Source: EURLEX
Language: en
Format: md

*|*

# 52012SC0310

**COMMISSION STAFF WORKING DOCUMENT Assessment of the 2012 national reform programme and stability programme for SPAIN Accompanying the document Recommendation for a COUNCIL RECOMMENDATION on Spain's 2012 national reform programme and delivering a Council opinion on Spain's updated stability programme, 2012-2015 /\* SWD/2012/0310 final \*/**

  

CONTENTS

Executive summary.. 3

1..... Introduction.. 4

2..... Economic developments and challenges. 5

2.1.    Recent
economic developments and outlook. 5

2.2.    Challenges. 6

3..... Assessment of the policy agenda.. 9

3.1.    Fiscal
policy and taxation. 9

3.2.    Financial
sector 15

3.3.    Labour
market, education and social policies. 17

3.4.    Structural
measures promoting growth and competitiveness. 21

3.5.    Modernising
public administration. 26

4..... Overview table (CSRs, EPP, Targets, etc.) 29

5..... Annex.. 34

Executive
summary

In 2012, Spain's
economic activity is expected to contract by 1.8 %, and by 0.3 % in
2013. Unemployment is foreseen to increase further to 25.1 % in 2013, also
for the young.

Spain has recently adopted ambitious reforms, including in key areas such
as the financial sector, the labour market and collective bargaining. It also introduced
legislation to strengthen the fiscal framework and reformed pensions.
Reflecting the outstanding challenges, Spain has announced comprehensive and
far-reaching plans for further measures to strengthen fiscal discipline and enhance
competitiveness to boost the country's growth.

Spain continues to face important policy challenges following the
bursting of the housing and credit bubble. Further fiscal consolidation and
fiscal discipline at regional level are necessary to restore market confidence
and to halt the rapid increase in government debt. The tax structure lacks
efficiency and there is room for making the tax system more growth friendly.
The banking sector remains fragile due to high private and corporate debt
levels. Low levels of competition in sheltered sectors such as professional
services and retail, sluggish adjustment of prices and wages and low
productivity growth hamper the economic recovery and the re-orientation of the
Spanish economy towards a new growth model. Unemployment has reached a record
high, and employability and labour market segmentation constitute significant
bottlenecks. Problems in the education system include low levels of achievement
at secondary level, too many students leaving school early and a vocational
training system insufficiently tailored to market needs.

1.
Introduction

In June 2011, the Commission proposed seven country specific recommendations[1] (CSRs) for economic and structural reform policies for Spain. In July 2011, the Council of the
European Union adopted these recommendations[2], which focused
on public finances, pension reform, restructuring of the financial sector, tax
policies, labour market and the functioning of the product and services markets.

In November
2011, the Commission published its Annual Growth Survey for 2012[3] (AGS 2012) presenting the basis for building the necessary common
understanding about the priorities for action at national and EU level in 2012.
It focused on five priorities – growth-friendly fiscal consolidation, restoring
normal lending to the economy, promoting growth and competitiveness, tackling
unemployment and social consequences of the crisis, and modernising public
administration – and encouraged Member States to implement them in the 2012
European Semester.

Against this
background, Spain presented its national reform programme and stability
programme in April 2012. These programmes provide details on progress made
since July 2011 and plans going forward.

Overall assessment

This staff
working document assesses the state of implementation of the 2011
country-specific recommendations as well as the Annual Growth Survey 2012 in Spain, identifies current policy challenges and, in this light, examines the policy plans.

Overall, the
policy plans submitted by Spain are relevant, but in some areas they lack
sufficient ambition to address the challenges identified. The national reform
programme confirms that Spain will continue with its current strategies and
announces new plans in the areas of active labour market policies, measures
promoting growth and competitiveness, bank regulation and cooperation between
different layers of public administration. For some of these areas, the national
reform programme does not contain any specific plans for addressing the
challenges.

Concerning
public finances, a stronger institutional framework has
been legislated, in line with the Council recommendation. However, the deficit
outturn in 2011 was considerably worse than planned in the previous programme.
The general government deficit[4] fell to 8.5 % of GDP in 2011 compared with a 6 % of GDP
target. The related country-specific recommendation has
therefore been only partially implemented.

In the area of
pensions, Spain has implemented the recommendation; however, the worsening of
the economic prospects in Spain is limiting the impact of the reforms on the
projected age-related public expenditure.

As far as the financial
sector is concerned, in February 2011 Spain adopted much more stringent minimum
capital requirements for all banks that were reached by end-September 2011, in
line with the commitment under the Euro Plus Pact and the country-specific
recommendation. However, the weakening of macroeconomic prospects may require
further strengthening of the capital buffers of banks, especially of weaker
institutions. Firms' access to finance continues to be one of the main concerns
of the Spanish enterprises.

The recent
reform of the tax system introduced by government is heading in the opposite
direction to the country-specific recommendation to Spain in this area. Overall,
the Spanish tax system still relies disproportionately on direct taxes, while
taxes on consumption and environmental taxes are relatively low compared to the
EU average.

Spain has
designed a sound labour market reform, in the direction advocated by the country-specific
recommendations in this area and in line with Euro Plus Pact commitments; nevertheless,
the reform was not ambitious enough to tackle the use of ex-post automatic wage
inflation indexation clauses in collective agreement, to reduce labour market
segmentation and to improve employment opportunities for young people.

In the area of competition
in the product and services markets, there has been some progress on
implementing the Sustainable Economy Law, but only in certain areas. The
absence of competition in professional services undermines the competitiveness
of users downstream. Strong commitment is needed from the new government to
carry on planned privatization efforts, which have currently been put on hold. No
major progress has been observed with respect to the administrative burden
associated to the lack of coordination between administrations.

2.
Economic developments and challenges
2.1.
Recent economic developments and outlook

Recent economic
developments

The large
internal and external imbalances built up during the long period of the housing
and credit boom started being corrected in 2007. The international financial
crisis accelerated this correction, as reflected by the downsizing in the
construction sector, the reversal in credit flows to households and firms, the
significant reduction of the traditionally high current account deficit and the
slowdown in external debt growth. Nevertheless, significant imbalances remain.
High private sector indebtedness and record-high unemployment continue to
depress the outlook for Spain. The Spanish economy has lost momentum due to a
weaker external environment, the intensification of the sovereign debt crisis,
negative spillovers in the financial sector, reductions in public expenditure
and a larger-than-expected deterioration in the labour market. Real GDP growth
stagnated in the third quarter of 2011 and declined by 0.3 %
quarter-on-quarter in the last quarter of the year. For 2011, real GDP growth
still reached 0.7 %. Unemployment has been fuelled by the radical downsizing
of the construction sector and by the economic downturn. The situation was
aggravated by a rigid labour market and very sluggish adjustment of wages. The
unemployment rate reached 24.4 % in the first quarter (over 5 million
people).

Outlook

The Commission’s
2012 spring forecast expects real GDP to shrink by 1.8 % in 2012 and by around
0.3 % in 2013. Spain went into recession in the fourth quarter of 2011,
driven by a larger-than-expected deterioration in the labour market, lower
public expenditure and deteriorating credit conditions, while the euro-area
sovereign debt crisis intensified and external demand weakened. Internal demand
will act as a drag on growth in 2012, only partially compensated by external
demand. The contraction is expected to be strongest in the second half of 2012,
reflecting the short-term impact of consolidation needs. The correction of the
economic imbalances will adversely affect domestic demand over the forecast
horizon, although a gradual improvement is expected in 2013. Resilient exports
and weaker imports, implied by the subdued domestic demand, should continue to
support net exports and, thus, economic growth. However, unemployment is likely
to increase further in the short-term.

2.2.
Challenges

Spain faces major adjustment challenges following the bursting of the
housing and credit bubble. Major reforms have begun in the areas of fiscal
consolidation and fiscal framework, the financial sector, pensions and labour
and, to a certain degree, product markets. However, Spain still faces
significant challenges in rebuilding market confidence, securing the sustainability
of public finances, reducing domestic and external vulnerabilities and
underpinning medium-term growth and employment. In consequence, there is need
to fully implement the ongoing reforms and substantially speed up reforms in
the product and service markets.

Public finances
have deteriorated significantly following the crisis. Further consolidation is essential to halt the rapid increase in government
debt and to restore market confidence. To achieve this, compliance with
budgetary targets at all levels of government is indispensable. The bursting of
the asset price bubble and the end of the domestic-demand-led boom has
structurally dented Spain’s revenue base. Consequently, structural adjustments
of both expenditure and revenue are required. Growth-friendly fiscal
consolidation would include improving the efficiency of the tax system by
shifting the tax burden from labour towards consumption and environmental
taxes, broadening tax bases and rationalising subsidies. The worsening of the
economic outlook limits the positive impact of recent reforms on the projected
age-related public expenditure. Dealing with the costs of ageing therefore
remains a further challenge.

Recent reforms
have helped to speed up restructuring of the banking sector, which should
continue. However, ensuring the stability of the financial sector is still a
challenge. Real estate loans make up a large proportion of total loans, and
this remains a risk factor. Households and corporations are still exposed to
very high debt levels and need to repair their balance sheets. Further
adjustments in house prices are needed to absorb the high stock of unsold
homes. Difficult market conditions, weak economic prospects and stricter
provisioning rules for banks pave the way for credit restrictions and leave
firms facing increasing difficulties with access to finance.

