growth Pact):  

Some  progress  has  been  made  to  strengthen 
Spain's  fiscal  framework.  The  updated  DBP  for 
2017 reports that the government will assess, with 
the  assistance  of  regional  and  local  governments, 
the  Stability  law's  spending  rule,  with  a  view  to 
removing  inconsistencies  with  the  SGP  spending 
rule,  without  however,  providing  details  and  a 
timeline.  The  government  has  implemented  in 
2017  some  provisions  set  out  in  Spain's  Stability 
law  that  had  never  been  implemented  –such  as 
the  requirement  to  adopt  cuts  in  expenditure 
appropriations for public administrations at risk of 
non-compliance  with  the  fiscal  targets.  However, 
the  government  has  disclosed  no  measures  to 
further  increase  the  automaticity  of  the  Stability 
Law's  mechanisms 
to  prevent  and  correct 
deviations  from  the  deficit,  debt  and  expenditure 
targets.  

Limited  progress  has  been  made  to  strengthen 
Spain's public procurement policy framework. The 

(73)  The  following  categories  are  used  to  assess  progress  in  implementing  the  2016  country-specific  recommendations: 
No progress: The Member State has not credibly announced nor adopted any measures  to address the CSR. Below a number of 
non-exhaustive typical situations that could be covered under this, to be interpreted on a case by case basis taking into account 
country-specific conditions: 

•  no  legal,  administrative,  or  budgetary  measures  have  been  announced  in  the  National  Reform  Programme  or  in  other  official 
communication  to  the  national  Parliament  /  relevant  parliamentary  committees,  the  European  Commission,  or  announced  in 
public (e.g. in a press statement, information on government's website);  
• no non-legislative acts have been presented by the governing or legislator body;   
•  the  Member  State  has  taken  initial  steps  in  addressing  the  CSR,  such  as  commissioning  a  study  or  setting  up  a  study  group  to 
analyse possible measures that would need to be taken (unless the CSR explicitly asks for orientations or exploratory actions), 
while clearly-specified measure(s) to address the CSR has not been proposed. 

Limited progress: The Member State has: 
• announced certain measures  but these only address the CSR to a limited extent;    
and/or 
• presented legislative acts in the governing or legislator body but these have not been adopted yet and substantial non-legislative 

further work is needed before the CSR will be implemented;  

• presented non-legislative acts, yet with no further follow-up in terms of implementation which is needed to address the CSR. 
Some  progress:  The  Member  State  has  adopted  measures  that  partly  address  the  CSR  and/or  the  Member  State  has  adopted 
measures that address the CSR, but a fair amount of work is still needed to fully address the CSR as only a few of the adopted 
measures have been implemented. For instance: adopted by national parliament; by ministerial decision; but no implementing 
decisions are in place. 

Substantial progress: The Member State has adopted measures that go a long way in addressing the CSR and most of which have 

been implemented. 

Full implementation: The Member State has implemented all measures needed to address the CSR appropriately. 

59 

 
 
 
                                                           
A. Overview table 

was adopted under article 126(9) of the Treaty on 
the  Functioning  of  the  EU,  therefore  superseded 
the Council CSR in the fiscal area. 

ensures 

towards 

updated 2017 DBP includes measures that can go 
some  way 
improving  some  public 
procurement practices in Spain. However, they do 
not  address  the  need  for  a  consistent  framework 
that 
and 
coordination  of  public  procurement  across  all 
contracting  authorities  and  entities.  Furthermore, 
the  reported  measures  do  not  spell  out  clear 
objectives for public procurement, instruments for 
action  and  a  timeline  for  their  adoption  and 
implementation.  

transparency 

sufficient 

CSR 2: 

Spain  has  made  some  progress  in  addressing 
CSR 2: 

  Take  further  measures  to 
by 

labour 
on 
market 
individualised  support  and  strengthening  the 
effectiveness of training measures. 

integration, 

focusing 

improve 

  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  childcare 
and long-term care. 

