A period of reforms

Brussels is right to urge Spain to undertake structural changes to its labor market, pensions system and market regulations

Spain's PM Pedro Sánchez presenting the national recovery plan on December 4.
Spain's PM Pedro Sánchez presenting the national recovery plan on December 4.MONCLOA / Europa Press

Along with investment, there must be reforms. Now that the lower house of parliament has approved the 2021 budget on first reading, Spain faces the daunting task of implementing the necessary reforms to correct its structural weaknesses and make the most of the European funds, in order to become a more sustainable and competitive country.

It’s not just about identifying profitable, innovative projects in which to invest European money, but also about improving the country’s administrative and economic infrastructure. That is the great underlying pact in Europe’s joint borrowing deal: that the disbursement of aid will be matched with changes to strengthen member states (and therefore reduce the risk that they will need help again in future crises).

Brussels is watching, and it is urging Spain to seek improvement in three key areas: the labor market, the pension system and greater market unity to avoid the fragmentation of regional regulation. The European Commission is right to highlight these three areas, and unlike a decade ago, it is not imposing specific solutions or demanding cuts.

Unfortunately, there are few signs that this debate will be immune to the partisanship that is infecting Spanish politics

Spain must therefore fully embrace this task, and the government – which until now has shown little transparency in the details of the reform efforts it’s been working on for months – should open a public debate about its ideas. Debating is an advisable way to improve and to persuade. The deadline for sending the national plan to Brussels is April 2021. Although the generalized sense of urgency imposed by the pandemic has reduced the margin for political arm-wrestling, the Commission and other member states will watch the proposals carefully.

The priorities that have been set out for Spain are logical. One is “to preserve the sustainability of the pensions system.” On this matter, it is essential to make progress on the effective age of retirement in a system with very unfavorable demographics and a penchant for early retirement, particularly in the financial sector. Care will have to be taken with the habit of indiscriminately pegging all pensions to inflation.

Spain is also advised to reform the labor market to favor a transition towards indefinite duration contracts and improve unemployment benefits: the progress made so far against an abusive use of temporary hirings has been useful, but it is not enough. The duality of the Spanish labor market is extreme and unacceptable. It traps many workers in precarious living conditions, and makes it hard to create added value. This is something that will require radical improvement, and serious thought must be given to the option of the so-called “Austrian backpack,” a system in which employers contribute funds throughout the working life of an employee.

And lastly, it is necessary to take steps towards “the implementation of the law to guarantee the unity of the market,” which involves eliminating hurdles distorting the Spanish market as a result of various regional regulations.

These are all enormously complex tasks, and discrepancies can be felt within the executive itself, particularly evident on labor issues. It will be necessary to overcome these differences, and it would be a mistake to keep the negotiations within the inner circle of the parties that backed the budget plan. With these kinds of reforms, a broad consensus is even more necessary than to secure approval for the 2021 spending plan, due to their transcendent significance.

Unfortunately, there are few signs that this debate will be immune to the partisanship that is infecting Spanish politics. By contrast, unions and employer groups have demonstrated a great ability for dialogue. Let us hope that this spirit will prevail in the search for a grand modernization of the Spanish economy, more efficient social protection and greater inter-generational justice.

English version by Susana Urra.

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