EUROPEAN COMMISSION

Brussels,7.3.2018

SWD(2018) 207 final

COMMISSION STAFF WORKING DOCUMENT

Country Report Spain 2018
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Including an In-Depth Review on the prevention and correction of macroeconomic imbalances

Accompanying the document

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP

2018 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011

{COM(2018) 120 final}

Contents

Executive summary

1.Economic situation and outlook

2.Progress with country-specific recommendations

3.Summary of the main findings from the Macroeconomic Imbalance Procedure In-Depth Review

4.Reform priorities

4.1.Public finances and taxation

4.2.Financial sector and private sector debt

4.3.Labour market, education and social policies

4.4. Investment

4.5.Public administration

4.6. Sectoral policies

Overview TableAnnex A:

Macroeconomic Imbalance Procedure ScoreboardAnnex B:

Standard TablesAnnex C:

References

LIST OF Tables

Table 1.1:Key economic and financial indicators — Spain

Table 2.1:Overall assessment of progress with 2017 CSRs

Table 3.1:Current account balance and net international investment position sensitivity analysis

Table 3.2:MIP Matrix

Table 4.2.1:Financial soundness indicators, all banks.

Table B.1:The Macroeconomic Imbalance Procedure scoreboard for Spain ( AMR 2018)

Table C.1:Financial market indicators

Table C.2:Headline Social Scoreboard indicators

Table C.3:Labour market and education indicators

Table C.4:Social inclusion and health indicators72

Table C.5:Product market performance and policy indicators

Table C.6:Green growth

LIST OF Graphs

Graph 1.1:    Composition of GDP growth    

Graph 1.2:    Contributions to potential growth    

Graph 1.3:    Net lending / borrowing by sector    

Graph 1.4:    Analysis of unit labour costs (ULC)    

Graph 1.5:    Activity, unemployment, long-term unemployment, youth unemployment, NEET    

Graph 1.6.1.a:    Regional disparities GDP per head1    

Graph 1.6.1.b:Drivers of regional disparities GDP per head 2    

Graph 1.6.2:    Spain — Breakdown of regional disparities in GDP per head (Theil index)    

Graph 1.6.3:    GDP per head and total factor productivity, the activity and the unemployment rates for NUTS-2 regions from DE, ES, IT, FR and NL. 2014 data1, 2    

Graph 2.1:    Overall multiannual implementation of 2011-2017 CSRs by February 2018    

Graph 3.1:    Current account balance and net international investment position    

Graph 3.2:    Analysis of the rate of change of NIIP — Spain    

Graph 3.3:    External liabilities by sector-type of financial assets: change 2013-2017    

Graph 4.1.3:    Government revenue by category    

Graph 4.1.4:    Share of regions having complied with fiscal rules over 2013-2016 by GDP per head and by year (100% = 17 regions)    

Graph 4.1.5:    Improvement in regional and local governments’ budget balance by component    

Graph 4.2.1:    Sources of financing of the Spanish economy    

Graph 4.2.2:    Loans to the private sector    

Graph 4.2.3:    Composition of debt — ES    

Graph 4.2.4:    Decomposition of y-o-y changes in debt-to-GDP ratios, households (ESA 2010) — Spain    

Graph 4.2.5:    Gap to the fundamental-based and prudential benchmarks, HH and NFC    

Graph 4.2.6:    Decomposition of y-o-y changes in debt-to-GDP ratios, quarterly non-consolidate data, non-financial corporations (ESA 2010) — ES    

Graph 4.3.2:    Responsiveness of wages to unemployment by region    

Graph 4.3.3:    Responsiveness of wages to productivity developments and regional changes in unemployment by sector (2012-2016)    

Graph 4.3.4:    Employment by type    

Graph 4.3.5:    Characteristics of temporary employment    

Graph 4.3.6:    Share of temporary contracts in total employment by sector, ES v. EU    

Graph 4.3.7:    At risk of poverty and social exclusion and its subcomponents    

Graph 4.3.8:    At-risk-of-poverty gap    

Graph 4.3.9:    In-work poverty by employment type    

Graph 4.4.1:    Change in the balance of trade goods and services: exports and imports contribution    

Graph 4.4.2:    Import content of GDP components in Spain    

Graph 4.4.3:    ULC by sector    

Graph 4.4.7.a:    Main determinants of Spanish exports    

and imports performance(1)    

Graph 4.4.7.b: Long term elasticities of imports (2)    

Graph 4.4.4:    Spain's productivity gap vs. average of Germany, France and Italy, 2010 EUR/hour    

Graph 4.4.8.1:    Change in share of GVA (1.a) and exports as % of gross output (1.b) by sector    

Graph 4.4.8.2:    Change in FTE employment (2.a), and change in productivity (2.b), by sector    

Graph 4.4.8.3:    Change in share of employment and productivity (3.a), and productivity and sectoral reallocation (3.b)    

Graph 4.4.5:    Distribution of labour productivity growth in Spain (real value added by employee)    

Graph 4.4.6:    R&D intensity projections, 2000-2020    

LIST OF Boxes

Box 1.6: Spain. Regional disparities in GDP per head    

Box 2.2: Tangible results delivered through EU support to structural change in Spain    

Box 3.4.1: Euro area spillovers    

Box 4.1.1: Medium-term projections of general government debt    

Box 4.1.2: The Spanish pension system — reforms and challenges    

Box 4.3.1: Monitoring performance in light of the European Pillar of Social Rights    36

Box 4.4.7: Assessing structural changes in Spanish exports and imports of goods and services: long-run elasticities to demand and competitiveness    49

Box 4.4.8: Sectoral rebalancing in Spain    51

Box 4.4.9: Investment challenges and reforms in Spain    57

Box 4.6.1: Policy highlights    63

Executive summary

Spain's continuing strong recovery is an opportunity to reinvigorate the reform momentum and complete earlier achievements. Economic activity and employment grew again strongly and imbalances further unwound in 2017. However, productivity is increasing slowly due to low innovation capacity and investment in knowledge and skills; and strong labour market segmentation and uneven social policy outcomes risk entrenching high income inequality. Addressing those challenges and ensuring full implementation of initiated reforms — such as in product markets regulation — could reduce the risk of a slowdown should the external economic environment and financial conditions become less supportive ( 1 ).

The Spanish economy continued to grow above expectations and the euro area average in 2017. In its fourth year of expansion, Spanish real GDP surpassed its 2008 pre-crisis peak. Economic growth was driven by domestic demand, in particular private consumption, supported by high job creation. Investment, especially in equipment, also grew robustly. Exports consolidated their positive contribution to growth, supported by an increasing internationalization of Spanish firms and further cost-competitiveness gains. Overall, the growth of economic activity continued on a more balanced pattern than before the crisis.

Growth is expected to decelerate but remain robust. Ambitious structural reforms in the aftermath of the crisis set the foundations for the strong recovery. However, other supporting factors - namely low oil prices and the stimulus from tax cuts and improving financing conditions - are set to gradually subside. Private consumption is therefore set to moderate but remain a robust driver of growth. Investment growth is forecast to ease only slightly.

The economic rebalancing progressed further, but high debt levels and unemployment still represent vulnerabilities. External debt is still very high, despite the continued reduction driven by a sustained current account surplus. Private sector debt reduction also progressed, only slowed down by new credit finally starting to grow again. The public debt ratio has so far declined slowly, leaving sustainability risks elevated in the medium term. Unemployment has continued its rapid decline, but remains among the highest in the EU.

Spain represents a source of potential spillovers to the rest of the euro area. Simulations show that a decisive implementation of product market reforms in Spain would have a limited but positive impact on the growth of other euro area countries.

Spain has made overall limited progress in addressing the 2017 country-specific recommendations (CSRs). Spain made some progress in reforming public procurement, limited progress in strengthening the fiscal framework, and some progress in undertaking a comprehensive spending review. Some progress was achieved in reinforcing coordination between public employment services and social services. There was limited progress in promoting hiring on open-ended contracts, addressing disparities in income guarantee schemes and improving family support, as well as in increasing the labour market relevance of tertiary education and addressing regional disparities in educational outcomes. Finally, Spain made limited progress on the implementation of the law on market unity and on research and innovation investment and governance, although there was some improvement in the latter area.

Regarding progress in reaching the national targets under the Europe 2020 strategy, Spain is performing well in reducing greenhouse gas emissions and on track to achieve its renewable energy and energy efficiency targets. The tertiary education rate is close to the target. While sizeable gaps remain concerning the employment rate and early school leaving, they were again substantially reduced. By contrast, there was little progress towards the targets for R&D investment and reducing poverty risk.

Spain faces challenges with regard to a number of indicators of the Social Scoreboard supporting the European Pillar of Social Rights. As past efforts to promote employment creation are bearing fruit, the creation of permanent employment is slowly increasing in prevalence, but the use of temporary contracts remains widespread. Income inequality stabilised but it remains relatively high. Early school leaving keeps improving but, together with a high risk of poverty among children, weighs on equality of opportunities. The shares of people at risk of poverty and social exclusion and of young people not in employment, education and training are decreasing but call for close monitoring. The impact of social transfers (other than pensions) on poverty reduction is weak.

The main findings of the in-depth review contained in this report and the related policy challenges are as follows:

·Spain does not face immediate risks of fiscal stress, but medium-term sustainability risks remain high. The general government debt ratio is still high. Its reduction is projected to slightly accelerate in 2018-2019, also supported by strong nominal GDP growth, but the debt ratio is expected to remain around 95 % of GDP in the medium term. Projected savings in age-related expenditure attenuate fiscal sustainability risks. The efficiency of some spending items may benefit from the recently initiated spending review and the implementation of a new public procurement law.

·Private debt reduction has continued, but certain groups of firms and households remain highly indebted. Private debt both of companies and households has fallen further overall. Nominal GDP growth is increasingly driving the debt ratio reduction, allowing credit flows to households and firms, especially SMEs, to pick up in 2017. The still high level of indebtedness of some households and non-financial corporations, in particular low-income and jobless households and companies in the construction and the real estate sector, reduces their ability to weather potential shocks.

·Structural improvements in trade performance underpin the slow reduction of Spain's external liabilities. Exports' increasing geographical diversification and a rising number of regularly exporting companies have led to gains in export market shares, indicating a structural shift in Spain's export performance. Furthermore, the economy's increased reliance on domestically produced goods has restrained import growth. As a result, in 2017, the current account registered a surplus for the fifth consecutive year. Current account surpluses will need to be sustained for an extended period of time to decisively bring down the still very high external liabilities.

·Employment continued to grow at a robust pace and unemployment further fell rapidly, but is still very high. The strength of the labour market recovery is partly due to the impact of the past reforms and wage moderation. Both helped to increase the responsiveness of employment to economic growth. However, the unemployment rate remains among the highest in the EU. This is especially true for young people, implying a considerable untapped skills potential. Almost half of the unemployed have been jobless for more than a year. Spain is stepping up activation policies targeting the long-term unemployed, young people, and older workers. Nevertheless, their effectiveness largely depends on regional public employment services' capacity and coordination with employers and social services, which is only slowly improving.