at 

In 2016 Spain adopted the three-year Joint Action 
long-term 
Plan  to  enhance  the  assistance  to 
the 
aimed 
unemployed, 
employment 
to  provide 
services' 
individualised  support  for  long-term  unemployed. 
the  Common 
to  develop 
The  Protocols 
Employment 
being 
developed. 

strengthening 

Portfolio 

capacity 

Services 

are 

Some progress has been made in improving labour 
market  integration  by  focusing  on  individualised 
support.  The  Joint  Action  Plan  to  enhance  the 
assistance  to  long-term  unemployed  lays  down  a 
limit  of  120  beneficiaries  per  caseworker. 
Caseworkers  should  design  an 
individualised 
pathway based on the profile of the unemployed, 
for which a profiling tool is being developed. 

Spain  has  made  some  progress  in  enhancing  the 
capacity  of  regional  employment  services.  The 
Joint  Action  Plan  to  enhance  the  assistance  to 
long-term  unemployed  provides  for  EUR  515 
million  for  2016-2018.  In  2016  Spain  has  finalised 
an evaluation of the regional employment services 
(EVADES),  whose  conclusions  have  not  been 
translated  into  concrete  action  so  far.  There  has 
been 
reinforce 
coordination between the public employment and 
social services. 

significant 

action 

no 

to 

Limited  progress  has  been  made  in  addressing 
gaps and  disparities in minimum income schemes 
improving  family  support  schemes.  The 
and 
findings  and 
government  will  analyse 
recommendations  of  the  in-depth  evaluation  of 
income guarantee systems and will work with the 
improve  the  effectiveness  of  the 
regions  to 

the 

60 

 
CSR 3: 

  Take  further  measures  to  improve  the  labour 
market 
tertiary  education, 
including by incentivising cooperation between 
universities, firms and research institutions.  

relevance  of 

 

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

CSR 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. 

A. Overview table 

schemes.  In  the  area  of  long-term  care  some 
progress  was  made  in  terms  of  provision  of 
services.  The  government  plans  to  improve  the 
conditions  for  access  to  the  services,  notably  by 
simplifying the categories of dependency. 

Spain  has  made  limited  progress  in  addressing 
CSR 3: 

Limited  progress  was  made  as  regards  measures 
to  foster  public-private  cooperation  in  research 
and  innovation.  There  is  no  strategic  approach  to 
knowledge transfer. Only a few punctual measures 
have  been  taken:  creation  of  a  working  groups 
with  chambers  of  commerce;  establishment  of  a 
new  technological  6  years-term;  creation  of  an 
industrial  PhD 
for 
companies hiring researchers 

incentives 

scheme; 

tax 

towards 

Limited  progress  made 
increasing 
performance-based  funding  of  public  research 
bodies  and  universities,  and  on  fostering  R&I 
investment  by  the  private  sector.  The  valuable 
initiatives  under  the  "institutional  strengthening" 
pillar  of  the  National  Plan  for  R&I  can  be  a 
stepping  stone  for  the  further  reinforcement  of 
performance-based funding. 

Spain  has  made  limited  progress  in  addressing 
CSR 4: 

Limited  progress  has  been  made  on 
the 
law  at 
implementation  of  the  market  unity 
regional level, judging from the pace of adaptation 
of sectorial regulation to the principles of the law 
on  market  unity  and  from  the  number  of 
agreements  reached  between  the  central  and 
regional governments at sectorial conference level 
to develop regulatory frameworks adapted to that 
law,  since  the  publication  of  the  2016  Country 
Report  for  Spain.  Moreover,  some  regulations 
adopted by regions in the area of the collaborative 
economy may be contrary to the principles of the 
market unity law.  

Limited progress has been made on implementing 
the retail sector reform, as only some regions have 
adopted implementing measures. 

No  progress  has  been  made  on  reforming 
professional services. Spain has neither announced 

61 

 
A. Overview table 

nor adopted any measures in this area in 2016. 