Net external
debt remains close to 90 % of GDP. The current account will have to shift
to a structural surplus to contain external financing needs amid persistent
market pressures. This will require additional improvements in price and
non-price competitiveness. Moreover, flexible product and factor markets are
essential to facilitate the re-orientation of the Spanish economy to the
tradable sector. Recent reforms are heading in the right direction, but the
adjustment is being hampered by lack of competition in sheltered sectors such
as professional services and retail, by sluggish adjustment of prices and wages
and by low productivity growth. What Spain needs is stronger competition, especially
in services, a more growth-friendly business environment and more efficient
education, training and R&D and innovation systems. These would make it
easier to reallocate resources, diversify Spain’s economic activity and its
productive potential, increase employment, improve productivity and boost
growth.

Unemployment in
Spain has surged to record-high levels in the aftermath of the crisis. Both
cyclical and structural factors play a role. Unemployment particularly affects
younger and low-skilled workers and those who had temporary contracts.
Adjustment in the labour market has been occurring via lay-offs rather than
through wage flexibility or by changing working conditions within firms. Young
people face significant challenges in making the transition from education and
training to the labour market. These challenges include lack of work
experience, low levels of qualification and a mismatch between skills and
labour market requirements. Spain has made a considerable effort to improve the
functioning of the labour markets through a series of labour market reforms in
2010, 2011 and, the most ambitious one in February 2012. They embrace changes
to employment protection legislation, the collective bargaining system,
internal flexibility, job incentives and labour market intermediation services.
However, there is still a question mark over the effectiveness of active labour
market policies and the efficiency of the intermediation services, in
particular with regard to coordinating national and regional public employment
services, including information exchanges on job vacancies throughout the
country. The social consequences of the crisis in Spain are reflected in the
recent increases in number of people at risk of poverty and/or social
exclusion, which makes harder to achieve the target of reducing the number of
people at risk of poverty and/or social exclusion by between 1.4 and 1.5
million.

Problems in the
education system include low levels of achievement at secondary level, too many
students leaving school early and a vocational training system insufficiently
tailored to market needs. These contribute to low productivity growth and
reduce the employability of the workforce.

3.
Assessment of the policy agenda
3.1.
Fiscal policy and taxation

Budgetary developments
and debt dynamics

The stability
programme plans to bring the budget deficit below the 3 % reference value
by 2013, in line with the Council recommendations of April 2009, and to reduce
it further to 1.1 % of GDP in 2015. Under the stability programme, the
medium-term objective (MTO), which remains a balanced budget in structural
terms, would be almost reached by 2015 with a structural budget deficit of 0.2 %
of GDP. The MTO adequately reflects the requirements of the Stability and
Growth Pact.

The deficit
outturn in 2011 was considerably worse than planned in the previous programme.
The deficit[5]
fell to 8.5 % of GDP compared with the target of 6 %. About two
thirds of the deviation is explained by overruns in the budgets of autonomous
communities, while central government and social security slippages were more
limited. The budget deviation was driven mainly by weaker-than-expected
revenues in line with the materialisation of a less favourable economic
environment than foreseen in the 2011 stability programme and additional
revenue shortfalls due to a less tax-rich growth composition. In particular, taxes
on production and imports (VAT, taxes on real estate transactions) recorded
major shortfalls, affecting the central and regional government levels. Social
contributions were also weaker, in line with a stronger-than-expected
deterioration in the labour market. Consequently, Spain has not met part of the
first 2011 recommendation, which called inter alia for achieving deficit
targets at all levels of government, including by strictly applying the
existing deficit and debt control mechanisms for regional governments, and
adopting further measures if budgetary and economic developments do not turn
out as expected.

For 2012, the
stability programme aims to achieve a general government deficit of 5.3 %
of GDP, compared with a target of 4.4 % in the previous update. This
revision reflects the worse starting position in 2012 and a weaker economic
outlook. In its 2012 spring forecast, the Commission predicts a deficit of 6.4 %
of GDP for 2012. The main difference concerns the expenditure side (0.8 pps
of GDP) given that some of the consolidation measures to be taken at regional government
level have not been yet fully specified. The difference in revenues (0.3 pps
of GDP) is explained by lower expected social contributions in line with a
deteriorating labour market outlook. While the central government's target of a
deficit of 3.5 % of GDP should be broadly within reach, regional governments
are expected to miss their targets, mainly because they need to further specify
their consolidation measures. Moreover, given the lower expected social
contributions, the social security system is likely to record a deficit again
this year, instead of the balanced budget planned in the stability programme.

The stability
programme maintains a budget deficit target of 3 % of GDP for 2013. The
target for 2014 has been set at 2.2 % of GDP (it was 2.1 % in the
previous update) and for  2015 it is set at 1.1 % of GDP.

The fiscal
consolidation plan is frontloaded, with most of the total fiscal adjustment to
be delivered in 2012 and 2013, in terms of headline, primary and structural
balances. According to the stability programme, the cumulative reduction of the
headline deficit between 2011 and 2015 amounts to 7.4 pps of GDP and is
mainly expenditure-based (6 pps of GDP). Expenditure cuts up to 2015 are expected
to be particularly severe for compensation of employees (2.3 pps of GDP),
intermediate consumption (1.7 pps of GDP), and gross fixed capital
formation (1.3 pps of GDP). The central Government plans to reduce its
deficit by 4 pps of GDP between 2011 and 2015, but regional Governments
will also have to deliver a reduction of close to 3 pps of GDP in their
budget deficit.

According to
the stability programme, total revenue-raising measures of 2.3 % of GDP
are planned in 2012. Of these, 1.8 % have already been adopted, while 0.5 %
remains to be decided at regional level. These include mainly increases in
direct taxation, such as changes to income and corporate taxation and a fiscal
amnesty. A number of these measures are temporary in nature, e.g. an increase
in income tax (limited to 2012 and 2013), a change in the ‘tax instalment’
system for corporate taxes in 2012, a public wage freeze in 2012 and the fiscal
amnesty in 2012. Total expenditure is expected to decline by 1.2 % of GDP
in 2012, underpinned by cuts in ministerial spending levels. The stability
programme envisages major cuts in capital spending and in current spending, for
example by ceasing to recruit civil servants. At regional level, the largest
cuts are set to come from the recently-announced savings in the areas of health
and education in 2012 and 2013.

|| Box 2. Main budgetary measures ||

|| Revenue || Expenditure ||

|| 2011 ||

|| · 2010 increase in VAT rates (residual impact of 0.3 % of GDP) · Increase in excise taxes in the 2011 budget (0.1 % of GDP) · Withdrawal of a personal income tax credit of 400 euro, residual impact (0.1 % of GDP). || · May 2010 cuts in expenditure, including a reduction in public investment and a freeze in public sector wages (-1 % of GDP). · Withdrawal of the National Fund for Employment and Local Sustainability (0.5 % of GDP). · Phasing out subsidies, including housing subsidies. (-0.1 % of GDP). ||

|| 2012 ||

|| · Increase in Personal Income Tax (0.4 % of GDP) · Corporate Tax (0.5 % of GDP) · Fiscal regularisation (0.2 % of GDP) · Fight against tax fraud (0.2 % of GDP) · Tax on Property (0.1 % of GDP) · Additional revenues of Autonomous Communities (0.3 % of GDP) || · Cuts in education (0.1 % of GDP) · Cuts in health care (0.3 % of GDP) · Cuts in capital transfers (0.5 % of GDP) ||

|| 2013 ||

|| · Revenues from indirect taxation (0.8 % of GDP) · Personal Income Tax (0.1 % of GDP) || · Cuts in education (0.2 % of GDP) · Cuts in health Care (0.3 % of GDP) · Removal of overlaps and rearrangement of competences between levels of Government (0.3 % of GDP) ||

Note: The budgetary impact in the table is the impact reported in the programme, i.e. by the national authorities. A positive sign implies that revenue / expenditure increases/decreases as a consequence of this measure. Among the macro-structural measures affecting potential growth, the main measures to highlight are the successive labour market reforms. A series of labour market reforms in 2010 and 2011 and again in February 2012 aimed to reduce labour market segmentation and to make the collective bargaining system more flexible (see Section 3.3).

In 2013 the
stability programme includes a large projected increase in revenues from taxes
on production and imports, within a framework of a tax restructuring that might
be partially compensated by lower taxes on labour. The Government has not yet
specified the measures it will take to underpin the increase in indirect taxes.
On the expenditure side, cuts in education and health are planned at regional
level, as well as a rearrangement of competences between levels of Government.
For 2014 and 2015, few concrete measures are included in the programme, so the
envisaged consolidation is not yet sufficiently supported by measures to
underpin the proposed deficit target.

According to
the stability programme, the annual average improvement of the structural
balance[6]
is 2.6 % of GDP for 2011-13, well above the fiscal effort of over 1.5 %
of GDP recommended in the excessive deficit procedure. Additional improvements
of 1.3 pps and 0.7 pps of GDP are envisaged in 2014 and 2015. The
stability programme expects a sizeable improvement in the primary balance — from
a deficit of 6.1 % of GDP in 2011 to a surplus of 2.0 % of GDP in
2015. This comes alongside an increase of 0.7 pps of GDP in interest
expenditure over the programme horizon. In its 2012 spring forecast, the
Commission expects a primary deficit of 3.3 % of GDP in 2012 and 3.1 %
in 2013 (compared to a 2.2 % deficit in 2012 and 0.2 % surplus in
2013 in the programme).

Targets of -2.9 %
in 2014 and ‑2.1 % in 2015 have been set for real public expenditure
growth. (This is the modified expenditure aggregate used for the expenditure
benchmark, which is the growth rate net of non-discretionary changes in
unemployment benefit and of discretionary revenue measures). These targets are
more ambitious than the lower reference rate of -0.2 for both years that the
expenditure benchmark would require. The lower reference rate applies as long
as Spain is still adjusting towards its medium-term objective of a balanced
structural budget. Spain thus meets the expenditure benchmark.