·Productivity has grown in some sectors, but weak innovation and investment entrenches the productivity gap between the best and worst performers. Since the recovery started, productivity has grown more in the tradable than non-tradable sectors, both in manufacturing and services. In some tradable sectors — where Spain has some competitive advantage — productivity growth compares favourably with other large euro area countries. Still, the productivity performance across firms within sectors is very heterogeneous, which can be partly explained by weaknesses in innovation capacity and, to a lesser extent, investment in knowledge-based capital.

Other key structural issues analysed in this report, which point to particular challenges for Spain's economy, are the following:

·Spanish banks continued their stabilisation, while access to finance improved. The banking system as a whole comfortably meets the regulatory capital requirements and non-performing loans have been further reduced. The successful resolution of one bank in June 2017 contributed to strengthening the stability of the financial sector. Policies to support equity funding are proving effective.

·The widespread use of temporary contracts negatively affects productivity growth and income inequality. While permanent contracts are on the rise amongst newly employed workers, the share of employees on temporary contracts is still high. Young and low-skilled workers are most affected by temporary employment, which often fails to lead to a permanent job. This outlook reduces incentives for workers and employers to invest in training and lifelong education, thus eroding human capital formation, which in turn impedes faster productivity growth. Moreover, temporary workers are at a higher risk of poverty and tend to accumulate lower entitlements to social benefits. Spain is fighting the abuse of temporary contracts with growing success and plans to increase the share of permanent posts in the public administration. However, incentives to promote open-ended contracts in the private sector have so far had only small effects.

·Skills mismatches and gaps in educational outcomes also weigh on productivity growth. Tertiary graduates face difficulties in finding adequate jobs, and both over- and under-qualification are widespread in Spain. Though decreasing, the early school leaving rate remains amongst the highest in the EU and educational outcomes continue to vary considerably across regions. A high share of teachers is recruited on temporary contracts. The teaching and acquisition of digital skills is a challenge, which recent initiatives have started to address.

·The social situation continued to improve with economic and job growth, but income inequality and the share of population at risk of poverty remain high. The employment situation of household members plays an important role in this context. In 2016, the share of people at risk of poverty and social exclusion again decreased slightly, but remains high especially for jobless and single-earner households, as well as for children. In addition, family policies and social benefits, notably income guarantee schemes, suffer from uneven coverage and low effectiveness. High levels of income inequality, early school leaving and child poverty may negatively affect the equality of opportunities.

·While public procurement and the fight against corruption saw progress, advances to improve the business environment have slowed down. The law on market unity, subject of several rulings by the Constitutional Court in 2017, is still to be fully implemented. Regulatory disparities and restrictions keep mark-ups high, geographical mobility of companies and workers low, and productivity growth restrained. By contrast, a new law on public procurement, if implemented well, is likely to improve the efficiency and transparency of public procurement. The justice system's efficiency is being increased and the implementation of anti-corruption laws is making the business environment more attractive. The perception of the justice system's independence has improved.

·The innovation performance remains weak, despite governance improvements. Public and private investment in R&D remains subdued. Low capacity of small and medium enterprises to adopt innovations and take advantage of digitisation is a drag on Spain's longer-term productivity growth. Governance of research and innovation has been streamlined and made more inclusive, but coordination between government levels is still uneven and the lack of systematic evaluations prevents policy learning.

·Cross-border transport and energy connections, as well as water infrastructure, face investment gaps. Bottlenecks at Spain's borders impede a closer integration in the EU electricity and gas markets and slow down trade flows. Water governance is being improved, but there is underinvestment in supply and wastewater infrastructure.

1.    Economic situation and outlook

Economic growth

Economic growth continued exceeding expectations in 2017. The volume of GDP finally surpassed its pre-crisis peak in the second quarter of 2017, and growth remained robust in the third quarter, at 0.8 % q-o-q. According to the GDP flash estimate, growth slightly decreased to 0.7% q-o-q during the fourth quarter, bringing the annual growth rate for 2017 to 3.1%. The expansion is underpinned by a more balanced growth pattern than before the crisis. Domestic demand, and specifically private consumption, remains the main driver of growth, but net exports have also been contributing firmly to growth since 2016. The strength of the recovery and of job creation partly reflects the impact of the structural reforms implemented in the early years of the crisis, in particular the financial sector and labour market reforms.

As favourable tailwinds subside, growth is expected to decelerate but remain robust. Real GDP growth is forecast to moderate to 2.6 % in 2018 and 2.1 % in 2019 (see Graph 1.1). ( 2 ) Private consumption is expected to slow down as job creation decelerates and the tailwinds that supported the growth of disposable income in recent years - i.e. declining oil prices, tax cuts and improving financial conditions - abate. However, private consumption is still projected to remain the main contributor to growth until 2019, as disposable income continues to increase and the financial position of households improves. After decelerating in 2016, growth of investment is expected to have rebounded in 2017, driven by residential construction. It is then set to ease slightly in 2018 and 2019, as equipment investment growth moderates in line with final demand. Downward risks to the outlook nevertheless exist, as uncertainty linked to the political situation in Catalonia could have a negative impact on growth, the size of which cannot be anticipated at this stage. At the same time, a stronger than expected recovery in other euro area countries is an upside risk for export growth.

Potential growth is projected to increase slightly. After plummeting during the crisis years, potential output growth has started to recover, and is estimated to reach 1.2 % in 2019, but still remaining below the euro area average (1.5 %) (see Graph 1.2). More than half of this increase can be explained by a higher contribution of labour to potential output growth. Whereas the contribution of capital and total factor productivity (TFP) to potential output is now in line with the euro area average, the contribution of labour is still lower on account of a slowly declining, structural unemployment rate (NAWRU).

External position

The external sector is expected to continue contributing to GDP growth until 2019. Since 2016, import growth has remained contained, despite strong growth of domestic demand and accelerating exports, pointing to a reduction in import propensity (see Box 4.4.1). At the same time, structural improvements in export performance, underpinned by cost-competitiveness gains and an increase in the number of regular exporters, have contributed to sizeable gains in market shares in recent years. Both exports and imports are expected to have accelerated in 2017 as Spain's export markets recovered, before moderating in 2018 and 2019. Exports are expected to continue outpacing imports, and net trade should make a positive contribution to growth until 2019.

In 2017, the Spanish economy registered a current account surplus for the fifth year in a row. The current account surplus, after increasing in 2016, is expected to remain broadly stable at almost 2 % over the period 2017-19, as swings in the terms of trade due to oil price increases are largely offset by changes in export and import volumes. Given its large net stock of external debt, reductions in the cost of debt in recent years had a positive impact on Spain's income balance. However, the scope for additional improvements seems contained, as interest rates are not expected to reduce further. In cyclically-adjusted terms, the current account has continued to improve, again suggesting that the external surplus is increasingly driven by structural factors.

Current account surpluses are slowly translating into a reduction of Spain's net external liabilities. Despite the current account surpluses registered since 2013, negative valuation effects (partly reflecting improvements in confidence and higher value of Spanish assets) are limiting the improvements in the net international investment position (NIIP). Still, the NIIP has improved by more than 16 pps of GDP since its peak, but at -83.2 % of GDP in Q3-2017, it remains very negative. Changes in the structure of external liabilities in recent years in terms of sectors (e.g. being increasingly composed of public sector and central bank liabilities), type of instruments (e.g. a higher share of equity than in the past), and maturity (e.g. longer maturity of public debt), can mitigate some of the vulnerabilities associated with a highly negative NIIP. Going forward, the strong GDP growth, pickup in inflation and net external surpluses projected until 2019 should facilitate further improvements of the NIIP (See Section 3.2).

Private and public debt

The reduction in private sector debt is progressing but has slowed down. Despite its rapid decline, private sector debt remains high and deleveraging needs remain for both corporates and households (see Section 4.2). Nominal GDP growth has now become the main driver of the reduction in debt ratios. The deleveraging process has slowed down as new credit is growing strongly, especially for households and SMEs. Debt reduction, however, is taking place at a faster speed than suggested by fundamentals for both companies and households, indicating the excess of debt accumulated in the past is unwinding at a sufficient pace (European Commission 2017) (see Chapter 4.2).

The reduction of public sector debt is expected to gather pace. The general government debt ratio is expected to decline from 99 % in 2016 to about 95.5 % in 2019. After narrowing to 4.5 % of GDP in 2016, Spain’s general government deficit continued to decrease in the first three quarters of 2017, by 1.4 pps (see Graph 1.3). This reduction has relied on the improved macroeconomic outlook but also on restraint on public expenditure growth. For the year as a whole, a general government deficit of 3.1 % of GDP is expected. At unchanged policies, the deficit is expected to narrow to 2.4 % and 1.7 % of GDP in 2018 and 2019, respectively. The structural deficit is expected to narrow from 3.3% of GDP in 2016 to 3.1% of GDP in 2017 and then remain almost unchanged in the two subsequent years.

Inflation

Core inflation is expected to gradually increase. After negative growth in the harmonised index of consumer prices (HICP) in 2016, inflation rebounded strongly in the first half of 2017 due to the increase in oil prices. HICP inflation moderated in the second half of last year to an annual average of 2 % in 2017, and is expected to decline further in 2018 and 2019 on account of oil price developments. Core inflation should recover gradually over 2018 and 2019 as wages pick up and the output gap turns firmly positive.

Labour market

The labour market situation continues to improve, supported by wage moderation and the labour market reforms implemented in previous years. Employment is expected to have expanded by 2.7 % in 2017. It is then projected to decelerate but remain robust at 2.1 % and 1.7 % this year and in 2019, respectively. The unemployment rate keeps decreasing, down to 16.6 % in Q4-2017 from 18.6 % one year earlier, and is expected to fall to about 14 % by 2019. The recovery in the labour market has also allowed for a reduction of disparities in GDP per head across Spanish regions (Box 1.6). After remaining subdued until 2017, nominal wage growth is expected to gradually increase in 2018 and 2019, as the cyclical slack in the economy narrows. Productivity is expected to grow only moderately, leading to modest increases in nominal unit labour costs (ULC) until 2019 (Graph 1.4). However, further cost competitiveness gains are expected, as ULC are projected to grow more slowly than in the rest of the euro area.