62 

 
 
 
A. Overview table 

Europe 2020 (national targets and progress) 

Europe 2020 national targets 

Assessment 

Employment rate target: 74 % 

R&D expenditure target: 2 % of GDP 

Greenhouse  gas  emissions  target:  -10 %  in  2020 
compared to 2005 (in non-ETS sectors) 

Non-ETS 2015 interim target: -6 % 

2020 Renewable energy target: 20 %  

Energy  efficiency  target:  119.8 Mtoe  expressed  in 
primary 
(80.1 Mtoe 
expressed in final energy consumption) 

consumption 

energy 

Early school leavers target: 15 % 

Tertiary education attainment target: 44 % 

2015:  62 %  (Eurostat).  Q3-2016:  64.5 %  (INE; 
70.3 % for men and 58.6 % for women) 

2015:  1.22 %  (provisional  data).  Spain's  spending 
on  R&D  relative  to  GDP  (i.e.,  R&D  intensity),  by 
both  the  private  and  public  sectors,  continued 
declining  in  2015.  Reaching  the  2%  national  R&D 
intensity target by 2020 will be a challenge. 

2020  target:  According  to  the  latest  national 
projections  submitted  to  the  Commission  and 
is 
into  account  existing  measures, 
taking 
expected that the target will be achieved: -12.4 % 
in 2020 as compared with 2005 

it 

2015 interim target: Preliminary figures show that 
the non-ETS emissions decreased by 16 %. 

With  a  renewable  energy  share  of  15.6 %(74)  in 
2015, Spain is on track to reach the 2020 target.  

Primary  energy  consumption  2015:  117.11 Mtoe 
Final energy consumption 2015: 80.46 Mtoe 

Spain has to increase its effort to decrease its final 
energy consumption further in order to achieve its 
indicative  final  energy  consumption  2020  target 
its  current  primary  energy 
and 
to  keep 
its  primary  energy  2020 
consumption  below 
target. 

2015:  20 %  (interim  target  for  2015  was  23 %). 
24 % for men and 15.8 % for women. 

2015:  40.9 %  (34.8 %  for  men  and  47.1 %  for 
women).  

Target  on  the  reduction  of  population  at  risk  of 
poverty  or  social  exclusion  compared  to  2008  in 
thousands of persons: -1 400 

2015: + 2 389, which represents the first break of 
the rising trend since the crisis (2 616 in 2014). 

(74)  "Renewable energy shares for 2015 are approximations and not official data, reflecting the available data (04.10.2016). See the 
the  2016  Report  on  Renewable 

in  Realisation  of 

Öko-Institut  Report:  Study  on  Technical  Assistance 
Energy,  http://ec.europa.eu/energy/en/studies" 

63 

 
 
                                                           
ANNEX B 

MIP Scoreboard 

Table B.1: 

The MIP Scoreboard for Spain 

Flags: e: estimated. p: provisional.           
1) House price index: e = Eurostat estimates. 
Source: European Commission, Eurostat and Directorate General for Economic and Financial Affairs (for Real Effective 
Exchange Rate), and International Monetary Fund. 

64 

Thresholds201020112012201320142015Current account balance, (% of GDP) 3 year average-4%/6%-5.8-3.8-2.4-0.60.81.3-35%-88.6-91.9-89.9-94.3-97.5-89.9Real effective exchange rate - 42 trading partners, HICP deflator3 years % change±5% & ±11% -0.3-2.5-5.3-0.4-1.0-2.9Export market share - % of world exports5 years % change-6%-11.4-8.2-17.6-10.6-12.0-3.5Nominal unit labour cost index (2010=100)3 years % change9% & 12% 5.7p-1.0p-5.1p-4.1p-3.5p-0.7p6%-3.7-9.8-16.8-10.10.23.814%0.9-3.7-11.2-10.3-7.2-2.7133%200.3196.2187.8176.7165.4154.060%60.169.585.795.4100.499.8Unemployment rate3 year average10%16.419.722.024.125.124.216.5%-2.02.82.7-11.6-1.2-2.1-0.2%1.71.21.20.80.30.00.5%5.66.96.75.74.00.42%23.421.715.214.07.0-4.6Activity rate - % of total population aged 15-64 (3 years change in p.p)Long-term unemployment rate - % of active population aged 15-74 (3 years change in p.p)Youth unemployment rate - % of active population aged 15-24 (3 years change in p.p)External imbalances and competitivenessNew employment indicatorsNet international investment position (% of GDP)Deflated house prices (% y-o-y change)Total financial sector liabilities (% y-o-y change)Private sector credit flow as % of GDP, consolidatedPrivate sector debt as % of GDP, consolidatedGeneral government sector debt as % of GDPInternal imbalances 
 