There are
significant downside risks to the scenario presented in the stability
programme. First, there are risks linked to the
macroeconomic scenario. These risks appear minor in 2012 and would be linked mainly to a less tax-rich composition
of growth, with weaker domestic demand and in
particular private consumption. For 2013 and beyond, the macroeconomic
assumptions of the programme appear favourable, with real GDP expected to turn
positive again already in 2013. Very high unemployment, the need for further
deleveraging in the private sector and tight financing conditions would also
point to a more subdued recovery of private consumption and investment than
expected in the programme. The Commission’s 2012 spring forecast projected that
GDP growth would reach -1.8 % in 2012 and -0.3 % in 2013, as against
-1.7 % and 0.2 %, respectively, according to the programme. Second, revenues
could be even more sensitive to the ongoing structural adjustment, due to
composition effects and the protracted slump in the real estate sector, and
this could also result in greater revenue shortfalls. Third, an additional risk
stems from the budgetary performance of the regional Governments, given their
recent poor track record. Sizeable slippages occurred in 2011 and the regional
deficit target for 2011 was breached by many regions. Fourth, it is hard to assess
the budgetary impact of measures, as the revenue impact of the fiscal amnesty
is subject to considerable uncertainty. Fifth, there is a lack of information
about the anticipated consolidation measures from 2013 onwards, which are not
yet fully specified. Sixth, a downside risk also stems from the one-off and
temporary nature of consolidation measures adopted so far, which will expire
post-2013. Finally, potential financial rescue operations may be a source of
risk for deficit, or debt, depending on the form they take. In terms of upside
risks, strict enforcement of the Budget Stability Law and the adoption of
strong fiscal measures at regional level would mitigate the risks of a slippage
at regional level.

Public debt is
expected to increase from 68.5 % of GDP in 2011 to 79.8 % of GDP in
2012, and further by 2.5 pps of GDP in 2013, according to the stability
programme, exceeding the Treaty reference value in all years. This increase in
debt is mainly driven by higher interest payments (which increase by 3.1 and
3.2 pps of GDP in 2012 and 2013) and to a lesser extent by the primary
deficit (with an increase of 2.2 pps of GDP in 2012). Stock-flow
adjustments are sizeable in 2012, contributing 5.4 pps of GDP to the debt
increase. They consist in the plan to settle invoices of providers of public bodies
and other outstanding operations accounted as debt according to excessive
deficit procedure rules. According to the programme, debt would then decrease
by 0.8 and 0.7 pps of GDP in 2014 and 2015, respectively. The trend in the
debt ratio may be less favourable than projected in the programme, given the
risks attached to the macroeconomic scenario and the budgetary targets, and given
that the financial sector will need additional re-financing as part of the
banking sector reform announced in May 2012. The Commission’s 2012 spring forecast
predicts that public debt will surge to 80.9 % of GDP in 2012 and to 87.0 %
in 2012, based on a no-policy-change scenario. In 2014 and 2015 Spain will be in a transitional period and plans would ensure sufficient progress towards
compliance with the debt criterion.

Long-term
sustainability

The long-term change in Spain's age-related expenditure is below the
EU average. The initial budgetary position compounds the long-term costs. Under
a no-policy-change assumption, debt would increase to 100 % of GDP by
2020. Considerable additional fiscal consolidation beyond the forecast horizon
would be needed to make progress towards the reference value for government
debt beyond the short term. Full implementation of the programme would be
enough to put debt on a downward path by 2020, though it would still be above
the 60 % of GDP reference value.

Spain has already taken steps to improve the long-term sustainability of its
public finances, in line with the 2011 country-specific recommendation. The
pension reform adopted in July 2011 increased the statutory retirement age by
two years and the contribution period taken into account for the calculation of
benefits by ten years. The changes will be phased in between 2013 and 2022
(2027 in some cases). A sustainability factor is planned for the period after
2027, linking retirement age to increases in life expectancy, although the
details of its implementation have yet to be decided. The reform was a
significant step towards containing the costs of ageing.

Nevertheless,
the projected increase in age-related public expenditure will still be higher
than the EU average by 2060, as a result of the continuously increasing
challenge. A Global Employment Strategy for Older Workers for 2012-2014 (known
as the ‘55 y más’ Strategy) was adopted in October 2011. It aims to increase
the number of older people in work and to improve their working conditions. This
strategy still needs to be underpinned with concrete measures.

Long-term
public spending trends, mainly related to pensions and healthcare, should be
contained further. To improve the sustainability of public finances, the
Government needs to ensure sufficient primary surpluses over the medium-term, to accelerate the planned gradual increase in the statutory retirement
age and to carry out an earlier update of the sustainability factor under the
reformed pension system.

Fiscal framework

Given the
decentralised nature of Spain’s public finances, a strong institutional framework is essential.
The medium-term budgetary framework has a good track record overall, but the
crisis put Spain’s fiscal institutions under strain and exposed a need to
tighten the control over regional and local authorities’ budgets and to take
better account of cyclical developments when setting budgetary targets.

On 27 January 2012, the Government took a
significant step forward to improve the fiscal framework with the adoption of a
draft ‘Organic Law on Budgetary Stability and the Sustainability of Public
Finances’. This develops the constitutional balanced budget rule adopted in
2011 and sets out new mechanisms for budgetary coordination and control
vis-à-vis regional governments. The law, which came into force in May 2012,
introduces a set of fiscal rules which are binding for all levels of Government,
including public-sector companies (structural balanced budget rule, debt rule
and expenditure rule). It also gives a mandate for a medium-term budgetary
strategy, introduces an early warning mechanism for budget deviations, provides
for corrective mechanisms and sanctions, and strengthens reporting requirements
for all levels of Government. The law is a positive step, as it compels not
only the national parliament, but also regional parliaments, to comply with
budgetary stability. The definition of the rule in terms of a structural
deficit should allow better reflecting cyclical developments in future budget
Laws.

However, the law provides for a very long
transition period, until 2020. Moreover, the preventive, corrective and coercive
arms of the new fiscal framework imply relatively long deadlines and may not be
sufficient to ensure a timely correction of emerging budget deviations. The
draft law does not provide for setting up an independent fiscal institution.[7]

Tax system

The tax-to-GDP
ratio in Spain is among the lowest in the EU,[8] and the
structure of the Spanish tax system does not appear to be particularly
growth-friendly, with revenue from indirect taxes being the second lowest in
the EU. Spain thus has some room to improve the efficiency of the tax system by
shifting revenue towards the least distorting taxes such as those on
consumption (in particular VAT) and environmental taxes, which would be
consistent with fiscal consolidation efforts. Reducing tax advantages, such as
the favourable fiscal treatment of residential housing (i.e. deductibility of
mortgage interest payments), would broaden tax bases and thus also help improve
the efficiency of the tax system.

Spain has a high rate of home ownership, which has been encouraged by tax
deductions for buying houses. These deductions were reduced in 1998, but the
tax policy bias in favour of buying rather than renting homes has been
maintained. Tax policy was therefore driving up household debt and feeding the
housing bubble in Spain.

VAT revenue
amounted to only about 5.5 % of GDP in 2010, which is the lowest in the
EU. The standard VAT rate of 18 % is at the lower end of the spectrum
compared with other Member States. Because of the wide application of a
super-reduced rate (4 %), a reduced rate (8 %) and the scope of VAT
exemptions, actual VAT revenue amounted to only around 42 % of the
theoretically possible level.[9] The low ratio also underlines the lack of effectiveness of
enforcement measures to reduce the level of VAT evasion. Revenue from excise
duties on tobacco and alcohol is also relatively low.

Revenue from
environmental taxes was the lowest in the EU in 2010 (as a percentage of GDP).
A wide range of tax exemptions and reductions are in place, as well as
environmentally harmful subsidies. There is also room for higher excise duties
on transport fuels (unleaded petrol and diesel). Spain is drawing up a
strategic multiannual plan for the coal industry in 2013-2018,
but it has not yet been published. This strategic plan is expected to include
details of how Spain intends to gradually reduce and
ultimately phase out coal production aid and to close down the coal mines by
2018. Economic instruments for waste management, which make prevention and
recycling more attractive and help cover the costs of collection, sorting and
recycling, offer alternative growth-enhancing tax measures and can help ensure
the sustainability of local public finances. The same applies to water tariffs,
which are amongst the lowest in the EU. In particular, certain regional water
pricing policies give farmers little incentive to reduce water use for
irrigation.

Spain has taken no measures to implement the country-specific
recommendation on revising the efficiency of its tax system. On the contrary,
the recent temporary increases in direct taxation, introduced on 30 December
2011,[10] go in the opposite direction to the Council recommendation, as they
further increase the direct tax burden and thus the growth-unfriendliness of
the Spanish tax system.

3.2.
Financial sector

Banking

In February
2011, Spain adopted more stringent minimum core capital requirements for all
banks (8 or 10 % of risk weighted assets). These were achieved by the end
of September 2011, in line with the commitment under the Euro Plus Pact. Most of
the savings banks raised capital from private investors. Plans for
restructuring those banks that have received public funds had to be submitted
by late March 2012. Four banks requested assistance from the state banking
restructuring fund (FROB).

Following the
October 2011 European Council conclusions in the context of the temporary bank
recapitalisation exercise coordinated by the European Banking Authority, five
systemically important Spanish banks (Santander, BBVA, Bankia, CaixaBank and
Banco Popular) were requested to raise roughly EUR 26 billion to comply with a
higher minimum core Tier 1 capital ratio of 9 % of risk-weighted assets
after accounting for sovereign debt holdings.