A high level of labour market segmentation and long-term unemployment act as a drag on potential growth. The youth unemployment rate has progressively decreased (from 53 % in 2014 to 37.5 % in Q4-2017), and so has the long-term unemployment rate (from 12.9 % in 2014 to 7.1 % in Q3-2017) (Graph 1.5). However, both rates continue to be among the highest in the EU, suggesting that unemployment has become entrenched at least for some among these groups. At the same time, the proportion of employees on temporary contracts relative to the total employment has continued to rise by 0.3 pps year-on-year up to 26.8 % in Q4-2017, and is amongst the largest in the EU. However, the share of open-ended contracts in net employment growth increased to 54 % on average in 2017, although the longer term impact on the overall share of temporary employment cannot be assessed yet.

Poverty, inequality and social inclusion

Though declining, the share of the population at risk of poverty or social exclusion remains high. The proportion of people at risk of poverty or social exclusion declined for the second consecutive year in 2016 (based on 2015 income ( 3 )), reaching 27.9 % of the total population, but it remains well above the 2008 level of 23.8 %. The decrease owes to a drop in severe material deprivation and in the share of people living in households with very low or low work intensity, which despite having improved, remains very high. The share of people at risk of monetary poverty remained stable in 2015 at 22 %, and much higher than the EU average. Flash estimates ( 4 ) indicate that for Spain no significant changes in this indicator are expected for the income year 2016. Although improving, challenges remain in the situation of children and young people as reflected by the high shares of early school leavers, young people not in employment, education, or training, and children in poverty. Work intensity is one of the most important drivers of poverty and inequality.

Income inequalities remain high and real income growth is lower than GDP growth. Since the recovery started, real gross household disposable income (between 2014 and 2017) has grown more slowly than GDP and social indicators point at various vulnerabilities. Income inequality, as measured by the income quintile ratio, registered a slight decline in 2016 (based on income from 2015), but continues to be one of the highest in the EU, as the richest 20 % share of the population earns about 6.6 times more income than the bottom 20 %. Inequality is mainly driven by a high unemployment rate, skills polarisation and labour market segmentation. It is especially high at the bottom of the income distribution. The redistributive power of the tax and benefits system is relatively low compared to other EU Member States. It reduces income inequality by only 34.6 %, as measured by comparing the Gini coefficients ( 5 ) of market income (i.e. before taxes and transfers) and disposable income (i.e. after taxes and transfers), below the EU average of 40%.

2.    Progress with country-specific recommendations

Progress with the implementation of the recommendations addressed to Spain in 2017 has to be seen in a longer term perspective since the introduction of the European Semester in 2011. Since then, Spain has overall advanced comparatively well in implementing CSRs. Looking at the multi-annual assessment of the implementation of the Country Specific Recommendations (CSRs) since these were first adopted, 42 % of all the CSRs addressed to Spain have seen 'some progress' in their implementation. On 35 %, Spain made 'substantial progress' or fully implemented them. 23 % of the CSRs recorded 'limited' or 'no progress' (see Graph 2.1). Reforms carried out during economically challenging times contributed to the Spanish economy's strong performance since its emergence from the crisis. The decisiveness and speed of implementation have however weakened somewhat since 2014. The current minority government seems to concentrate its political capital on few selected policy issues, as well as on preventing roll-back of earlier reforms. In several policy areas subject to CSRs, both the national and regional levels of government are involved in reform implementation. In those areas, coordination and accountability remain challenges for CSR implementation.

Recommendations concerning the financial sector, the insolvency framework and the long-term sustainability of public finances have been addressed to a large extent. The restructuring of banks that had received state aid is well advanced, and the successful resolution of Banco Popular in June 2017 reinforced confidence in the stability and resilience of the Spanish banking sector as a whole. The 2011 and 2013 pension reforms made public finances more sustainable in the long term. The fiscal framework has seen various improvements since 2012. The reform of the corporate and personal insolvency frameworks has facilitated private debt reduction and made company defaults less onerous.

In labour market and social policies, significant gaps remain despite substantial progress in earlier years. The labour market reforms carried out since 2012 have made employment creation more responsive to economic growth. Increased flexibility and continuing wage moderation has been aiding this development. Still, policy efforts to address the high segmentation in the labour market have remained limited and have not prevented the share of temporary contracts from increasing. Progress has also been less prominent in social policies, notably concerning income support schemes and family policies, and in education.

Progress has been more muted in implementing product market reforms and improving research and innovation, also seen from a multi-annual perspective. Over the past few years, Spain has received recommendations to address regulatory fragmentation in its internal market and to strengthen research and innovation, a prerequisite for sustainable productivity growth. Although the law on market unity has been in force for four years, the adaptation of sectoral legislation to its principles has been slow. The renewed commitment of regions and the central government in January 2017 to strengthen cooperation on market unity has so far not translated into tangible results. No policy measures have been taken to reform size-contingent regulation or liberalise professional services, which had been the subject of previous years' CSRs. Both public support and promotion of private funding for research and innovation have seen only modest increases. There were only a few isolated advances in innovation governance and public-private cooperation in research and tertiary education, although some measures taken may need more time to generate measurable impact.

Spain has made limited ( 6 ) progress in addressing the 2017 Country-specific Recommendations (see Table 2.1). In fiscal policy and governance (CSR 1), a new law on public procurement has been adopted which improves transparency and control mechanisms. Its effectiveness, in particular at regional and local level, will however depend on proper. While no legislative initiatives have been taken to strengthen the fiscal framework in 2017, the government has continued implementing the measures already set out in the law. An expenditure review, focusing on subsidies in several policy areas, was kicked off in 2017. Some progress has thus been made in implementing CSR 1, thereby also addressing aspects of the 2017 Council Recommendations for the Euro Area to ensure sustainable public finances.

In labour market, social and education policies (CSR 2), some regions have advanced towards better coordination between public employment and social services. Spain reinforced labour inspectorates to fight more effectively against the abuse of temporary contracts. Initial steps were taken to reduce the number of interim contracts in the public administration. Measures to promote open-ended contracts in the private sector, however, have shown limited effectiveness so far or have not yet moved to the implementation stage. The roll-out of the Universal Social Card in 2018 will make the receipt of social benefits more transparent, but will not necessarily improve the effectiveness of income guarantee schemes and family support across the country. Some measures to increase labour market relevance of tertiary education have been initiated or pursued further, but are still too recent to have a noticeable effect on outcomes. Efforts to improve educational outcomes have not reduced the persisting regional disparities. Some measures to strengthen teacher training and to support students, notably those at risk of leaving school early, were approved in 2017. Work in Parliament on the "National Pact for Education" had not resulted in decisions as of February 2018. Overall, progress on CSR 2 has been limited, implying few achievements on the Euro Area Recommendation to promote social fairness and convergence.

Innovation funding saw modest increases, but this has so far not led to increased investment in terms of GDP share. However, Spain took a number of steps towards making the governance of research and innovation more inclusive (CSR 3.1). There were few advances in the further implementation of the law on market unity. The consequences of the constitutional court rulings declaring some of its articles null and void remain to be seen (CSR 3.2). This results in limited progress on CSR 3, which also means few substantial achievements concerning the Euro Area Recommendation to prioritise reforms that increase productivity and improve the business and investment environment.

European Structural and Investment Funds are pivotal for addressing key challenges to inclusive growth and convergence in Spain. Among others, they support SME competitiveness, strengthening of digital skills and vocational training, and women's labour market participation. They are also instrumental for fostering investment in regions' relative strengths in the framework of smart specialisation and for reducing regional disparities in the medium term (see Box 2.2).

3.    Summary of the main findings from the Macroeconomic Imbalance Procedure In-Depth Review

3.1.Introduction

The in-depth review for the Spanish economy is presented in this report. In spring 2017, Spain was identified as having macroeconomic imbalances, in particular relating to high levels of external and internal debt, both public and private, in a context of high unemployment. The 2018 Alert Mechanism Report (European Commission, 2017i) concluded that a new in-depth review should be undertaken for Spain to assess developments relating to the identified imbalances. Analyses relevant for the in-depth review can be found in the following sections: Public finances (Section 4.1.1); Financial sector and private sector debt (Sections 4.2.1 and 4.2.3); Labour market (Section 4.3.1); and Investment (Section 4.4). Potential spillovers to the rest of the euro area are discussed in Box 3.4.1.

3.2.Imbalances and their gravity

Spain's net international investment position (NIIP) remains very negative. The large stock of net external liabilities (-83.2 % of GDP in Q3-2017) leaves the country exposed to adverse shocks or shifts in market confidence. Favourable changes in their composition somewhat mitigate the associated vulnerabilities.

Despite a significant reduction, private sector indebtedness is still well above prudential and fundamental-based levels. Private sector debt, in non-consolidated terms, amounted to 159.9 % of GDP in Q3-2017 (of which 61.8 % of GDP was household debt and 98.1 % of GDP non-financial corporate debt). A high level of debt increases vulnerability to interest rate shocks, and its associated financial burden constrains domestic demand. The financial position of Spanish households has strengthened thanks to improvements in the labour market and lower income taxes. Furthermore, the financial burden of household debt has been reduced by the prevailing low interest rates. With sustained GDP growth, household debt reduction is likely to continue, but prudential and fundamental-based benchmarks show that household debt remains high and deleveraging needs persist (see Section 4.2.3). On the corporate side, the debt reduction process has taken place simultaneously with new credit flowing towards the less indebted and most productive firms, supporting investment (Banco de España, 2017d). Despite its significant decline, the outstanding debt of non-financial corporations remains above what prudential and fundamentals-based benchmarks warrant (see Section 4.2.3).

The general government debt ratio is expected to have decreased slightly further in 2017, albeit remaining at a very high level. The Commission 2017 autumn forecast projects a decrease by 0.6 percentage points (pps) in 2017, to 98.4 % of GDP. Despite this downward trend, the high stock of public debt continues to be a vulnerability in the face of potential changes in market sentiment and the prevailing low interest rate environment.

Unemployment, though still very high, has continued its rapid decline. Unemployment is estimated at 17.2 % for the whole of 2017 and is forecast to decline to 15.6 % in 2018. This constitutes a fall of more than 10 pps since its peak in 2013. Long-term and, especially, youth unemployment saw a similarly steep fall during this period, but more than one third of the active population under 25 years of age did still not have a job in Q4-2017. 34% of the increase in employment between Q4-2016 and Q4-2017 has taken the form of temporary contracts. This increase is however lower than the increase in the share of permanent contracts.

The relatively large size and economic integration of the Spanish economy with the rest of the EU make it a potentially significant source of spill-overs to other member states, especially those with which Spain has significant trade, financial and/or banking linkages. Box 3.4.1 illustrates how structural reform measures in Spain can carry both a positive domestic and cross border effect. The simulations presented therein follow the spirit of the 2017 Council Recommendations for the Euro Area, in particular as regards increasing productivity and potential growth, and improving the institutional and business environment.