 
 
ANNEX C 

Standard tables 

Table C.1: 

Financial market indicators 

(1) Latest data Q2-2016. 
(2) Quarterly values are not annualised. 
(*) Measured in basis points. 
Source: European Commission (long-term interest rates); World Bank (gross external debt); Eurostat (private debt); ECB (all 
other indicators). 

65 

201120122013201420152016Total assets of the banking sector (% of GDP)338.3344.4307.3286.7263.0244.5Share of assets of the five largest banks (% of total assets)48.151.454.458.360.2-Foreign ownership of banking system (% of total assets)9.59.18.18.57.2-Financial soundness indicators:1)              - non-performing loans (% of total loans)5.26.47.96.75.35.0              - capital adequacy ratio (%)12.211.513.313.614.514.6              - return on equity (%)2)0.2-24.95.86.76.63.4Bank loans to the private sector (year-on-year % change)-1.9-7.4-8.6-4.8-2.3-2.2Lending for house purchase (year-on-year % change)-1.2-3.3-4.1-3.7-4.2-2.8Loan to deposit ratio108.7108.198.793.391.489.1Central Bank liquidity as % of liabilities6.513.58.76.26.16.6Private debt (% of GDP)196.2187.8176.7165.4154.0-Gross external debt (% of GDP)1) - public25.624.341.248.551.149.9    - private54.440.652.452.848.847.1Long-term interest rate spread versus Bund (basis points)*283.3435.1299.2156.0124.0131.4Credit default swap spreads for sovereign securities (5-year)*250.1325.7185.571.472.668.1 
 
 
 
 
C. Standard tables 

Table C.2: 

Labour market and social indicators 

(1) The unemployed persons are all those who were not employed but had actively sought work and were ready to begin 
working immediately or within 2 weeks.       
(2) Long-term unemployed are those who have been unemployed for at least 12 months.       
(3) Not in education employment or training.       
(4) Average of first three quarters of 2016. Data for total unemployment and youth unemployment rates are seasonally 
adjusted.  
Source: European Commission (EU Labour Force Survey). 

66 

201120122013201420152016 4Employment rate(% of population aged 20-64)62.059.658.659.962.063.7Employment growth (% change from previous year)-2.7-4.0-2.60.92.52.7Employment rate of women(% of female population aged 20-64)56.154.653.854.856.457.9Employment rate of men (% of male population aged 20-64)67.764.663.465.067.669.4Employment rate of older workers (% of population aged 55-64)44.543.943.244.346.949.0Part-time employment (% of total employment, aged 15-64)13.514.415.715.815.615.1Fixed-term employment (% of employees with a fixed term contract, aged 15-64)25.223.423.224.025.226.0Transitions from temporary to permanent employment10.814.414.412.010.2:Unemployment rate1 (% active population, age group 15-74)21.424.826.124.522.120.0Long-term unemployment rate2 (% of labour force)8.911.013.012.911.49.7Youth unemployment rate (% active population aged 15-24)46.252.955.553.248.345.1Youth NEET3 rate (% of population aged 15-24)18.218.618.617.115.6:Early leavers from education and training (% of pop. aged 18-24 with at most lower sec. educ. and not in further education or training)26.324.723.621.920.0:Tertiary educational attainment (% of population aged 30-34 having successfully completed tertiary education)41.941.542.342.340.9:Formal childcare (30 hours or over; % of population aged less than 3 years)20.015.016.016.0:: 
 
 
 
 
C. Standard tables 

Table C.3: 

Labour market and social indicators (continued) 