Spanish banks
still have large exposures to the real estate and construction sectors
(amounting to about 10 % of total consolidated assets in December 2011).
Over a half of this exposure is already problematic and may eventually rise
further as developers prove unable to sell their assets and make repayments.
Mortgages to households imply, however, a much lower risk for banks. At
present, the doubtful asset ratio of mortgage loans (around 3 %) is much
lower than the loans to construction and real estate firms, whose repayments
are conditional on their ability to sell real estate assets. To tackle this
problem, new measures were adopted in February and May 2012, which increase
specific and generic provisions and require banks to set aside capital buffers.
The main objective of this reform is to dispel any uncertainties arising from
Spanish banks’ exposure to the real estate sector and to promote further
consolidation of the banking system. Banks have until the end of 2012 to comply
with the new requirements, and until the end of 2013 in the event of mergers.

The current
difficult macroeconomic environment coupled with the high funding costs and the
on-going increase in impaired assets continues to put pressure on the banks'
short- to medium-term profitability. Given the risk of bank funding stress, it
is necessary to continue to strengthen the banks’ capital base. The reform
measures adopted in February and May 2012 targeted the legacy stock of real
estate assets, but the vulnerabilities related to other exposures such as loans
to SMEs and residential mortgages have not been addressed. Spain needs to ensure that the policy response is consistent with a broader strategic
context (i.e. on-going discussions about new proposals for recapitalising of
the financial sector across the euro area).

Firms’ access to
finance

A main factor
currently constraining firms operations and growth in Spain, particularly small and medium-sized enterprises (SMEs), is the lack of access to
bank financing, which has been stricter since last year and continue to be one
of the main concerns of Spanish business. According to the Spanish Statistics
Institute (INE), 60 % of SMEs will need financing for their working
capital until 2013. In this respect, the national reform programme falls short
of proposing specific actions to help banks finance firms.

In addition, the
long delays in payments, in particular from the public sector, further
aggravate the problem. The effects of the recent law on late payments[11] have not yet fully
materialised. According to the latest data from the Cross-sector Platform
against Late Payments, which represents around one million businesses in Spain, the public sector takes 162 days to pay bills, making it the second worst performer in the EU
after Greece. The average payment time for the private sector is 98 days. The
main measure proposed in national reform programme in this area is a mechanism
for regional and local entities to address late payments (measure 52 of the
NRP); however, this measure implies penalising suppliers, who have to accept
the non-inclusion of interests and other costs in the final payment, and it
goes against the principles of the Late Payments Directive. In addition, the national
reform programme does not provide details on whether accepting a voluntary
reduction of the due payment would be considered as a criterion for priority
payment. Financial instruments other than credit (e.g. risk capital, business
angels or mezzanine finance) could help fill the credit gap in Spain, but they have yet to be developed.

Structural
funds are a good opportunity to help in this area. So far three financial
instruments supported by Structural Funds have been put in place to provide
guarantees and loans to small and medium businesses (JEREMIE[12] holding funds) to help them carry out
research and innovation at regional and national level. JESSICA[13] is another financial instrument at national
level for promoting sustainable urban projects and is supported by the
Structural Funds. More extended use of these funds and their introduction in
other regions would certainly help SMEs in search of finance. The European
Regional Development Fund (ERDF) offers various possible options in this area.
For example, the reallocation of EUR 400 million to a reindustrialisation aid
scheme on investment loans primarily for SMEs; support for measures related to
seed capital and micro credit in the framework of the upcoming Law on
Entrepreneurship; and the reallocation of EUR 155 million for the creation of a
working capital fund for innovative SMEs, to be run by existing national
institutions/instruments, to which regions can be asked to further contribute
on a voluntary basis. Another line of action by the Spanish authorities has
been to reform and extend the Official Credit Institute (ICO) credit lines.
Their design still needs to be improved in order to make this mechanism more
efficient. Other measures which can help in this area are the rapid
implementation of the VAT Directive and the compensation of debts/credits
between administrations and enterprises.

3.3.
Labour market,
education and social policies

Employment continued
to fall last year, while wages kept reacting only partially to the situation on
the labour market. The cumulated loss in employment in the period 2008-2011,
which has reached 11.3 %, was accompanied by a cumulated increase of
11.2 % in nominal wages (6.9 % in real terms), thus leading to an
increase in nominal unit labour costs. The existing rigid system of wage
bargaining prevented a better alignment between wages and productivity, notably
by including a generalised use of ex-post wage indexation. The unemployment
rate, already the highest in the euro area, reached a new record high of
24.4 % in the first quarter of 2012. Young people and the less qualified
and less experienced workers, many of them on temporary contracts, continue to
bear the brunt of the economic crisis. Youth unemployment increased from
49 % in the fourth quarter to 52% in the first quarter of 2012. Young
people are much more likely to find themselves unemployed, on involuntary
temporary and part-time work contracts or in precarious employment conditions
and on low pay. In recent years, the number of long-term unemployed people has
increased substantially — from 1.7 % in 2007 to 7.3 % in 2010.

The average
exit age from the labour market was 62.3 in 2009, so 2.7 years lower than
the statutory retirement age at 65, even if above the EU average (61.4).
Employment rate of older workers (55-64) has risen from 39.2 % in 2001 to 43.6 % in 2010, but it was still below the
EU average of 46 %.

The measures
detailed in the national reform programme are intended to address the main
challenges facing the labour market situation in Spain, in line with the
comprehensive reforms entailed by the Government. The segmentation of the
labour market and the high unemployment rate, especially for youth, are subject
to a comprehensive diagnosis. On 10 February 2012, the Spanish Government
adopted a further reform[14]
of the labour market, which included reducing the severance payment for
unjustified dismissals to 33 days per year of service, gave priority to company-level
collective agreements, allowed firms to opt out of agreements on higher level,
granted firms greater internal flexibility and provided financial incentives
for hiring workers, especially young.

These elements
of the reform have the potential to change the dynamics of the Spanish labour
market, enabling firms to adapt quickly to changes in market conditions. In
this regard, it is more ambitious than previous reforms. By reducing severance
pay, simplifying the procedures for collective and individual dismissals and
clarifying objective dismissals, the reform may help restore the conditions for
hiring workers on permanent contracts. In the short term, however, it may lead
to an increase in unemployment.

The effect of
the reform on labour market segmentation and job creation depends on a series
of elements. Past evidence shows that strong emphasis on financial incentives
does not have the intended effect of ensuring sustainable job creation.
Moreover, although the reform re-establishes limits on renewing temporary
contracts, in order to reduce segmentation, the new contracts for SMEs contain
relatively long trial periods and may become a substitute for temporary
contracts. The trial period for the new permanent contract is one year — much
longer than the two or three months limit (six months for qualified workers)
set by the Workers’ Statute. There is a risk that firms will use the one-year
period to transform this contract into a de facto low-quality temporary
contract with zero termination costs. Apprenticeship contracts share a similar
risk, since a person can be hired under consecutive apprenticeship contracts
that can be terminated at zero cost. This may indeed contribute to increasing
segmentation. The cost of dismissing someone on a permanent contract also
remains high compared to the figure for a temporary contract.

In the area of
collective bargaining, the reform could lead to a faster adjustment of wages,
in line with the 2011 Council recommendation. This is because it gives the
priority to company-level decisions on working hours, tasks and wages. It also
makes it easier for firms to opt out of sectoral agreements and it puts an end
to the practice of indefinitely extending collective agreements. However, such
agreements can still be extended beyond their term for two years. Enhanced
internal and external flexibility helps the labour market adjust to shocks in a
more balanced way. Until now, adjustment has concentrated mainly on headcounts,
with the brunt being borne by people on temporary contracts.

Regarding
wage-setting mechanisms, the system of ex-post inflation wage indexation
usually applied in collective agreements has been put on hold by a recent
social partners’ agreement for the period 2012-2014. In addition, the limit of
two years for the validity of expired agreements is too long, and small firms
might not find it easy to implement the opt-out clauses, as they rarely have
collective agreements at firm level. Indeed, in the event of disagreement on
the derogation from sector agreements, the reform has added a third layer of
dispute resolution (the National Advisory Committee on Collective Bargaining)
which may lead to the appointment of an arbitrator. It remains to be seen
whether this additional layer would actually make it easier to implement such
derogations.

According to
the national reform programme, the efficiency of the active labour market
policies, as a key element for preventing unemployment, needs to be improved.
An annual employment policy plan is intended to monitor the effectiveness of
measures and refocus them, if necessary. Priority is given to measures
counterbalancing the high youth unemployment rates. Importance is accorded to
the promotion of self-employment and entrepreneurship, the improvement of
vocational training and a whole set of new instruments for vocational guidance
and labour market intermediation, such as the creation of individual training
accounts which will help providing information for the placement of job
seekers.

The national
reform programme states that the revision of the active labour market policies
will be implemented on a gradual basis. EU funding (and the European Social
Fund in particular) can be a useful tool to support the necessary change in
order to improve employment opportunities and human capital. The reform of
February 2012 allows private employment services to act as intermediaries, to
complement the capacity of the Public Employment Service and expand hiring
capacity. However, there is little coordination between the national and regional
public employment services, particularly when it comes to sharing labour market
information and publishing job vacancies throughout the entire country. In
addition, active labour market policy instruments do not seem to be effective
enough at getting unemployed people into work and upgrading their skills, and
they rely excessively on employment subsidies. Strengthening training and
re-training measures, which might be partly financed by the European Social
Fund (ESF) can improve human capital, and thus employment opportunities, and
can also help to renew the country’s productive potential and redirect economic
activity toward sectors with greater job-creating capacity.

For all that,
the labour market reform goes in the direction advocated by Council recommendations
for the labour market addressed to Spain last year, and tackles one of the Euro
Plus Pact commitments made by Spain. Moreover, the reform is particularly
useful for tackling unemployment in the medium and long term and for addressing
the social consequences of the crisis, which are priorities of the 2012 Annual
Growth Survey.