3.3.Evolution, prospects, and policy responses

The persistent current account surplus is increasingly driven by structural factors. Despite the key role of domestic demand in driving the economic recovery, Spain has been recording a current account surplus since 2013. Also, between 2013 and 2017, Spain's net lending capacity has remained relatively stable at almost 2 % of GDP, despite the shrinking output gap. Initially, cyclical and transitory factors (such as low oil prices or low interest rates) drove the improvement in the current account balance, but, more recently, structural factors are playing an important role in preserving the improved external position. Accordingly, in cyclically adjusted terms, the current account balance has continued to improve (see Graph 3.1), exceeding the level suggested by current account norms, that is, the one explained by fundamentals (close to 0.4 % of GDP in 2017) ( 7 ). Export market share increases and signs of import substitution (whereby foreign imports are replaced with domestic production), confirm the perception that a structural change has taken place in the Spanish economy (see Box 4.4.1).

Current account surpluses are slowly translating into a reduction of Spain's net debtor international investment position. Complemented by high nominal GDP growth, the surpluses are driving a slow but steady reduction of Spain's negative NIIP (see Graph 3.2) ( 8 ). Negative valuation effects prevented a larger improvement in 2013 and 2014, and again in 2017 with the appreciation of the euro. Continued current account surpluses and high nominal GDP growth projected until 2019 are expected to facilitate a further improvement of the NIIP.

The change in the composition of Spain's external liabilities in terms of asset type helps to mitigate the vulnerability risks. Since 2013 the proportion of equity instruments in total external liabilities has been increasing, although from a very low level. Equity does not carry the same risks as debt for external sustainability, as its remuneration, i.e. dividend payments, can be adjusted during economic downturns. The change in the composition of external indebtedness towards public and central bank liabilities, with generally lower refinancing and liquidity risk, also mitigates to some extent the external vulnerability of the Spanish economy (see Graph 3.3). Additionally, most of the external debt has maturities of one year or more (about 74 % of general government and private sector external debt, excluding intercompany loans).

Spain would need to maintain current account surpluses over a sustained period of time to decisively improve its still large external liabilities. While the current account surpluses recorded since 2013 have put the NIIP onto a declining path, the amount of Spain's net external liabilities is still far from having achieved a level that could be considered prudential or in line with fundamentals. This gap warrants further and sustained adjustments (see Graph 3.2) ( 9 ). Even under a relatively benign growth scenario, maintaining current account surpluses over a long period of time would be required to decisively bring down the large NIIP (see Table 3.1). It is therefore crucial for Spain to pursue fiscal consolidation and preserve the competitiveness gains made in the past years. While the latter have so far been largely driven by wage restraint, advances based on productivity growth and non-cost competitiveness more generally continue to pose a challenge.

Private sector deleveraging is increasingly driven by GDP growth as new credit continues to grow. Private sector debt has been reduced by about 58 pps of GDP since its peak in 2010. Most of this reduction is due to a decline in corporate debt (about 35 pps of GDP), but progress in household debt reduction (over 23 pps of GDP) has also been significant. Even so, deleveraging needs remain for both households and companies, as debt of both institutional sectors remains above their estimated prudential and fundamentals-based levels (see Section 4.2.3). Thanks to the robust nominal GDP growth, the private debt-to-GDP ratio is expected to continue decreasing, even as bank lending resumes. Indeed, although the outstanding volume of credit to the private sector continues to shrink, new bank lending to households and to the most productive and/or less indebted firms continues to increase, underpinning Spain's strong economic growth (Banco de España, 2017d).

In 2017, the quality of bank assets improved further. The stock of non-performing loans went down further to 8.1 % as of November 2017, and is now close to the euro area average. On aggregate, the banking system comfortably meets the regulatory capital requirements. The resolution of Banco Popular on 7 June 2017 has strengthened the Spanish banking sector at large, with no losses for taxpayers and depositors.

After the sharp adjustment that largely prompted the financial sector crises, the housing market and construction sector have consolidated their recovery. Housing prices have risen for almost four years in a row. However, there remains a large stock of unsold houses, notably in some regions, and the recovery does not show potentially harmful price dynamics (Philiponnet and Turrini, 2017). The development of the real estate market remains crucial for banks’ profitability.

The insolvency reforms over the past years have facilitated private debt reduction. The use of pre-insolvency proceedings has increased by about 50 % and out-of-court agreements have become common for natural persons. The overall number of insolvency proceedings has started to increase in the first two quarters of 2017, by 3.9 % and 4.3 % quarter-on-quarter, respectively. In the prevailing context of high economic growth and improving access to finance, such figures indicate that insolvency procedures have become more conducive to deleveraging (see Section 4.2.2).

The reduction of public sector debt is expected to gather pace. Despite strong nominal GDP growth and debt-decreasing stock-flow adjustments in 2015 and 2016, the decline in the debt ratio has been muted, totalling 1.4% of GDP between 2014 and 2016. This is due to the still high, though declining, general government deficit. Since 2014, the reduction of the deficit has relied to a large extent on the positive macroeconomic outlook and the improving financing conditions. As the deficit is forecast to continue narrowing in 2017 and 2018 (to 3.1 % and 2.4 % of GDP, respectively) thanks to the continuation of the economic upswing as well as some expenditure restraint, the debt ratio is forecast to decrease further to just below 97 % of GDP in 2018. While there appears to be no immediate risk of fiscal stress, risks to fiscal sustainability remain significant in the medium term (see Section 4.1.1).

The labour market has continued to improve, but unemployment and segmentation remain high. Strong job creation has continued throughout 2017, and is expected to slow down but remain robust through 2019. Employment growth has been underpinned by wage moderation and the labour market reforms implemented in 2010-2012. However, it still occurs to a large extent through temporary contracts, the proportion of which in total employment is significantly higher than the EU average, and has increased further throughout 2017 (to 26.8% in Q4-2017). This has a potential negative impact on productivity growth and social cohesion. Spain is taking measures to strengthen individual support to the long-term unemployed, but their impact relies on the capacity of the regional public employment services. This has remained limited despite increases in resources and improved coordination with social services in some regions (see Section 4.3.1). Addressing education and skills gaps is critical to reducing structural unemployment and supporting the reallocation of human resources towards more productive activities.

3.4.Overall assessment

The reduction of macroeconomic imbalances in Spain has progressed further, but the still high stocks of external, public and private debt mean that significant vulnerabilities remain. Private sector debt reduction has continued to advance, and the slower debt reduction pace in 2017 is due to credit flows turning positive. Public sector debt has been slightly reduced, a process that is expected to accelerate somewhat as government deficits are forecast to narrow further. Improvements in the external balance are increasingly sustained by structural factors supporting the growth of exports and limiting that of imports. Nevertheless, in order to decisively bring down its stock of external liabilities, Spain will have to record current account surpluses over an extended period of time. Although unemployment has been declining rapidly, it remains very high with a large proportion of it being long-term, and the share of temporary employment remains high.

4.    Reform priorities

4.1.    Public finances and taxation

4.1.1.General government debt *

Spainʼs general government debt ratio remains high. After rising sharply in the years following the financial crisis, the general government debt ratio peaked at slightly over 100 % of GDP in 2014, about 65 pps above its low point of 2007. The Commission 2017 autumn forecast projects that the debt ratio will decrease from 98.4 % of GDP in 2017 to 95.5 % of GDP in 2019, as relatively strong nominal GDP growth increasingly offsets the narrowing deficits. As the private debt ratio has declined faster than the government debt ratio, general government debt now makes up a much larger share of the total indebtedness of the economy – at around 37 % in 2016 relative to around 20 % in 2010, the year in which private debt peaked (See Graph 4.2.3).

Spain does not appear to face immediate risks of ʻfiscal stressʼ. ( 10 ) This is thanks to the improved macro-financial situation, while the short-term challenges from the fiscal side are not sufficiently severe to generate short-term fiscal stress at the aggregate level. In particular, Spain still has a sizeable negative net international investment position and low household savings rate. However, risks are mitigated by the strong real GDP growth, positive current account balance and regained cost competitiveness, as well as the low proportion of short-term debt among non-financial corporations and households and subdued private sector credit flow. Short-term risks stemming from the fiscal side are larger and are mainly related to the high general government debt ratio and relatively high gross financing needs. These elements are mitigated by an improved headline balance, a relatively low share of short-term debt (as % of GDP), a low interest/growth rate difference and subdued government expenditure growth.

Spain faces high fiscal sustainability risks in the medium term. Debt sustainability analysis shows that under normal economic conditions and assuming a constant structural primary balance after the last Commission forecast year (2019), the Spanish general government debt is expected to remain at around 95 % of GDP by 2028 (last projection year). This projection is driven by the gradual improvement in the primary balance over the projection period offsetting an increasing interest rate-growth differential, especially in the last part of the period. The analysis also shows that the level of the debt ratio is highly sensitive to shocks (see Box 4.1.1). Furthermore, Spainʼs structural primary balance would need to improve by as much as 5.3 % of GDP in cumulative terms over a five-year period (from 2019 until 2024) relative to the baseline no-fiscal policy change scenario to reach the 60 % public debt-to-GDP ratio reference value by 2032. In the Commission's assessment of debt sustainability, this increase is well above the threshold that qualifies a country as facing high risks in the medium term.

In the longer term, risks to fiscal sustainability due to the unfavourable initial budgetary position are mitigated by savings in age-related expenditure. Savings on non-health ageing related spending (pensions and unemployment benefits) amount to about 2.4 % of GDP, due to the 2011 and 2013 pension reforms and other factors. By contrast, public expenditure on health care and long-term care adds 1.5 % of GDP to the fiscal sustainability gap. This projection is based on current expenditure trends and the expected demographic changes.

The persistent deficit of the social security system and the continued application of the minimum pension revaluation rate are receiving policy attention. While two successive reforms of the pension system, in 2011 and 2013, will help contain pension expenditure in the long term, they are also likely to result in less generous pensions. The parliamentary committee dedicated to pension issues held meetings in 2017 to discuss possible further reforms. To date, these have not led to a consensus. For a summary of the current situation and remaining challenges, see Box 4.1.2.

4.1.2.Taxation

Spain has a relatively low tax-to-GDP ratio and relies less on labour taxes than other EU countries. In 2016, Spainʼs tax burden accounted for 33.3 % of GDP, compared to an EU average of about 38.9 % and euro area average of 40.1 %. Spain raises roughly equal shares of revenues from indirect taxes, direct taxes and social contributions. Following a steep fall during the crisis (from 12.4 % of GDP in 2006 to 8.7 % in 2009), the share of indirect taxes has largely recovered (to 11.8% of GDP in 2016) as a result of higher VAT rates, improved VAT compliance and the economic recovery. Personal income taxes and social contributions have seen more limited changes, while corporate income taxes have varied significantly with the cycle and were still much below their pre-crisis level as a share of GDP. In 2015 and 2016, both personal and corporate income taxes were affected by legislated tax cuts. Some of the reduction of the corporate income tax was reversed in 2017, as the corporate tax base was broadened by reducing the deductibility of some items. In 2015, the implicit tax rate on labour stood at 31.3 %, below the EU average of 35.9 %, and the tax wedge ( 11 ) in 2016 for an average single wage earner was 39.5 % compared to an EU average of 40.6 %. Employersʼ social contributions make up a relatively large part of the tax burden, particularly at low wage levels, resulting in a less progressive system.

