Structural reforms in Spain

The Spanish economy has been growing at over 3% since 2015, above the average for the EU and the euro area. Unemployment, although still 10 percentage points above the EU average, has fallen from a high of 26.1% in 2013 to 17.2% in 2017. Interest rates are at historical lows thanks to the expansive monetary policy of the European Central Bank. The public deficit has fallen substantially in recent years and is close to, but still above, 3%, and there has been a current account surplus for several years. Therefore, Spain’s macroeconomic situation appears healthy. However, major vulnerabilities still threaten to hinder long-term growth: high unemployment and mismatches in the labour market; high structural public deficit and external debt; and low productivity growth.

Spain must address these vulnerabilities via structural reforms. Structural reforms are a critical factor for long-term growth. If correctly designed and implemented, such reforms can improve the functioning and integration of markets, enhance the degree of fair and open competition, increase incentives for innovation and help the economy to more efficiently allocate resources. In turn, these outcomes can help create the right conditions for increased productivity, which paves the way for higher growth and competitiveness. However, it is crucial to both monitor the progress of national reform programmes and evaluate their effectiveness at the macro- and microeconomic levels.

This report provides a microeconomic analysis of the structural reforms taking place in Spain. It pays close attention to four areas:

1. Spain’s internal market Market segmentation continues to exist in Spain for which political boundaries are likely to be playing a significant role. In this report, we focus on trade flows and use gravity models to present an up-to-date estimation of the internal border effect in Spain. We aim to shed light on whether internal market barriers affect the operations of firms across regions and whether this is reflected in the volume of trade between Spanish regions. We aim to understand the extent to which Spanish regions trade more with themselves than with other regions, and look at whether this has changed since the coming into effect of Spanish Law 20/2013 on the Guarantee of the Market Unity. We use the most recent data on regional trade flows available, which has not been analysed by other researchers to date. In our gravity models, as well as the trade flows between Spanish regions, we include international trade flows. This is essential as international trade flows may affect the magnitude of the internal border effect, as shown in previous papers. We also assess whether market fragmentation may affect the size of regional trade flows from a qualitative point of view and, where we can,we establish differences, across regions, industries and over time.

2. Business entry regulations In this section, we examine the relationship between entry barriers and business dynamics to identify the economic rationale for further reforms to the administrative environment governing business entry in Spain. We combine quantitative indicators of the barriers to entry for new firms with the latest available data on business demography, thus we take into account the progress made by Spain in the early stages of its reform process (2012– 15). We undertake analyses at the national level, comparing Spain with other major European economies, but also at the regional level, exploring the implications of interregional heterogeneity in entry requirements between Spain’s autonomous cities and communities. In both samples, we find that the height of entry barriers depresses firm birth rates and raises the average size of newly born enterprises. Our results suggest that further reforms to the administrative environment governing business entry in Spain — both nationally and regionally — would yield economic benefits in terms of higher rates of business creation, which could in turn be expected to raise overall levels of business dynamism and growth.

3. Financial health of businesses The 2008 financial crisis made necessary the correction of disequilibria accumulated in the years of credit-fuelled expansion, particularly the excessive debt levels and burden. In 2008, the Spanish economy, particularly the corporate sector, underwent an intense process of deleveraging. This section describes this process and assesses the financial strength of the non-financial business sector of the economy in the period 2008 to 2015, the last available year. We also examine the role of the financial sector in the reallocation of capital across firms. To this end, several dimensions of firm health are examined: liquidity; indebtedness; leverage; debt burden and profitability. The analysis is carried out using a representative sample of 848,000 Spanish firms obtained from the SABI database (INFORMA). We also estimate the outstanding debt, firms and employment at risk in the corporate sector, despite the favourable economic tailwinds. Furthermore, we simulate the effect had on these vulnerabilities under different scenarios of Spanish GDP growth and interest rate increases. Finally, we illustrate the relationship between the indebtedness of firms and the efficient allocation of capital.

4. Public procurement A range of problems are frequently identified in public procurement in Spain: a lack of coordination between governments; conflicts between governments with respect to their powers; cost overruns in investment projects; a lack of transparency in contracting and corruption. All these issues can generate inefficiencies in the functioning of governments, to the extent of needlessly increasing the costs of acquiring inputs or reducing service provision standards. The analysis in this section entails the following three steps:

1. We assess the differences in public procurement expenditure by level of government (central, regional, local) and expenditure function (health, education, etc.).
2. We identify the determinants of the differences in public procurement expenditure. The differences in regional government expenditure stem not only from the prices paid for services, but also from the differences in the services supplied, how the public service is provided (publicly, privately or by subsidisation), the characteristics of each region (demographic, geographic, etc.) and differences in their resources.
3. We examine the differences in the intensity of competition and efficiency of public contracts awarded by the different governments (type of procedure, type of contract, number of bids, savings, duration of procedure, etc.).

The rest of the report is structured as follows. Section 1 analyses the Spanish internal market and the barriers to internal trade. Section 2 looks at how entry regulations and other obstacles affect firm growth. Section 3 assesses the financial health of the corporate sector, while Section 4 examines the inefficiencies of public procurement procedures in Spain. Finally, Section 5 summarizes the main findings.

Read the other background studies on Single Market integration and competitiveness 2018 here