Following the
European Council of 30 January 2012, the Spanish authorities and the Commission
examined measures for reducing youth unemployment, including through reallocation
of the European Structural Funds. As a result, within the European Social Fund,
EUR 135 m is to be redirected to the public
employment service to help young people find work and the possibility of
redirecting an additional amount is being considered. Additional over EUR 80 m
will be redirected for the young under specific operational programmes.

To tackle the challenge of high overall unemployment and youth
unemployment in particular, it is crucial for Spain to improve the quality of its education
and training system and to match training (particularly in medium-level skills)
to the needs of the labour market. The plan for improving the foreign language
learning announced in the national reform programme represents a step in the right direction, as it should help young
people become more competitive and mobile. The Sustainable Economy Law of 2011
laid down measures to be taken in this area, but there is no information on
what has been done to implement these measures.

In spite of
expenditure cuts in 2012, the budget to combat early school-leaving has been
maintained. Spain managed to reduce the early school-leaving rate from 31.2 %
in 2009 to 28.4 % in 2010. The economic crisis was very likely one of the
factors contributing to the lower ESL rate and there is a long way to go to
achieve the target of 15 % by 2020, as recognised by the Government in the
national reform programme.
Moreover, the overall early school-leaving rate conceals significant
disparities between the autonomous communities. By contrast, the national
target of 44 % higher education attainment for 2020 is ambitious enough
compared to the policy challenge and is achievable.

Considerable
progress has been made in vocational training, and the measures provided
for in this area by the Sustainable Economy Law in March 2011 are apparently
being successfully implemented. However, the Reinforcement, Counselling and
Support Plan (PROA) is not ambitious enough to address the challenge, and there
are not enough basic vocational training programmes. In the national reform programme the Government
announces a reform in this area, although objectives and measures are not
clearly differentiated. The labour market reform of 10 February 2012 provides
positive elements, such as steps towards a dual system of professional training
and a reform of apprenticeship contracts and training contracts to reduce youth
unemployment. In this regard, the Government announces a pilot project for a
dual system of professional training. This a promising initiative that favours
an active participation of firms in providing professional training in order to
better adapt competencies and skills to labour market demands. The national reform programme acknowledges the
key role that the ESF plays in the area of vocational training and
employability of youth. A comprehensive plan for lifelong learning is missing
in the national reform programme.

The NRP
announces a relevant set of reforms in the area of university education, which
aim at improving the efficiency of the offered qualifications and services.
Proposals include a rationalisation in the offer of new education programmes
and an alignment of the university fees to real costs, although details about
practical implementation remain unclear.

Addressing
youth unemployment, which is high in Spain, was identified as one of the main
priorities. Following a Commission initiative, the Spanish authorities and
Commission staff examined measures for reducing youth unemployment, including
through reallocation of the European structural funds. Structural funds provide
instruments to strengthen national efforts to combat youth unemployment,
training for young people and early school leaving. For example, the European
Regional Development Fund provides support for low-skilled unemployed young people
in the most under-developed regions. It does so through programmes for
innovative SMEs in the agri-food sector at end of the production chain. The
European Social Fund also offers possibilities in this area. For example, a
number of regional operational programmes can be refocused towards early school
leavers, vocational training and apprenticeships.

All in all, Spain still lacks a comprehensive education and training strategy, including a
comprehensive plan on lifelong learning, reflecting the change in the country’s
productive model. Continuous training and the maintenance of competences and
skills are not sufficiently updated and adapted to market needs, especially the
needs of those sectors with better prospects of economic development.

The poverty and
exclusion target set for Spain is based on the EU
headline target. It combines three indicators: (i) the at-risk-of-poverty
indicator (reflecting relative income poverty), which worsened from 19.5 %
in 2009 to 20.7 % in 2010; (ii) the severe material deprivation
indicator, which increased by 0.5 pps to 4 % in 2010; and
(iii) the percentage of people living in households with very low work
intensity, which also worsened from 7 % in 2009 to 9.8 % in 2010.
This means there has been no progress towards achieving the target of reducing
the number of people at risk of poverty and/or social exclusion by 1.4 to 1.5
million. On the contrary, the number of people at risk of poverty or exclusion
increased by 1.1 million (to 26.2 % of the overall population) in 2010
alone. Furthermore, the at-risk-of-poverty rate for children and the in-work
poverty rate continued to rise significantly in 2010. The rate for children
rose by 2.5 pps to 26.2 %. There is a high risk of poverty among
children in medium work-intensity households and a high proportion of
children at risk in two-parent households. This is partly because, in many
cases, only one of the parents has a paid job. Spain is also among the EU
countries where social protection does the least to reduce child poverty. This
is partly due to reduced redistributive effects across income groups, and to
the fact that Spain’s spending on child and family benefits (as a percentage of
its total expenditure on social protection), is below the EU average.

In-work
poverty has increased steadily since 2006, rising
from 10 % to 12.7 % in 2010 —the third highest level in the EU.
Moreover, the in-work poverty rate for young people reached 14 % in 2010,
even further below the EU average, and the in-work poverty rate for temporary
workers was four times higher than for permanent workers. The good news is that
the at-risk-of-poverty rate for the elderly has decreased considerably, falling
in 2010 by 3.5 pps to 21.7 %.

3.4.
Structural measures promoting growth and
competitiveness

Spain is currently going through deep structural adjustments following
the build-up of large external and internal imbalances during the housing and
credit boom. Current account deficits remain high, although they have started
to decrease recently in the context of the severe economic slowdown and on the
back of an improving export performance. Since 2008, losses in price and cost
competitiveness have only partially been reversed. While the adjustment of
imbalances is ongoing, it will take time to absorb the large stocks of internal
and external debt and to reallocate the resources freed from the construction
sector. Adjusting imbalances in Spain means tackling structural problems that
are hampering growth and preventing the country from becoming more competitive.

Spain urgently needs to continue implementing major structural reforms in
the product and services markets in order to create new jobs. That objective
will become more achievable if Spain sets easier conditions for firms to enter
and leave the market, if it ensures that the institutional set-up guarantees
effective competition enforcement in all sectors of the economy as well as
effective and independent regulatory activity in regulated sectors and if it
enhances competition and reduces regulation in a number of services sectors
with high spillover effects, such as professional services. Private-sector
participation in R&D and innovation activities remains too low and the
system of knowledge transfer is weak. Spanish firms still face very difficult
access to credit, a lack of alternative financing instruments and a heavy
bureaucratic burden, in particular at regional and local levels. There is still
considerable room for using or reprogramming available Structural Funds, in
particular to support youth employment and human capital development, and to
make small and medium-sized enterprises more competitive. This could boost the
country’s growth and competitiveness and help it achieve the Europe 2020
targets.

With respect to
measures promoting growth and competitiveness, the Spanish national reform
program proposes solutions going in the right direction, even if some of them
are not yet enough developed.

Internal market,
market opening and competition

In April 2011, Spain set up an Advisory Commission on Competitiveness, as part of its Euro Plus Pact
commitments. The main functions of this body include preparing an annual
indicator-based report on productivity and competitiveness, carrying out
studies on competitiveness and answering ad hoc questions from the Government on
competitiveness issues. It aims to guide the Government in designing economic
policy and in negotiations with the social partners. It is an independent body,
although it is financed from the budget of the Ministry of Economy and Finance.
Until now the Commission has not been fully operational.

The fragmentation
of the domestic market in Spain is a major obstacle preventing businesses from
taking advantage of economies of scale and scope. The national reform programme
acknowledges the problem but the measures proposed are very general. In
particular, the ‘Law on the unity of the domestic market’ (point 79) goes in
the right direction but now the challenge is to properly develop its content, to
proceed swiftly with its approval and to ensure its full and speedy
implementation.

Business services present the largest
development potential of the Spanish economy both in terms of growth and jobs.[15]  Business services are the key
factor in the proper performance and development of other sectors and, given
that they are inputs for other sectors of the economy, the absence of
competition in services also undermines the competitiveness of users
downstream. However, business services, and in particular professional services
(which account for 75 % of business services) show lower productivity than
in the rest of the EU. Transposing the Services Directive into national law has
led to a significant removal of barriers in certain services, namely retail,
tourism, some business services and some regulated professions. However, some
professional services are still protected from competition by ‘activity
reservations’ (or exclusive rights) to provide services. Opening up these
services to competition would certainly drive down prices, improve the quality
of the services, add transparency and ultimately provide more job
opportunities.[16]

The Spanish National Competition Authority
had already advocated abolishing profession-specific restrictive regulations
and has recently published a report on the functioning of the guilds following
the transposition of the Services Directive.[17]
The liberalisation of professional services proposed by the national reform
programme would be a significant step forward, but the programme does not provide
much detail. Meanwhile, the reform should cover highly regulated professions
such as notaries, property registry agents or court officers, removing the
barriers to entry and operation imposed by professional associations. The
national validity of authorisations and declarations required for professionals
(point 81 of the national reform programme) would facilitate the provision of
services, but would need to be enforced at all levels of administration.

Despite major efforts at simplification, both
nationally and at regional level, regional governments have maintained
authorisation schemes for opening large-scale retail outlets, and these
schemes limit competition. According to the Spanish Competition Authority,[18] maintaining these restrictions
is continuing to make it difficult for new operators to enter the market. They
are thus prevented from exerting competitive pressure on incumbent retailers
and from developing alternative distribution models. These restrictions also
tend to strengthen the bargaining power of incumbent retailers. The intention
to remove municipal licences expressed in the national reform programme (point
82) is welcome.