Despite a standard VAT rate in line with the EU average (21 % vs EU average of 21.6 %), Spain has a relatively large VAT policy gap. The 'actionable policy gap' – the policy gap remaining after excluding those items where charging VAT would be either impractical or is beyond the control of national authorities ‒ stood at 27 % in 2015, of which just over half was due to the use of reduced and super-reduced rates. Simulations conducted by the European Commission based on the EUROMOD model (See Box 4.1.2 in the 2017 Country Report) show that reducing the incidence of these reduced rates would increase revenues by 0.2-1.4 % of GDP, depending on the scope and extent of the reduction. Negative distributional effects can be reduced or avoided by giving priority to items where the reduced rate has a regressive effect or be compensated through other means, such as social transfers.

In some cases, reduced VAT rates tend to have a regressive impact. All VAT rate reductions potentially benefit all consumers regardless of their income level. As such they are not an effective tool for income redistribution. While, on average, the reduced rates in Spain have some progressive effect, which is almost entirely due to foodstuff, for many items they have a strongly regressive effect. For instance, this is the case of the reduced rate for restaurants and hotels.

The VAT compliance gap continued to decrease. The gap – calculated as the difference between the theoretical VAT liability and the revenue actually received as a percent of the former – amounted to 3.5 % in 2015 (down from a peak of 13 % in 2011), which is significantly below the EU average of 13 %. In July 2017, Spain put in place a new information system (SII) that requires medium and large enterprises to inform the tax administration about their commercial transactions with a much shorter delay.

Environmental taxes are still below the EU average, despite increases in recent years. Environmental taxes in Spain amounted to about 1.9 % of GDP in 2016, compared to an EU average of about 2.4 % of GDP. In particular, energy taxes (including transport fuel taxes) yielded little revenue, which reflects the low level of excise duties on both unleaded petrol and diesel. This is particularly the case for diesel, on which Spain applies the minimum excise duty, despite diesel having a higher carbon and energy content than unleaded petrol. Finally, taxes on transport, such as vehicle taxes, only yield half as much revenue in Spain as the EU average (0.2 % compared with 0.5 % of GDP).

Spain relies to a relatively low extent on recurrent taxes in the area of property taxation. While revenues from property taxation in Spain are slightly above the EU average (2.8 % compared with 2.6 % of GDP in 2015), the recurrent element is below the EU average (1.3 % of GDP compared with 1.6 % in 2015), while transaction taxes exceed the EU average (1.6 % compared with 1 % of GDP). Recurrent property taxes are considered among the taxes least detrimental to growth and preferable to transaction taxes, as the former allow a more efficient allocation of assets and higher labour mobility. No major policy changes have been introduced in the area of property taxation in recent years, except for the gradual phasing out of mortgage deductibility.

The Spanish tax system features elements hindering investment. A high debt bias hampers developments in equity markets (see Box 4.4.1 in the 2017 Country Report). The difference in the cost of capital for new equity-funded investment, on the one hand, and debt-funded investment, on the other, was still one of the largest in the EU in 2016, despite having improved somewhat.

4.1.3.FISCAL FRAMEWORK

Spain’s fiscal framework sets out the obligation for subnational governments to comply every year with a deficit, debt and expenditure rule target. At regional level, compliance with fiscal targets improved considerably in 2016 (Graph 4.1.4). Over 2013-2016, the debt target was met most frequently, followed by the expenditure rule target. However, deficit targets have had the worst compliance record, even though the regional public deficit has gone down over 2013-2016 (Graph 4.1.4 left-hand side). Nevertheless, in 2016 nine regions complied with the deficit target, the highest number since 2013. Over 2013-2016, fiscal rules were in general more frequently observed by regions falling within the medium GDP per head groups (Graph 4.1.4).

Local governments have on aggregate, overachieved their budget balance targets over 2013-2016. Unlike regional governments, they have missed more frequently the public debt target. The improvement in the local entities’ budget balance has been driven by reductions in the interest and current expenditure to GDP ratios (Graph 4.1.5 left-hand side), although current expenditure has increased when measured in real and per capita terms (Graph 4.1.5 right-hand side).

The recovery in tax revenues and the increase of revenue transfers facilitates deficit reduction by regions. In 2016, the improvement in the budget balance was explained by reductions in the share of capital, current and interest expense in GDP, but also by the increase in revenue transfers, on account of the tax settlement of the 2014 fiscal year, which yielded regions additional EUR 7.6 billion (Graph 4.1.5 left-hand side). An additional rise in revenues from the regional financing system was observed in the first ten months of 2017, implying that the regional deficit target for that year is likely to have been complied with (AIReF, 2017).

Expenditure rules can be an effective tool to underpin the sustainability of public finances as revenue recovery sets in. By capping growth in the expenditure falling under the control of the government with reference to a medium-term growth rate – as is the case in the Spanish legislation - they help fiscal consolidation in good economic times, while in times of recession they do not hinder fiscal policy playing a stabilizing role. Expenditure rules therefore reduce pro-cyclicality in fiscal policy. In fact, the economic literature associates expenditure rules with improved fiscal performance (IMF, 2015). Over 2013-2016, regions having complied with the expenditure rule have, on average, recorded higher primary balances. However, regional governments may have opted to reduce discretionary expenditure, such as on public investment, to seek compliance with the rule rather than pursuing more structural forms of consolidation. For local governments, which on aggregate are in a better budgetary situation, special provisions apply, as those with sound public finances can, under certain conditions, use their budget surplus to fund financially-sustainable investment, with this spending not qualifying as eligible spending for the purposes of the domestic spending rule.

Selected features in the Stability Law’s expenditure rule remain unregulated. For example, the law does not call on non-compliant governments to make up for spending slippages within a pre-defined time frame. Linked to that, the law does not clarify whether the reference rate of eligible expenditure should be applied to the end-of-the-year level of eligible expenditure or to the level compliant with the rule. This can reduce the impact of the rule on fiscal consolidation depending on the interpretation given to the legal provisions.

The circumstances leading to the activation of measures to prevent the risk of non-compliance with the domestic fiscal rules are not defined. While this gives the authorities more discretion in the activation of those measures, it can reduce the automaticity in their implementation. In early December 2017, shortly after the publication of the quarterly budget execution data, the Ministry of Finance sent letters to selected regions calling on them to address the risks of non-compliance with the expenditure rule. However, the timing of the letters reduced the chances for regions to take remedial action still in 2017.

Other policies have been put in place to assist regional consolidation and enhance spending efficiency. A spending review was launched in June 2017 covering public subsidies with a view to improving procedures, eliminating duplications and evaluating impacts. An action plan was adopted by the Spanish government on 26 January 2018. The first phase of the review is planned to be completed by end-2018.

4.2.    Financial sector and private sector debt

The Spanish economy continues to rely heavily on the banking sector. In 2016, total bank loans in the economy represented about 45 % of GDP (see Graph 4.2.1) vs an EU average of around 36 %, while non-bank financial intermediation via equity markets, debt issuance and venture capital is below the EU average. The outstanding level of loans to the Spanish private sector has continued to decline but at a slower rate than in the past years. On aggregate, private sector debt deleveraging has progressed, but certain groups of households and firms remain vulnerable.

4.2.1.Financial sector *

Banks have further adjusted their business models and cost structures, paving the way to new loans to the economy ( 12 ). On aggregate, banks comfortably meet the regulatory capital requirements, and the quality of their assets has further strengthened. The successful resolution of Banco Popular in June 2017 further strengthened the stability of the banking sector and put pressure on some small banks to accelerate the clean-up of their balance sheets. In 2017, Spanish banks have continued to be profitable. Against this background, FROB's (the Spanish Executive Resolution Authority) divestment from Bankia as well as the divestment of SAREB's portfolio, the Spanish asset management company, have made further progress but remain to be completed.

Excluding losses due to one resolved bank, banks' profitability improved in the first half of 2017. Profits increased by about 4 % y-o-y for domestic operations and by about 19 % y-o-y if operations abroad are included. The improvement was mainly driven by lower impairment provisions. The capital buffers of Spanish banks remained comfortable in the first half of 2017, although the resolution of Banco Popular in June 2017 led to the reduction of the average common equity tier 1 ratio from 12.6 % at end-2016 to 11.6 % at end-June 2017, as its equity was written off (see Table 4.2.1). Nonetheless, Banco Popular’s acquirer, Banco Santander, undertook a EUR 7 billion capital increase in July to restore its capital ratios. Thus, at the end of September the average common equity tier 1 ratio stood at 12.4 %.

In 2017, Spanish banks continued to clean up their balance sheets and reduce the share of crisis legacy loans. The overall non-performing loan (NPL) share in total loans in Spain went down to 8.1 % as of November 2017, from 9.2 % a year before. However, once banks' activity outside Spain is taken into account, the share of NPLs is only 5.3 % in second quarter of 2017, close to the EU average (see Table 4.2.1). SAREB made further progress in divesting the large amount of legacy assets stemming from the crisis. Nonetheless, its financial results remained negative in both 2016 and the first half of 2017, due to the slower than expected recovery of real estate prices, in particular in regions where SAREB is overexposed.

The housing market consolidates its recovery, easing progress in cleaning up banks legacy assets. After the sharp adjustment that followed the crisis, the housing market and the construction sector are recovering. Housing prices increased by 6.7 % year-on-year in the third quarter of 2017. Prices of new dwellings went up by 6.5 % and those of used dwellings by 6.7 %. Moreover, during the three-month period ending in November 2017, the number of transactions on dwellings increased by 17.9 % year-on-year ( 13 ). However, residential investment is still much lower than before the crisis, and the stock of houses for sale remains high in some regions, which explains cross-regional differences in the evolution of housing prices.

The outstanding volume of credit is still decreasing, but new bank lending to SMEs and households, especially consumer credit, has picked up strongly. In November, banks' domestic assets increased by about 1 % year-o-year, despite the additional decline in the outstanding volume of private credit. Lending to households decreased by about 3% y-o-y in November 2017, while credit to non-financial corporations (NFCs) declined by 3.3 % year-on-year (Graph 4.2.2) (by 2.1% year-on-year when external borrowing and issuance of bonds are included). According to the Bank Lending Survey (Banco de España, 2018), credit conditions for company loans remained stable while they eased for household lending in the last quarter of 2017.