(1) People at risk of poverty or social exclusion: individuals who are at risk of poverty and/or suffering from severe material 
deprivation and/or living in households with zero or very low work intensity.       
(2) At-risk-of-poverty rate: proportion of people with an equivalised disposable income below 60 % of the national equivalised 
median income.        
(3) Proportion of people who experience at least four of the following forms of deprivation: not being able to afford to i) pay 
their rent or utility bills, ii) keep their home adequately warm, iii) face unexpected expenses, iv) eat meat, fish or a protein 
equivalent every second day, v) enjoy a week of holiday away from home once a year, vi) have a car, vii) have a washing 
machine, viii) have a colour TV, or ix) have a telephone.       
(4) People living in households with very low work intensity: proportion of people aged 0-59 living in households where the 
adults (excluding dependent children) worked less than 20 % of their total work-time potential in the previous 12 months.       
(5) For EE, CY, MT, SI and SK, thresholds in nominal values in euros; harmonised index of consumer prices = 100 in 2006 (2007 
survey refers to 2006 incomes)       
Source: For expenditure for social protection benefits ESSPROS; for social inclusion EU-SILC. 

67 

 
 
 
 
 
C. Standard tables 

Table C.4: 

Product market performance and policy indicators 

(1) The methodologies, including the assumptions, for this indicator are shown in detail at : 
http://www.doingbusiness.org/methodology .        
(2) Average of the answer to question Q7B_a. '[Bank loan]: If you applied and tried to negotiate for this type of financing over 
the past six months, what was the outcome?'. Answers were scored as follows: zero if received everything, one if received 
most of it, two if only received a limited part of it, three if refused or rejected and treated as missing values if the application is 
still pending or if the outcome is not known.       
(3) Percentage population aged 15-64 having completed tertiary education.       
(4) Percentage population aged 20-24 having attained at least upper secondary education.       
(5) Index: 0 = not regulated; 6 = most regulated. The methodologies of the OECD product market regulation indicators are 
shown in detail at :  http://www.oecd.org/competition/reform/indicatorsofproductmarketregulationhomepage.htm        
(6) Aggregate OECD indicators of regulation in energy, transport and communications.    
Source: European Commission; World Bank — Doing Business (for enforcing contracts and time to start a business); OECD (for 
the product market regulation indicators); SAFE (for outcome of SMEs' applications for bank loans). 

68 

Performance indicators201020112012201320142015Labour productivity (real, per person employed, year-on-year % change)Labour productivity in industry5.502.782.290.492.383.52Labour productivity in construction-1.052.2012.302.181.19-7.23Labour productivity in market services1.761.531.701.210.710.98Unit labour costs (ULC) (whole economy, year-on-year % change)ULC in industry-4.11-1.63-0.240.72-2.43-4.46ULC in construction1.03-4.12-12.38-4.09-2.025.34ULC in market services-0.900.23-2.07-1.17-0.320.82Business environment201020112012201320142015Time needed to enforce contracts1 (days)515.0515.0510.0510.0510.0510.0Time needed to start a business1 (days)52.029.030.024.014.014.0Outcome of applications by SMEs for bank loans20.990.941.150.980.970.66Research and innovation201020112012201320142015R&D intensity1.351.331.291.271.241.22Total public expenditure on education as % of GDP, for all levels of education combined4.984.824.344.19nanaNumber of science & technology people employed as % of total employment414243444545Population having completed tertiary education3282930313232Young people with upper secondary education4626263646669Trade balance of high technology products as % of GDP-1.24-1.05-0.86-0.70-0.87-1.06Product and service markets and competition200320082013OECD product market regulation (PMR)5, overallna1.591.44OECD PMR5, retail3.673.482.88OECD PMR5, professional services2.922.742.43OECD PMR5, network industries62.271.651.59 
 
 
 