The Spanish Government has announced its
intention, in the second quarter of this year, to merge the national
competition authority with seven national sector supervisory and
regulatory authorities (energy, telecommunications, postal services,
audio-visual industries, railway and air transport and gambling) thus creating a
single body — the National Commission for Markets and Competition (CNMC). This
new body should be more efficient and could boost competitiveness in all
sectors of the economy, as it would allow any sectoral legislation to be
screened on competition grounds before being adopted. However, the current
draft Law that creates the CNMC does not guarantee that it will carry out its regulatory
activity in an effective and independent way.

Energy, transport,
infrastructure and environment

Spain ranks 6th in
the EU-27 in terms of total greenhouse gas (GHG) emissions. Spain has committed itself to reduce GHG emissions by 10 % in 2020, compared to 2005,
in sectors not covered by the emissions trading system (ETS). In 2010 the
emissions were 4 % lower than in 2005, and this is in line with the
target. According to the latest Spanish projections, emissions are expected to decrease
by 9.7 % by 2020 (compared to 2005), leading to a shortfall of the target
by less than one percentage point.

Spain has put forward
an appropriate mix of policy measures on energy efficiency and support
for renewable energy sources in order to achieve its energy and climate targets
by 2020. However, the electricity tariff system in Spain remains inefficient
and competition insufficient.

Spain has
traditionally capped end-user prices of electricity to several consumer groups
under a regulated tariff system. The tariffs do not always cover the costs, so
a so-called tariff deficit is generated within the system at the expense of
utilities. With the costs of generation and the regulated costs (e.g.
transportation and distribution) rising faster than the tariff, the deficit has
significantly increased in recent years and reached an accumulated amount of
EUR 24 billion (more than 2 % of GDP).[19]
Two thirds of this amount (around EUR 17 billion) is guaranteed by the Government,
which has allowed utilities to securitise it. In 2009, the Government revised
the whole tariff system with the aim of ensuring that electricity prices cover
total costs.[20]
However, low-consumption households (representing 83 % of consumers) were
still allowed to pay electricity prices that did not fully reflect the overall
costs of the system[21]
under the so-called ‘last resort tariff’.[22]
As a result, the tariff deficit continued to build up.

In January 2012, the Government temporarily
suspended[23]
renewable energy premiums paid to newly-built plants (wind, solar, biomass and
hydro technologies) in an attempt to reduce electricity costs and thus the
electricity tariff deficit. Suspending support for renewables discourages
investment in the sector and will make it hard to achieve Spain's target under the Europe 2020 energy and climate goals. Moreover, with less
renewable energy in the mix, Spain’s dependence on imported energy would
further increase from the current 79 % (which is already much higher than
the EU average of 54 %). Streamlining complex authorisation and planning
procedures and removing other barriers to the growth of renewable energy can help
reduce the cost of renewables, which remains an issue for Spain.

In March 2012, the Government adopted
further measures to reduce costs in the electricity sector by EUR 1 700
million, e.g. distribution, transmission, capacity payments, financing the
regulator CNE, an interruptible tariff and a slight reduction of subsidies for
coal. It also increased tariffs (around 7 % for the tariff of last resort),
thus generating an additional income of around EUR 1 400 million. The Government
also adopted legislation to completely take on board the EU’s internal energy
market legislation, in particular strengthening the powers of the Spanish
national regulatory authority. This is expected to enhance competition. While cutting
electricity costs should help reduce the tariff deficit, the increase in
tariffs for consumers may hinder domestic consumption and reduce firms' external
competitiveness.

Weak competition in the energy sector has
contributed, at least partly, to building the tariff deficit by favouring
overcompensation to certain utilities, such as nuclear and large hydro power
generators which have already been paid for, or by sustaining inefficient and environmentally
harmful energy subsidies to coal mines. These measures have not been translated
into lower prices, and they thus hinder economic growth. Indeed, Spain has one of the lowest levels of interconnectedness in the EU. Completing electricity
and gas interconnectors with France and Portugal, currently under construction,
would help to intensify competition in the energy sector. Increasing the
electricity network's capacity for cross-border exchanges, notably with France, will allow Spain to increase its trade with neighbouring countries and balance the supply of
renewable electricity such as wind power. Indeed, the low cross-border
transmission capacity has contributed to a waste of resources in renewable
utilities, which have to plan heavy investments in expensive backup power (i.e.
for wind power), such as gas-fired capacity, and in transmission networks.
Giving priority to developing the Africa-Spain-France gas corridor and
establishing a functioning Iberian gas hub (Mibgas) would foster
competition between gas companies, increase market liquidity and help diversify
and secure gas supplies. Connecting Catalonia to the Rhone Valley in France would also boost cross-border capacity.

Spain faces
considerable challenges in the area of water and waste management and air
pollution. Although parts of Spain are experiencing water shortages, there
are insufficient incentives for using water efficiently and this results in
unsustainable use. In particular, there is still no clear commitment on part of
the Spanish Government to reform the market for water concessions in order to
concretely address the mentioned inefficiencies. More than 50 % of
municipal waste in Spain is landfilled, and opportunities for prevention and
recycling have not been fully harnessed. Full implementation of the existing
legislation could create more than 54 000 jobs and increase the annual
turnover of the waste sector by around EUR 5.7 billion, while reducing
total direct and indirect greenhouse gas emissions by 3.5 % to 6.1 %
in 2020. Environmental policy is disregarded in the national reform programme
and Spain continues to lag
behind other EU countries in implementing environmental legislation.[24]

The transport infrastructure deficit
of the past has, to a large extent, already been addressed in Spain. The resulting extensive network of motorways, high-speed railway lines, airports and
ports requires high on-going maintenance and renewal costs, high debt service
or public-private partnership (PPP) service payments. At the same time, the network
suffers from a lack of interoperable interconnections with other Member States and poor integration between transport modes — ports and railways, airport
hubs and high speed railway lines, multimodal platforms and railway corridors.
There is insufficient competition in transport services, notably in railways
and ports, leading to inefficient exploitation of transport assets.

It is therefore critically important that,
for any new infrastructure project, a fully transparent cost-benefit analysis
is carried out. An issue for Spain is to limit infrastructure investment to
those projects for which there is genuine demand and which are affordable,
taking into account the high opportunity cost of public funds. Transport users
should bear a more proportionate share of the overall costs through wider
application of the ‘user pays’ principle. It is crucial to adopt measures to
increase competition in railway and port services, to develop and manage
transport infrastructure in a more business-oriented way, to open up the
isolated network and better integrate transport modes.

Air transport has expanded considerably in
recent years, with the rise of low-cost carriers and the implementation of new
airport strategies. However, it is important to ensure that unprofitable
regional airports do not place an unnecessary burden on public finances and do
not distort competition within the internal market. The sustainable growth of
airports and airlines requires full compliance with state aid rules and the
avoidance of detrimental airport duplication. A recent study showed that out of
the 48 regional commercial airports built in Spain over the last 20 years, only
11 make a profit.[25]
There are some 20 airports handling fewer than 100 000 passengers a year,
well below the profitability threshold of around 500 000, and only a few
among them help preventing isolation of remote regions (i.e. in the Canary
Islands).

Research and
innovation

Spain’s public
investments in research and development (R&D) grew consistently between
2000 and 2009. Business spending on R&D also grew until 2008. In the wake
of the crisis and fiscal consolidation, both public and private investment in
R&D declined. Business R&D investment remains very low in Spain and the economic structure has not shifted substantially towards a more sustainable
model based on more knowledge-based products and services. The trend of falling
public and private investment in R&D will need to be reversed to avoid
long-term damage to Spain’s capacity for innovation.

The considerable increase in public and
private R&D expenditure over the decade 2000-2009 did not significantly
boost innovation in Spain. The country has made little progress in accumulating
intellectual assets (patent applications, community trademarks and designs), in
improving public-private and private-private partnerships or in introducing and
marketing new and innovative products, processes and services.

Spain has initiated
comprehensive policies and reforms to improve its research and innovation
system. These include the new Science Law adopted in 2011, the Spanish
Innovation Strategy (e2i) and the 2015 University Strategy for Excellence.
These reforms need to be implemented fully in 2012, including making fully
operational the National Research Agency for competitively funding R&D in Spain, as mentioned in the national reform programme. Special attention should be paid to
ensuring a consistent institutional framework to reduce uncertainty and
increase efficiency in the allocation of stable resources to R&D
activities. To this end, the scope of the new agency's financing powers and
responsibilities needs to be clarified to avoid overlapping and to foster
cooperation with partially competing bodies like the CDTI (Centro para el
Desarrollo Tecnológico Industrial) and the CNEAI (Comisión Nacional de
Evaluación de la Actividad Investigadora). Building on the success of other
Member States in boosting the efficiency of their public R&I system, Spain could also improve its institutional funding. It could introduce a performance-based
financing system for universities and public research institutions, linking
some of the funding to each institution’s progress in scientific excellence,
its level of internationalisation and the extent of its public-private
cooperation. In terms of innovation, Spain needs to continue moving towards a
more knowledge-intensive economy, building on existing sectors and potential
new growth areas. The national reform programme has a strategic focus on core
sectors (point 90) but at the same time remains vague on implementation.

Innovation is particularly important at
regional level. Complementary monitoring and support at national level would
ensure consistency and economies of scale. In this respect, the national reform
programme could be more explicit how the state plan for science and technology
would mesh with regional strategies, to avoid duplication and to ensure
synergies.

3.5.
Modernising public administration

A number of
indicators suggest that more efficient public administration would help improve
Spain’s business environment and boost its growth potential. In recent years,
businesses have seen a decline in the effectiveness and quality of public
services in Spain, when compared to other European countries.[26] Some serious cases of corruption in local and regional public
administrations and the excessive administrative burden on businesses may have
contributed to this deterioration. The new Law on budgetary stability and
financial sustainability will contribute to progress in this area, as will the
future new Law on transparency, access to public information and good
governance.