4.2.2.access to finance

Access to finance is not considered an important problem by SMEs in Spain anymore (ECB SAFE Survey, 2017). Several measures were introduced in 2014-2015 to ease SME access to finance, notably fund-of-funds, regulation of crowdfunding, and a specific legal form for venture capital funds specialised in investing in SMEs. More time is needed, however, to measure their full impact. The availability of bank loans has improved (Section 4.2.1) and business angel funding for new and fast-growing firms has also accelerated. Still, despite significant progress since 2008, Spain continues to underperform in some indicators in this area such as on equity funding for new and growing firms, payment delays, and venture capital (European Commission 2016b).

Venture capital continues to grow but remains underdeveloped (see Graph 4.2.1). While remaining a niche option compared to traditional financing venues, this source of funding is particularly important for higher risk and innovative projects and companies. Investment on venture capital continued to grow in 2016 reaching a volume of EUR 385 million in 436 investments, with an increasing weight of national investors (42 % in 2016) ( 14 ). However, this represents only 0.5 % of Spanish SMEs (vs. 1.3 % in the EU) (ECB SAFE Survey, 2017). Around 3 % of SMEs consider venture capital relevant for their funding needs (vs 10 % in the EU), and equity funding is the preferred option for 3.8 % of them (vs. 6.4 % in the EU). Meanwhile, bank loans remain by large their primary financing source for planned growth (71 % vs 63.8 % in the EU). ( 15 ) 1 % of innovative SMEs use venture capital, not significantly more than the overall SME population. Beyond mere access to finance, the underdeveloped venture capital market affects also the low level of innovation in Spain (Section 4.4.3).

4.2.3.Private sector debt *

Private sector indebtedness continues declining, but remains high, especially for certain groups of corporations and households. The stock of private non-financial sector debt amounted to 159.9 % of GDP, in non-consolidated terms, in the Q3-2017 (61.8% of GDP by households and 98.1% of GDP by NFCs), about 58 pps of GDP lower than at its peak in Q2-2010 (Graph 4.2.3). Despite this significant reduction, prudential and fundamentals-based benchmarks for private debt indicate that Spain still faces deleveraging needs ( 16 ). This is the case in particular for companies in the construction and real estate services sectors, and for low-income and jobless households (IMF Chapter IV Report, October 2017). Nonetheless, debt reduction has been faster than the fundamentals would suggest.

Real GDP growth has become the main driver of households’ debt reduction. Households have reduced debt more gradually than the corporate sector, as most household loans are long-term mortgage loans, which banks write off less often than corporate loans. The debt reduction process was initially driven by negative credit flows, but is increasingly being supported by the recovering GDP growth (Graph 4.2.4). New credit to households is growing, in both segments, to house purchases and consumption. With sustained GDP growth, debt reduction is likely to continue while prudential and fundamentals-based benchmarks reveal that household deleveraging needs still persist (Graph 4.2.5). Nevertheless the adjustment is taking faster than suggested by fundamentals, indicating a sufficient deleveraging speed. Even so, in the long term, household saving rate levels should adjust slightly upward to guarantee household debt's sustainability at aggregate level ( 17 ). What is more, debt is unevenly distributed across households, and some over-indebted households – often low income or jobless households - are particularly vulnerable to changes in the economic and financial outlook.

The financial burden of Spanish households continued to decline in 2017. With low interest rates and variable rate loans, although declining, prevailing in the Spanish mortgage market, the financial burden borne by households to service their debt has been falling rapidly. Nevertheless, and despite labour market improvements and growing gross disposable income, the ratio of NPLs from household debt has remained broadly stable at 5.5 % in the first three quarters of 2017.

Debt reduction in the corporate sector as a whole is taking place simultaneously with new borrowing by the most solvent and productive firms. Between 2012 and 2016 negative net credit flows were the main driver of the fall in the corporate debt-to-GDP ratio. However, deleveraging is now mainly driven by real GDP growth, while the improvement in economic conditions has gone hand-in-hand with an increase in new credit. New lending to SMEs (approximated by loans under EUR 1 million) continued to rise in 2017 (a 8.3 % year-on-year growth the three months moving average until November), as well as the volume of new loans above EUR 1 million (a 2.5 % year-on-year increase). As a result, the deleveraging process slowed down during 2017. According to the Bank of Spain's Central Credit Register, while the total stock of outstanding credit to non-financial corporations has decreased, the proportion of firms that increased or maintained their borrowing levels has risen (Banco de España, 2017d). As is the case for households, corporate indebtedness remains above the prudential and fundamentals-based benchmark (Graph 4.2.5), but deleveraging is progressing at a sufficient pace.

The financial position of the corporate sector has continued to improve in 2017. The net financial wealth of firms, although remaining negative, increased for a fourth consecutive year, from −134.6 % of GDP in 2013 to a forecasted −113.8 % in 2017. This improvement was driven by reductions on the liabilities side that more than offset those on the assets side. While assets decreased across almost all asset classes, the drop in liabilities was mostly driven by reductions in corporate loans.

Reforms to the insolvency regulation framework in 2014 and 2015 have facilitated debt restructuring and made insolvencies less onerous. The use of pre-insolvency proceedings has increased strongly, from 55 % of insolvency proceedings in 2013 to 81 % in 2016. Out-of-court agreements for natural persons have increased from 32 % of total proceedings in 2015 to 84 % in 2016, partly because the applicability of such agreements was extended to debt not related to economic activity. The number of corporate insolvency proceedings decreased by 3.6 % in annualised terms in the first three quarters of 2017. However, given that in 2017 economic growth was strong and access to finance improving, this slight decline can still be seen as a sign that insolvency procedures have become more conducive to debt reduction and preventing capital from being tied-up in unproductive companies. Proceedings with an anticipated insolvency plan still took a relatively long time in 2015 (most recent available data), but their average length (408 days) represents a significant improvement compared to ordinary insolvency procedures (544 days) ( 18 ).

4.3.    Labour market, education and social policies

4.3.1.Labour market *

Efforts undertaken to promote employment creation are bearing fruit, but unemployment and segmentation still remain high. Robust economic growth supported strong net job creation in 2017, which in turn supported domestic demand and growth. In Q4-2017 the employment rate reached 66.1 %, and the unemployment rate continued to decline steadily to 16.6 %. Both indicators remain nevertheless far from their pre-crisis levels (70% and 8% in Q3-2007, respectively). Unemployment affects in particular the young (37.5 % for 15-24 years old), low-skilled ( 19 ) workers (23.8 %) and third-country nationals (25.9 %; all figures for Q4-2017). Long-term unemployment is decreasing (1.6 million people, compared to 2.1 million one year before), but still accounts for 43.6 % of all unemployed. The temporary employment rate is very high (26.8 % in Q4-2017). However, the share of open-ended contracts in net employment growth has increased to 54% on average in 2017.

The four-year recovery continues to benefit from past reforms and wage moderation. The labour market reforms carried out between 2010 and 2012 helped increase employment elasticity to real GDP, bringing it closer to pre-crisis levels (from 0.8 in 2015 to 0.86 in 2017, compared to 0.98 in 2000-2007). Whereas real wages increased in 2015 and 2016 due to negative inflation, nominal wage growth is projected to have remained contained in 2017 (0.5%), below HICP inflation (2%), but broadly in line with productivity (0.3%).

Wages have become gradually more aligned with labour market conditions. Before the crisis, wages were relatively insensitive to unemployment changes, and were still rising at a rate above 4 % in 2009. Wage growth started to adjust to overall labour market conditions in 2010, when unemployment approached 20 %. Wage adjustment accelerated after the 2012 labour market reforms, which, among others, increased firms’ internal flexibility and raised the wage bargaining system's responsiveness to business cycle developments (European Commission, 2017a). During the economic recovery, wage moderation has contributed to the rapid unemployment decline.  This wage moderation is consistent with the still high unemployment rate and, also, with the labour market slack in the economy, including a high share of people who are marginally attached to the labour market or underemployed ( 20 ). In Q3-2017, labour market slack in Spain was estimated at a sizeable 27.1 % of the labour force (15-74 years). In addition, the collective agreements with recorded economic effects in 2017 have shown signs of moderate wage increases (1.45 % on average).

The 2017 rise in the minimum wage did not affect employment significantly. Its increase by 8 % has had a limited impact on aggregate employment and the wage distribution (Bank of Spain, 2017). For 2018, a further increase of 4 % has been approved and the government has announced plans to define a growth path for increasing the minimum wage up to a monthly EUR 850 in 2020 (up from EUR 736 today), conditional upon a certain minimum GDP and employment growth. This may put pressure on the lower part of the wage structure and thus have a more noticeable negative effect on employment, notably for young and low-skilled workers.

Wage developments have become more conducive to labour market adjustment across regions. All regions have benefited from the recovery, but the decline in unemployment has been larger in regions where it increased most during the crisis. For example, between Q2-2013 and Q2-2017, the unemployment rate dropped by more than 11 pps in Andalucía, Canarias, Castilla y León, Extremadura and Murcia, where it had increased by more than 20 pps between 2007 and 2013. Before and during the first years of the crisis, wages increased more in high unemployment regions. After the 2012 labour market reforms and the inter-professional agreements between the social partners for 2012-14 and 2015-17, wage developments have aligned to some extent with regional differences in unemployment (Graph 4.3.2).

Wage developments have been only weakly aligned with sectoral productivity developments. According to European Commission analysis, between 2012 and 2016, a 1% increase in real productivity in a given region and sector results on average in a 0.06 % increase in real wages in that region and sector, whereas a 1 pp increase in the unemployment in that region results in a 0.2 % decrease in real wages. However, these estimates differ substantially from sector to sector (Graph 4.3.3).

A number of policy initiatives aim at enhancing labour activation and insertion of young people. The share of young people neither in employment, nor in education or training is decreasing (from 18.6 % in 2013 to 14.6 % in 2016) but remains high. Following the reform adopted in December 2016 and increased outreach efforts, the number of newly registered young people in the Youth Guarantee continues to increase, particularly for those 25-30 years old (around 1 million in December 2017). Moreover, the share of young beneficiaries still in employment six months after leaving the Youth Guarantee has increased significantly from 38 % in 2015 to 51 % in 2016. The increase is partly explained by an improved statistical tracking of former beneficiaries. ( 21 ) However, implementation challenges remain, including reaching the most vulnerable young NEETs, limited capacity of the Public Employment Services (PES) to ensure delivery of personalised action plans and quality offers matching the beneficiaries’ profiles. Moreover, the existing partnerships with education and training providers have not yet allowed an effective up-skilling of part of the young people registered in the Youth Guarantee.