 
C. Standard tables 

Table C.5:  Green growth 

All macro intensity indicators are expressed as a ratio of a physical quantity to GDP (in 2005 prices) 
          Energy intensity: gross inland energy consumption (in kgoe) divided by GDP (in EUR) 
          Carbon intensity: greenhouse gas emissions (in kg CO2 equivalents) divided by GDP (in EUR) 
          Resource intensity: domestic material consumption (in kg) divided by GDP (in EUR) 
          Waste intensity: waste (in kg) divided by GDP (in EUR) 
Energy balance of trade: the balance of energy exports and imports, expressed as % of GDP   
Weighting of energy in HICP: the proportion of 'energy' items in the consumption basket used for the construction of the HICP 
Difference between energy price change and inflation: energy component of HICP, and total HICP inflation (annual % 
change) 
Real unit energy cost: real energy costs as a percentage of total value added for the economy 
Environmental taxes over labour taxes and GDP: from European Commission's database, ‘Taxation trends in the European 
Union’ 
Industry energy intensity: final energy consumption of industry (in kgoe) divided by gross value added of industry (in 2005 EUR)  
Real unit energy costs for manufacturing industry excluding refining : real costs as a percentage of value added for  
manufacturing sectors 
Share of energy-intensive industries in the economy: share of gross value added of the energy-intensive industries in GDP 
Electricity and gas prices for medium-sized industrial users: consumption band 500–20 00MWh and 10 000–100 000 GJ; figures 
excl. VAT. 
Recycling rate of municipal waste: ratio of recycled and composted municipal waste to total municipal waste 
Public R&D for energy or for the environment: government spending on R&D for these categories as % of GDP 
Proportion of GHG emissions covered by EU Emissions Trading System (ETS) (excluding aviation): based on greenhouse gas 
emissions 
(excl land use, land use change and forestry) as reported by Member States to the European Environment Agency. 
Transport energy intensity: final energy consumption of transport activity (kgoe) divided by transport industry gross value 
added (in 2005 EUR) 
Transport carbon intensity: GHG emissions in transport activity divided by gross value added of the transport sector 
Energy import dependency: net energy imports divided by gross inland energy consumption incl. consumption of 
international bunker fuels 
Aggregated supplier concentration index:  covers oil, gas and coal. Smaller values indicate larger diversification and hence 
lower risk. 
Diversification of the energy mix: Herfindahl index over natural gas, total petrol products, nuclear heat, renewable energies 
and solid fuels 
(*) European Commission and European Environment Agency 
Source: European Commission (Eurostat) unless indicated otherwise. 

69 

Green growth performance201020112012201320142015MacroeconomicEnergy intensity kgoe / €0,120,120,120,120,110,11Carbon intensity kg / €0,370,370,380,350,35-Resource intensity (reciprocal of resource productivity)kg / €0,600,540,440,420,400,40Waste intensity kg / €0,14-0,13-0,12-Energy balance of trade % GDP-2,9-3,7-3,7-3,4-2,9-Weighting of energy in HICP%10,2310,7811,6012,3912,3012,38Difference between energy price change and inflation %4,312,77,4-1,92,6-4,5Real unit of energy cost% of value added12,913,414,514,915,0-Ratio of environmental taxes to labour taxesratio0,100,090,090,110,11-Environmental taxes% GDP1,61,61,61,91,9-Sectoral Industry energy intensity kgoe / € 0,140,140,140,150,140,13Real unit energy cost for manufacturing industry excl. refining% of value added20,320,821,120,720,8-Share of energy-intensive industries in the economy% GDP8,508,528,348,078,26-Electricity prices for medium-sized industrial users€ / kWh0,110,110,120,120,120,12Gas prices for medium-sized industrial users€ / kWh0,030,030,040,040,040,03Public R&D for energy % GDP0,030,030,010,010,010,01Public R&D for environmental protection% GDP0,030,030,020,020,020,02Municipal waste recycling rate%29,226,729,832,530,833,3Share of GHG emissions covered by ETS*%36,539,540,837,838,340,5Transport energy intensitykgoe / €1,010,960,910,920,890,90Transport carbon intensitykg / €2,502,322,202,292,21-Security of energy supplyEnergy import dependency%76,776,373,170,472,973,3Aggregated supplier concentration indexHHI13,114,114,919,825,2-Diversification of energy mixHHI0,300,290,270,270,27- 
 
 
 
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