Administrative
burden and licensing

So far the progress in reforming the business
environment has been slower and less ambitious than reforms in other areas.
Despite continuing efforts to reduce the administrative burden for enterprises,
bureaucracy remains heavy, especially when it comes to the time needed to start
up a company (second highest in the EU) and to granting operating licences.
According to a recent Commission study, Spain is the Member State where it takes the longest for a firm to obtain its business licence — on average 116
days, compared to the EU average of 66 days. This causes potential start-ups to
lose their innovative edge. The national reform programme (point 82) is not
clear whether shorter delays in granting licenses will be applied to sectors
other than retail and wholesale. In this regard, the Law on Entrepreneurs (Ley
de emprendedores) announced in the national reform programme may help improve
the situation.

On a more general note, increasing lack of
coordination, and overlapping or divergent rules laid down by the lower
levels of the public administration in recent years, are partly undermining
government efforts to cut red tape, are hampering business innovation and
productivity and impede more efficient reallocation of resources. They are also
fragmenting the Spanish single market by obliging firms to meet different
criteria in order to operate in different autonomous communities. The different
layers of public administration need to work together more closely to overcome
this problem and similar problems in other areas (such as the coordination of
public employment services). In the national reform programme, the Government
has committed itself to tackling this issue and has announced a law to
guarantee the unity of the market (‘Ley de garantía de la unidad de Mercado’).
This is a positive step with important efficiency gains. The complexity of the
task should not be underestimated though. Some measures
fall directly under the responsibility of the autonomous communities, and the national reform programme fails to indicate
how the central Government is going to encourage the regional authorities to
adopt these measures. For example, some public bodies need to be abolished, and
national law needs to be fully implemented at regional and local levels.

eCommerce and eGovernment

Spain scores below
the EU average for the percentage of citizens using eCommerce. The proportion
of Spanish people shopping on-line, especially across borders, is still
relatively small compared to the EU average. Spain scores better when it comes
to small and medium-sized enterprises, both for on-line purchasing and on-line
selling. While Spain has almost 100 % online availability of public
services, for citizens and businesses, the direct use of eGovernment services
by people in Spain is close to the EU average, but use by businesses is among
the lowest in the EU. According to a recent Commission study,[27] Spain has a decentralised
eProcurement policy with a national platform (contrataciondelestado.es)
that is mandatory for the federal administrations. Regional authorities have
their own platforms, and regional and local authorities can use a mix of
national, regional and their own platforms. Spain is generally performing well
in this area and has set itself a target of 100 % e-procurement
availability and aims to procure 50 % of contracts above EU thresholds
electronically. E-procurement is, however, in the initial phase of development,
especially regarding the electronic submission of offers. For example, a recent
report indicates that less than 1 % of municipalities use e-procurement.[28] Moreover, the national reform
programme measures on eGovernment in general and eProcurement in particular remain
vague and are not underpinned with details on implementation and expected
benefits.

Spain has made
significant progress in the past few years in developing eGovernment, both in
terms of investment and legislative measures. The country also supported the
development of the Digital Single Market. The national reform programme has
announced a Spanish Digital Agenda that reproduces the
Digital Agenda for Europe. However, the presentation of the agenda is vague and
it objectives are neither clearly defined nor given a target date.

Judicial system

The Spanish judicial system has been
adversely affected by the economic crisis. It has seen a considerable increase
in the number of incoming civil and commercial cases and labour cases (e.g.
related to enforcement of mortgages, bankruptcy proceedings, dismissal
proceedings, etc.), especially at first-instance level. Labour courts, in
particular, have seen their workload increase considerably as a result of the
crisis. The recent labour market reform introduced specific measures to extend
the competence of labour courts and to facilitate changes in working conditions
and dismissal. Labour procedures have also been improved by recasting the law
on labour jurisdiction (Law 36/2011 of 10 October 2011). On 5 March
2012 mediation in civil and commercial matters was also improved though the
adoption of Royal Decree Law 5/2012, which aims at transposing in national law
the EU rules in this area (Directive 2008/52/EC). The national reform programme
announces additional measures aiming at improving the efficiency in the
judicial system, which are expected to reduce legal uncertainty in the economic
activity. These measures include a revision of existing working methods, the
promotion of extra-judicial solutions for conflicts and a modification of the
legal regulations involved in business transactions.

State aid

The relatively
high spending on State aid in Spain in a context of a decentralised
administrative structure requires a large effort of coordination, which is
ensured by the Ministry for Foreign Affairs. However, opinions on draft State
aid measures issued by the Ministry are not binding and are not independent. Entrusting
a competent independent body with the responsibility to coordinate State aid
and to issue binding opinions, and establishing a central State aid registry
can improve the institutional framework.

4.
Overview table (CSRs, EPP, Targets, etc.)

2011 commitments || Summary assessment

Country-specific recommendations (CSRs)

CSR 1: Implement the budgetary strategy in 2011 and 2012 and correct the excessive deficit in the year 2013 in line with the Council Recommendation under the EDP, ensuring the achievement of deficit targets at all levels of government, including by strictly applying the existing deficit and debt control mechanisms for regional governments; adopt further measures in case budgetary and economic developments do not turn out as expected; take any opportunity including from better economic conditions to accelerate the deficit reduction; set out concrete measures to fully underpin the targets for 2013 and 2014 which should bring the high public debt ratio on a downward path and ensure adequate progress towards the medium-term objective. Keep public expenditure growth below the rate of medium-term GDP growth, by introducing a binding expenditure rule at all levels of government, as envisaged. Further improve the provision of information in relation to regional and local government budgets and their execution. ||

CSR 2: Adopt the proposed pension reform to extend the statutory retirement age and increase the number of working years for the calculation of pensions as planned; regularly review pension parameters in line with changes to life expectancy, as planned, and develop further measures to improve lifelong learning for older workers. || Spain has implemented the recommendation. Overall, the reforms adopted so far are ambitious compared to earlier measures and represent a significant step in the right direction, in line with the Council recommendation, and help reducing the risks for the long-term sustainability of public finances. However, the worsening of Spain’s economic outlook is limiting the impact of the reforms on the projected increase in age-related public expenditure, which is still expected to remain higher than the EU average by 2060. Moreover, the 2012-2014 Global Employment Strategy for Older Workers has not yet been underpinned by concrete measures. Indeed, Spain appears now to be at medium risk with regard to the sustainability of public finances in the long -term.

CSR 3: Monitor closely the ongoing restructuring of the financial sector, in particular as regards savings banks, with a view to finalising it by 30 September 2011 as envisaged. || Spain has implemented the CSR. Spain has made a considerable progress in restructuring its financial sector; the policy response in this area has been ambitious compared to earlier measures and is in line with the Council recommendation. However, the worsening of the macroeconomic outlook might require an increase in provisions, which would have an impact on the profitability of the banking system. In addition, given the risk of bank funding stress, further strengthening of the capital base of banks may be required. It is therefore of paramount importance that the banking sector be sufficiently capitalised and that the on-going restructuring continues.

CSR 4: Explore the scope for improving the efficiency of the tax system, for example through a move away from labour towards consumption and environmental taxes while ensuring fiscal consolidation plans. || Measures adopted by Spain in this area are not in line with the recommendation. The recent reform of the tax system introduced by the Government mainly affects direct taxes and is set to be temporary. However, direct tax increases are heading in the opposite direction to the Council recommendation to Spain in this area. Indeed, direct tax increases lead to a higher tax burden on labour and capital, which is considered to be particularly detrimental for growth. Other tax increases which are considered to be less detrimental for growth, i.e. further increases in indirect taxation, have been explicitly excluded by the Government.

CSR 5: Following consultation with social partners and in accordance with national practice, complete the adoption and proceed with the implementation of a comprehensive reform of the collective bargaining process and the wage indexation system to ensure that wage growth better reflects productivity developments as well as local- and firm-level conditions and to grant firms enough flexibility to internally adapt working conditions to changes in the economic environment. || Spain has implemented the recommendation only partially. The reform of collective bargaining adopted by the Government in February 2012 is a step in the direction advocated by the Council recommendations in this area and is in line with Euro Plus Pact commitments made by Spain. However, it is not yet clear whether this reform is ambitious enough to address the challenge. The Government needs strictly to monitor implementation of the reform, in particular whether the social partners are able to seize the opportunities given by the law to negotiate locally trade-offs between wages and working conditions. These include revising the ex post automatic wage inflation indexation clause in collective agreements — which a recent social partners’ agreement has simply put on hold for the period 2012-2014. In addition, the ultra-activity limit of two years is too long, and opt-out clauses might not be easy for SMEs to implement. Indeed, in the event of disagreement on the derogation from sectoral agreements, the reform has added a third layer of dispute resolution (the National Advisory Committee on Collective Bargaining) which may lead to the appointment of an arbitrator. Concerns remain as to whether some elements of the reform are compatible with the Spanish Constitution.