Spain extended the existing support measures for the long-term unemployed. The PREPARA (Professional Retraining Programme) Plan has been extended until April 2018. Following a Constitutional Court ruling, there are plans to integrate the three national non-contributory unemployment assistance schemes (PREPARA, RAI, i.e. Active Insertion Income, and PAE, i.e. Activation Programme for Employment) into one single scheme that would be financed through the national social security system, but administered by the regions. If approved and implemented, this plan would partly address the fragmentation of the national income guarantee schemes and reinforce their activation component. The joint action plan signed in December 2016 to support regional Public Employment Services (PES) in financing activation of the long-term unemployed (LTU) is being implemented (budget: EUR 515 million). LTU's exit rate from unemployment increased from 8.6 % to 10.7 % in 2013-2015 (Fedea, 2017/07). Still, only 8.7 % of all registered LTU had a job integration agreement in 2016 (against an EU average of 56.2 %). Among them, the share of those who regained employment is close to the EU average (15.6 % vs. 14.2 %; European Commission, 2017c).

The Employment Activation Strategy 2017-2020 aims to improve the impact of measures already in place, with a stronger focus on results. The Strategy includes guidance, training and support for LTU, people over 50 years of age and low-skilled young people. In addition, it will promote the modernisation and coordination of the PES, including a results-based evaluation, and an improvement of the Vocational Education and Training System (VET), especially the Dual Training. This strategy has a budget of EUR 5.6 billion for 2017 (6 % more than in 2016). Around 37 % of this amount will be transferred to the Spanish regions. These resources will be conditional on the results and performance achieved by the regions, especially for LTU. However, the amount of funds per unemployed is still below the levels of 2011.

New measures have been adopted to encourage self-employment in a context of a limited number of newly registered self-employed. The approval of a new Self-employed Law in October 2017 seeks to encourage job creation through entrepreneurship ( 22 ). It includes a one-year extension of the monthly flat rate EUR 50 social security contributions for new self-employed workers, a 100 % bonus on social security fees for maternity leave, the deduction of current expenses if working from home, and flexible administrative procedures (such as the registration in the self-employed register and changes in the contribution base). So far these measures have had a limited impact on the number of registered self-employed workers and on the creation of additional jobs through self-employment. ( 23 )

Lack of resources and weak coordination continue to weigh on Public Employment Services' (PES) effectiveness. In Spain, active labour market policies are managed at regional level and passive measures at national level. In 2017, Spain increased the economic and human resources of regional PES and set up new measures to improve their effectiveness, including an intermediation model based on competency management, a common system of statistical profiling for jobseekers, better functionality of the Single Job Portal, and a legal framework for public-private collaboration. However, total PES staff is still 3 % lower than in 2015, and PES expenditure is 33 % (EUR 12 000 million) lower than in 2012. The number of vacancies managed remains small (2.8 % of total vacancies against 10 % on average in the EU). Besides, the Spanish unemployed are less inclined than their European peers to use the PES (24.6 % in 2017 against 46.2 % in the EU-28, lowest share in the EU; based on Labour Force Survey data). This figure has steadily decreased from a peak of 41.4 % in 2009.

After a long negotiation, Spain approved new vocational training measures for the unemployed in July 2017. The initiative, known as "Cheque formación", will be implemented at regional level and is expected to enhance training of unemployed people in order to improve their employability.

Strong labour market segmentation and widespread involuntary part-time employment persist in Spain. Spain continues to rank among the countries in the EU with the highest shares of employees in temporary contracts (26.8 % in the Q4-2017, Graph 4.3.4). Nevertheless, the share of open-ended contracts in net employment growth increased to 54 % on average in 2017 (from 39 % on average in 2015). While the share of part-time employment started to decline (to 14.9 % in 2016, 4 pps below the EU average), 61.9 % of it is involuntary (compared to an average of 27.7 % in the EU-28).

The above EU-average share of temporary contracts in Spain cannot be explained by a different sectoral structure of the economy. Segmentation remains a key feature of the Spanish labour market (see the 2017 Country Report for a detailed analysis). The share of temporary employees in total employment is almost 10.7 pps higher than the EU average, and only a very small fraction of this difference (about 1.5 pps) is explained by a higher weight of sectors where the use of temporary contracts is more widespread. The share of employees with a temporary contract in Spain is higher than in the EU in all sectors, not only those with strong seasonal or cyclical nature such as agriculture, tourism and construction (Bank of Spain, 2017) (Graph 4.3.6).

Temporary employment affects mostly young, low-skilled workers and third-country nationals (74.5 %, 39 %, and 39.6 %, respectively ( 24 )). Contracts shorter than three months remain widespread. Evidence for Spain shows that the shorter the duration of the contract, the less likely workers are to move to a permanent contract (CaixaBank Research, 2017). Short contracts also give few incentives for both workers and employers to invest in continuous education and job-specific training, thus hampering investment in human capital. Temporary workers face significantly higher risks of poverty and tend to be more exposed to detrimental physical and psychosocial working conditions, weaker occupational health, and lower safety measures (Eurofound 2016) (Graph 4.3.5). They also tend to be under-protected by unemployment and disability insurance and have lower pension entitlements.

Policy initiatives aimed at fighting abuse of temporary contracts are bearing fruit. In 2016, some 373 000 temporary contracts were investigated (21 % more than in 2015), resulting in 22 % of them being transformed into indefinite contracts ( 25 ). The new legal framework for labour inspectorates and increased resources seem to have led to increased efficiency and capacity (including IT tools) and improved coordination with other institutions, while the fight against the abuse of temporary contracts in certain sectors is receiving priority. There are plans to reduce the reliance on fixed-term employment in the Spanish public sector through recruitment competitions for permanent posts.

The involvement of social partners in policy design has been strengthened recently, but there is still room for improvement. The current framework allows social partners to actively participate in the European Semester, although planning is not always timely and consultation often not focused on content. Through the comprehensive agenda of quality in employment (Agenda integral de calidad en el empleo), the government launched four tripartite roundtables in February 2017 on employment and jobs quality, training, long-term unemployment, social protection and the social card, and health and safety. Bipartite negotiations on collective bargaining (i.e. on a national wage pact) faced several delays in 2017 due to the difficulty in reaching an agreement satisfying both parties. Nevertheless, an agreement was reached on the increase of the minimum wage.

4.3.2.Education and skills

Although improving, gaps in education and skills mismatches persist. In a context of overall low employability of tertiary graduates (Section 4.3.1), the share of tertiary graduates employed in jobs that do not require higher education was 39.7 % in 2016 (EU average: 23.5 %). Over-skilling is particularly frequent in Spain, with 25 % of workers being over-skilled in both literacy and numeracy (OECD average: 16.4 %). Over-skilling rates among non-EU-born workers reach 65 %. Under-skilling is also widespread, ranging from 15 % of workers in numeracy to 17 % in literacy competencies (OECD average: 9 %). At the same time, low-skilled workers still face significant difficulties in accessing the labour market. The unemployment rate in the group aged 20-64 was 23.5 % in Q4-2017, 14 pps higher than for highly-skilled workers.

Despite having improved, early school leaving (ESL) rates are still high and regional disparities persist. The ESL rate decreased from 23.6 % in 2013 to 18.3 % in 2017 but is still around 8 pps above the EU average (see Box 4.3.1). Moreover, the rate increases to 38.1 % for third-country nationals and 39 % for people with disabilities in 2016, the latter being among the highest rate in the EU. The situation still varies greatly across regions. Regional ESL rates range between 7 % and 26.5 % (2017), though the difference has been falling since 2013 (Ministry of Education, Culture and Sports, 2017a).

Regional differences remain in students’ performance in terms of skills. In the 2015 PISA study Spanish students obtained results similar to the EU average. While PISA results in reading and maths have improved in most regions, disparities across regions are still significant. Students’ performance differs across autonomous regions by between 46 and 66 points – equivalent to one full school year – in the three tested fields (reading, maths and science). This divide can be explained by GDP per head, employment and poverty rates, level of education expenditure per family, student’s economic and social status. Since education is a regional competence, policies also differ considerably. The institutional set-up allows for coordination through the exchange of best practices and peer review amongst regions, but in practice it is not used systematically. Targeted measures to help regions improve educational outcomes have so far only had a small effect in reducing differences between them.

The National Pact on Education is facing delays in its negotiation in Parliament. The Parliament has already agreed on a National Strategy for University Education but it still has to agree a National Pact on (non-university levels of) Education. The process was launched in December 2016 by creating a parliamentary subcommission. All along 2017, representatives from different educational sectors were invited to appear in Parliament. In 2018, parliamentary groups are drafting a proposal to reform the Spanish educational system expected to be ready halfway through the year.

Reforms in teachers' professional development and career opportunities are not envisaged before conclusion of the Pact. The initial practical training of teachers and the pathway to the teacher profession are planned to be reformed. Teachers' unions consider that budget cuts during the crisis have deteriorated their working conditions (increase of teaching hours, fewer opportunities for lifelong learning courses and tightened requirements for leaves). The high share of interim contracts affects the career perspectives of many teachers. However, in a survey by the Ministry of Education, 73 % of teachers report to be satisfied in their profession, much above the OECD and EU average (51 % and 46 % respectively). In 2017, EUR 115 million were allocated to training and improving competences and mobility of teachers at all education levels and there are plans to reduce the non-university teachers' temporary employment rates with recruitment competitions for permanent posts in the public sector (see Section 4.3.1).

Spending on education increased over the last decade but remains below the EU average, at 4.3 % of GDP in 2015. From 2012 to 2015, the share of total public expenditure devoted to education increased to 9.3 %, still below EU average. Set against a steadily growing student population (by 13.3 % between 2005 and 2015), public expenditure for education in real terms increased by just 9.1 % over the past decade.

The 2017 budget law envisaged additional funding for the education system and an increased replacement rate of retired teachers. Currently one out of four teachers has an interim contract, the highest rate since 2009. To reduce this high share, the government decided in 2016 to replace 100 % of permanently-employed retiring teachers (rather than 50 % as in the previous years) and steps towards this goal were taken in early 2018. Furthermore, in 2017 EUR 392 million was allocated by the Ministry of Education to regional measures for new initial vocational education and training (VET) programmes. These are intended to open up new pathways in lower secondary education and help vulnerable households with children of school age. EUR 20 million was allocated to the territorial cooperation programme PROEDUCAR, whose goal is to retain students in the school system and bring back early leavers.

Spain's tertiary education attainment rate exceeds the EU average and differs strongly by gender. 47.5 % of women have a tertiary degree compared to 34.8 % of men. The overall tertiary educational attainment rate for people 30-34 years old (41.2 %) remains above the EU average, but is still below the national Europe 2020 target of 44 %. Furthermore, the gap between Spanish-born and non-EU-born students is large (45.2 % versus 25.1 %), as is the gap between people with and without disabilities (19.9 pps versus an EU average of 13.6 pps.). ( 26 )

Tertiary graduates face difficulties in finding jobs matching their education level. Since 2013, the employment rate of tertiary graduates increased by 5.5 pps to 72.3 % in 2016, which is still below the EU average and the national pre-crisis rate of 85.3 %. In 2015 Spain designed an employability map for tertiary graduates with the aim of raising students’ awareness of their future employment prospects, which currently is being updated.