CSR 6: Assess, by the end of 2011, the impacts of the labour market reforms of September 2010 and of the reform of active labour market policies of February 2011, accompanied, if necessary, by proposals for further reforms to reduce labour market segmentation, and to improve employment opportunities for young people; ensure a close monitoring of the effectiveness of the measures set out in the National Reform Programme to reduce early school leaving, including through prevention policies, and facilitate the transition to vocational education and training. || Spain has implemented the recommendation only partially. The reform is a step in the direction advocated by the recommendation. However, it is not yet clear whether the reform is ambitious enough to address the challenge. The Government needs strictly to monitor implementation of the reform, and in particular its effects on labour market segmentation. The reform re-established the limitation (introduced by the 2010 reform) on chains of temporary contracts and will probably reduce use of these contracts. The negative effect on employment might be offset by creating jobs using the new permanent contract for SMEs, particularly given the considerable hiring incentives. However, these positive effects need to be assessed against the risk that firms will use the one-year trial period for the new permanent contract as a way of turning this contract into a de facto temporary contract with zero termination costs. Moreover, allowing an employer to hire a worker under consecutive apprenticeship contracts with no associated severance payments runs counter to the intentions of the reform unless these contracts actually become permanent. Finally, the cost of dismissing an employee who is on a permanent contract remains high compared to the figure for a temporary contract. The reform also relies too much on financial incentives for job creation that proved inefficient in the past. With respect to education and training, although Spain has taken measures to combat early school-leaving in line with the recommendation, the rate remains high (28.4 % in 2010) and conceals significant disparities between the autonomous communities.

CSR 7: Further open up professional services and enact the planned legislation in order to redesign the regulatory framework and eliminate current restrictions to competition, efficiency and innovation; implement the Law on Sustainable Economy, notably measures aimed at improving the business environment and enhancing competition in the product and service markets, at all levels of government; and improve coordination between regional and national administrations to reduce the administrative burden for enterprises. || Spain has not implemented the recommendation yet. Spain committed itself under the Euro Plus Pact to present a new law on Professional Services before the summer of 2011. However, no progress has been made. The proposal to further facilitate the provision of professional services put forward by the current Government in the Spanish NRP is thus welcome. There has been some progress on implementing the Sustainable Economy Law, but only in certain areas: telecommunications (a major auction of spectrum); reforms to cut red tape; simplifying operating licences and permits; bankruptcy law and SMEs (taxation, access to finance, and business angels). Strong commitment is needed from the new Government to carry on planned privatisation efforts, which had been put on hold (lottery and airports). No major progress has been observed with respect to the administrative burden associated to the lack of coordination between Administrations, although the NRP flags some initiatives to tackle the issue such as the so-called new Law to Guarantee the Unity of the Market and the Law on Entrepreneurs.

Euro Plus Pact (national commitments and progress)

Public finance: Reform the Fiscal Stability Law to promote the establishment of an expenditure rule, taking into account nominal GDP growth in the medium term. || The public finance commitments are being fully implemented. On 27 January 2012, the Spanish Government adopted a draft Organic Law on Budgetary Stability and the Sustainability of Public Finances. This develops the constitutional balanced budget rule adopted in 2011 and sets out an expenditure rule, taking into account nominal GDP growth in the medium term.

Labour market: Reform the collective bargaining system by April 2011. Adopt implementing acts in compliance with the Royal Decree Law of February 18 on active labour policies, with a view to designing a Strategy for Employment. Adopt Decree laws to develop the provisions of the Sustainable Economy Law in the field of vocational training. Implement a programme to promote the reduction of informal employment. || The commitment to reform collective bargaining has been implemented via the labour market reform adopted in February 2012. The commitment to design a Strategy for Employment was implemented on 28 October 2011 when the Government adopted the National Employment Strategy for 2012-2014. This aims to foster employment of the active population, to reduce temporary contracts, improve productivity and adapt professional skills to market needs. However, there has been no progress on implementing this strategy. The commitment to develop the provisions of the Sustainable Economy Law on vocational training has been implemented. The commitment to reduce informal employment has been implemented with the adoption of Royal Decree 5/2011 of 29 April, which sets out measures for regulating and controlling undeclared work as well as measures to encourage the eradication of undeclared work, including higher penalties and greater control by the Labour Inspection System.

Structural policy: Reform professional services. Set up an Advisory Commission on Competitiveness. Speed up bankruptcy procedures by reforming the bankruptcy law. || The commitment to reform professional services has not been implemented. The commitment to set up the Advisory Commission on Competitiveness has been implemented: Spain set up the Commission in April 2011.

Europe 2020 (national targets and progress)

Employment rate target: 74 % || The employment rate was 63.7 % in 2009 and 62.5 % in 2010. No significant progress has been made towards achieving the target.

R&D target: 3 % (2 % from private investment) || Gross domestic expenditure on R&D (as percentage of GDP) was 1.39 % both in 2009 and in 2010. No progress has been made towards achieving the target. Private R&D expenditure (as percentage of GDP) was 0.71 % in 2010.

Greenhouse gas (GHG) emissions target: -10 % (compared to 2005 emissions), ETS emissions are not covered by this national target. || Change in non-ETS GHG emissions between 2005 and 2010: -4 % (this number corresponds to the current scope of the ETS)

Renewable energy target (as a share of renewable energy in gross final energy consumption): 20 % || The figure was 13.3 % in 2009. Progress has been made towards achieving the target.

Energy efficiency– reduction in primary energy consumption by 2020: 25.2 Mtoe || n.a. The energy efficiency objectives are set according to national circumstances and national formulations. The Commission is not yet able to present the overview, as the methodology for expressing the 2020 energy consumption impact of these objectives in the same format was agreed only recently.

Early school leaving target (in %): 15 % || The proportion of early leavers from education and training (as a percentage of the population aged 18-24 with at most lower secondary education and not in further education or training) was 31.2 % in 2009 and 28.4 % in 2010. Progress has been made towards achieving the target; however, the rate remains high and relatively far from the target of 15 %. It also conceals significant disparities between the autonomous communities.

Tertiary education target (in %): 44 % || Tertiary educational attainment was 39.4 % in 2009 and 40.6 % in 2010. Progress has been made towards achieving the target.

Target on the reduction of population at risk of poverty or social exclusion in number of persons: between 1.4 and 1.5 million. || The number of people at risk of poverty or social exclusion was 10 652 000 in 2009 and 11 675 000 in 2010. No progress has been made towards achieving the target.

5.
Annex

Table I. Macroeconomic
indicators

Table II. Comparison of macroeconomic developments and forecasts

Table III. Composition of the budgetary adjustment

Table IV. Debt dynamics

Table V. Sustainability indicators

Source: Commission,
2012 stability and convergence programmes.

Note: The ‘no
policy change’ scenario depicts the sustainability gap on the assumption that
the budgetary position evolves according to the spring 2012 forecast until
2013. The ‘stability programme’ scenario depicts the sustainability gap on the
assumption that the budgetary plans in the programme are fully implemented.

\* The
required adjustment of the primary balance until 2020 to reach a public debt of
60 % of GDP by 2030.

Graph —
Medium-term debt projections

Source: Commission,
2012 stability and convergence programmes.

Table VI. Taxation indicators

Table VII. Financial market indicators

 Table VIII. Labour market and social indicators

Table IX. Product market performance and policy indicators

Table X. Green growth indicators

[1]       SEC(2011)
817 final of 7 June 2011

[2]       OJ C 212, 19.7.2011, p. 1-4.

[3]       COM(2011) 815 final of 23 November 2011

[4]       According to latest information, official general government
deficit in 2011 might be still subject to revision.

[5] According to latest information, official general government
deficit in 2011 might be still subject to revision.

[6] Cyclically adjusted balance net of one-off and temporary measures,
recalculated by the Commission on the basis of the information provided in the
programme, using the commonly agreed methodology.

[7] Council Directive 2011/85/EU of 8 November 2011 on requirements for
budgetary frameworks of the Member States.

[8] Just below 32 % of GDP in 2010, compared to the EU average of
above 38 %.

[9] Theoretical revenues assume that all final consumption is taxed at
the standard rate.

[10] Spain in particular introduced a temporary increase in individual
income tax rates and savings income tax rates for the years 2012 and 2013.

[11] Law 15/2010 published on 6 July 2010 in the Spanish Official
Journal (BOE No 163).

[12] Joint European Resources for Micro to Medium Enterprises:
initiative of the European Commission together with the European Investment
Fund to promote the use of financial engineering instruments to improve access
to finance for SMEs via Structural Funds operations.

[13] Joint European Support for Sustainable Investment in City Areas:
initiative of the European Commission in cooperation with the European Investment
Bank (EIB) and the Council of Europe Development Bank (CEB) to support
sustainable urban development and regeneration through financial engineering
mechanisms.

[14] Royal Decree 3/2012 ‘on urgent measures for reforming the labour
market’.

[16]     According to official estimates, professional services account
for 8.5 % GDP and their reform could increase potential GDP by 0.7 %.

[17]     Comisión
Nacional de Competencia — Informe sobre los colegios profesionales tras la
transposición de la Directiva de Servicios, April 2012.

[18]     Comisión Nacional de Competencia — Report on the relations
between manufacturers and retailers in the food sector, October 2011.

[19] There is also a tariff deficit in the gas sector, but it is much smaller
(EUR 0.4 bn.).

[20] Total electricity costs include hidden costs designed to sustain
certain regulated activities (e.g.inefficient and environmentally harmful
energy subsidies to coal mines and the return on the distribution/transport
activities according to the net value of the assets used).

[21] Elements contributing to the overall cost include the production,
transportation and distribution of electricity and various energy-related
policies.

[22] Households whose consumption capacity is limited to 10 kW.

[23] Recently, the energy regulator suggested maintaining this
moratorium at least until 2017.

[24] Spain continues to have one of the highest numbers of infringement
cases in EU.

[25]‘La reforma del modelo de gestión de
aeropuertos en España: ¿Gestión conjunta o individual?’, October 2010:
http://www.ief.es/documentos/recursos/publicaciones/revistas/hac\_pub/196\_5.pdf.

[26] World Bank Governance Indicators 2011.

[27]     Digitising Public Services in Europe: Putting ambition into
action 2010.

[28]     ‘La licitación electrónica en el sector público español. Presente
y futuro’, IESE and Vortal, 2012, p. 9.
http://www.iese.edu/research/pdfs/ESTUDIO-160.pdf.

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