Several challenges in higher education remain unsolved. In December 2016 the government adopted a strategy for higher education, which envisages the modernization of the governance structures, including further autonomy to assess their performance and institutional capacity. Besides, plans are to address the in-job training challenges and reinforce cooperation with the private sector. It is too early to assess its effectiveness.

University-business cooperation on education has improved, but barriers remain. The Industrial PhD programme for training researchers in companies is seen as a positive policy development by all actors involved. In 2015, the Torres Quevedo programme supported 200 places for students or graduates in private companies with EUR 15 million. Some regional administrations and universities are particularly proactive in responding to the 2016 Country-Specific Recommendation to foster cooperation between universities and businesses. Yet, stakeholders identify a lack of funding, limited capacity of SMEs to take in interns or researchers, and excessive bureaucracy as the main obstacles for cooperation.

Enrolment in vocational education and training (VET) has decreased slightly from 35.2 % in 2014 to 34.8 in 2016. By contrast, adult participation rate in learning has decreased from 11.4 % in 2013 to 9.4 % in 2016 below the EU average of 10.8%. Spain completed the reorganization of the "training for employment" subsystem (subsistema de formación para el empleo) in July 2017 and plans to improve the evaluation and validation of professional skills, including those in the education sector.

Some steps have been taken to improve the teaching of digital skills. Despite an increasing number of Spaniards going online, raising digital skills levels remains a key issue for supporting longer-term productivity growth. 45 % of individuals between 16 and 74 years old had no or low digital skills in 2017. ICT specialists represent a low share of the workforce (3 % compared to 3.7 % in the EU). Spain has a high share of graduates holding a STEM (Science, Technology and Mathematics) degree with 21.6 graduates per 1000 individuals. The use of ICT in teaching is one of the issues to be addressed by the proposed National Pact on Education. In October 2017, the government adopted the latest Spanish Digital Competence Framework for Teachers to improve teaching skills in ICT and has designed a Digital Competence Portfolio for teachers to register and improve their digital competences through continuous self-assessment.

Digital skills training for young unemployed is key to improve their labour market access. In order to match the demand for specialists in digital technologies, the Government (through the public entity red.es) has launched a grant program to promote training and employment of young people in the Digital Economy called "Profesionales digitales" (Ministry of Energy, Tourism and Digital Agenda, 2017). The programme offers on the one hand training that meets the requirements of the digital industry and new business models, and on the other hand facilitates young people's access to jobs in this sector. EUR 19.75 million (about 98 % of the total budget) have been already allocated to projects in 15 regions. Furthermore, the Spanish National Coalition for Digital Skills and Jobs became operational in 2017.

4.3.3.Social policies

As the social situation continues to improve thanks to the steady economic and job growth, a challenge is to ensure that positive impacts reach all groups. In 2016, the share of people at risk of poverty or social exclusion further decreased to 27.9 % (accounting for almost 13 million people) from 28.6 % in 2015, but remains 4.1 pps above the 2008 rate and about 5 pps above the EU average ( 27 ). The economic recovery translated into less people living in severe material deprivation and in jobless households (Graph 4.3.7). However, the at-risk of poverty rate (measured on 2015 income data ( 28 )) remained almost stable since 2014 (22.3 % in 2016) and is expected to continue to do so in 2017 ( 29 ). The risk of poverty or social exclusion is especially high for children, the unemployed, people living in single earner households and people with disabilities. Migrants are also disproportionately affected, as 51.4 % of non-EU-born people were at risk of poverty and social exclusion in 2016 (a 27.6 pps gap compared to the native-born).

The depth of poverty shows signs of improvement for all age groups. The average income of people living below the poverty threshold - typically the long-term unemployed and their children - slightly increased in 2016. For the first time in ten years, the difference in poverty gaps between the working age population (18-64) and the elderly (65 and older) started to decrease. The share of people affected by persistent risk-of-poverty ( 30 ) decreased to 14.8 % in 2016, but is still 4 pps above the 2008 levels and the EU average.

In-work poverty is closely linked to households’ work-intensity, with strong labour market segmentation playing a big role. In 2016, 13.1 % of employed people were at risk of poverty, 0.6 pps higher than in 2014. In-work poverty was especially high for non-EU-born (33.5 %), people with low-educational attainment (21.2 %), and with less stable jobs, such as part-timers (24.3 %) and temporary workers (20.9 %) (Graph 4.3.9). Workers with children, and especially single parents, were the most likely group to suffer from in-work poverty. Social policies do not cater specifically for this group as there are no social assistance top-ups.

The poverty-reducing impact of social transfers (other than pensions) for the overall population continues to decline. It decreased by 7.6 pps since 2013 to reach 24.4% in 2016, that is 8.5 pps below the EU average. This reflects, among other things, the low effectiveness of working-age social benefits (due in particular to low coverage), and the fact that during the economic recovery, the median income of employed people has increased faster than for benefit recipients. The adequacy of minimum income schemes (European Commission, 2017b) and family benefits in particular is low. As concerns unemployment benefits, Spain ranks close to or above the EU average on adequacy and coverage of short-term unemployed people, although their duration (with a work record of at least one year) is comparatively low 31 .

Initiatives intended to address limited effectiveness, fragmentation and disparities in income guarantee schemes are progressing very slowly. The study to map income guarantee schemes at national and regional level conducted in 2016 is not yet published and the follow-up action plan is still in preparation. Apart from the planned integration of the three unemployment assistance schemes managed at national level (Section 4.3.1), the government announced the launch of a "social card" meant to integrate information on cash benefits received from all administrations at national, regional, and possibly local level. The card is intended to ensure transparency of benefits received and facilitate participation in associated activation measures, but will not per se address the fragmentation of the existing schemes.

Differences in the coverage and adequacy of the regional minimum income schemes remain large. Most regions capped the minimum income at the IPREM ( 32 ) level, while some reach the level of the minimum wage and just a few (such as Navarra and the Basque Country) go above it. European Commission's Joint Research Centre calculations based on simulations with the Euromod model indicate a large gap between the potential number of beneficiaries that could receive income support under the current regional minimum income schemes and the actual number of beneficiaries. This gap varies across regions and is partly due to non-take-up and to budgetary constraints applied to these schemes in most regions, which result in eligible individuals not receiving support. Andalucía, Balearic Islands, Catalonia and Navarra recently reviewed their minimum income schemes, with a potential positive impact on their coverage and adequacy.

The degree of coordination between employment and social services varies across regions. Social services are still largely working outside the scope of employment services and vice-versa, although some progress was made at the regional level. The Social Inclusion Network aims to enhance collaboration among different levels of the administration. Cooperation agreements between public employment and social services have been signed in a few regions in 2017.

The relative child poverty rate is one of the highest in the EU, although it is declining. Social protection for families remains low and fragmented. Public spending on family benefits in 2014 was 1.3 % of the GDP, compared to 2.4 % at EU level. The impact of social transfers on reducing child poverty is below the EU average (17.5 % in 2016 in comparison to 39 % in the EU in 2015) and deteriorates since 2013. This partly results from a low level of spending on family benefits. Improving labour market conditions contributed to a decline in the share of children living in jobless households, from 14.2 % in 2014 to 11.6 % in 2016. Among children whose parent(s) work risk of poverty is among the highest in the EU28 (22.8 %), in particular if only one of the parents is working (42.7 % in 2016, 3.2 pps more than in 2015).

The share of children below 3 years enrolled in formal childcare has steadily increased and is above the EU average (39.7 % vs. 30.3 %). However, participation rates are low in public centres, and regional disparities persist. The National Schools Council has highlighted the need to create more places for children aged 0 to 3 (Ministry of Education, Culture and Sport, 2017b).

High rates of early school leaving and child poverty are a risk for equality of opportunities. Spain's Gini coefficient edged down 0.1 pp in 2016 but with 34.5 was still one of the highest in the EU. The polarisation of skills and the high rate of early school leavers reflect inequalities of opportunities (Doménech 2016, Castelló and Doménech 2014). The high share of children with parents at risk of poverty or social exclusion weighs on the capacity of Spain to reduce inequalities in the long term, as the socio-economic background of children has a negative impact on their chances to do well in school. The impact of socio-economic status on PISA science results for the 15-year olds is close to the EU average, but had slightly deteriorated in 2015 compared to 2006.

Finding affordable housing is a challenge for the most vulnerable, despite some improvements. The housing costs overburden rate ( 33 ) for the lowest income quintile was 38.4 % in 2016, compared to 36.3 % in the EU (in 2015). This is despite the establishment of the Social Housing Fund in 2013 to relieve the situation of those unable to pay their mortgage, housing bills or rent, for which eligibility exceeds half a million households (Bank of Spain 2014, 2016). Access to social housing is limited and less than 0.01 % of GDP is devoted to housing-related social protection, which in 2017 decreased by 19 % from 2016 in nominal terms.

Energy efficiency measures have alleviated energy poverty as a side effect. The share of people at risk of poverty who are unable to keep their homes adequately warm increased from 17.1 % to 23.3 % between 2005 and 2015 (above the EU average) mainly due to the economic downturn. However, economic recovery and measures launched have brought down this indicator by 5% in the year 2016. As of 2017 amended criteria to obtain the so called social tariff ("bono social") seek to better target the low income households and to strengthen the protection of vulnerable consumers. For the period 2014-2020, Spain allocated significant amounts of EU cohesion policy funds to energy efficiency measures, in particular in the residential sector. This is expected to enable more people to adequately heat their homes, a positive side effect from Spain's efforts to fulfil its EU 2020 energy efficiency commitments (Section 4.5.2).

The provision of long-term care services keeps improving, but needs are unevenly met across regions. The number of people receiving long-term care services increases steadily, with 11.44 % more people receiving such care in 2017 than in 2016. However, about a quarter of people recognised as dependent (315 000 out of 1.26 million) were on a waiting list in November 2017. In 2017 all regions reduced their waiting list to different degrees. The cost per care recipient is slowly decreasing and job creation in long-term care services was stable in the first semester of 2017. Untrained informal carers – mostly female relatives – still provide a substantial part of the care. In December 2017 the government increased its funding for the provision of long-term care by 5.3 %.

Inequalities in access to health care are low compared to the EU average, although they have slightly increased. Spain has one of the lowest rates of reported unmet needs for medical care in the EU. The difference in self-declared unmet need for medical examination between the lowest and highest income groups has however increased from 0.2 pps in 2008 to 1.6 pps in 2014. While this gap remains below the EU average, it constitutes a significant change (OECD, 2017c). Furthermore, out-of-pocket medical spending exceeds the EU average by 50 % (3.5 % of overall expenditure against 2.3 % in the EU). 4.4 % of the population stopped taking prescribed medications because they were too expensive ( 34 ). Disparities in access to healthcare are also sizeable. For instance, waiting times for surgery vary between 50 and 160 days across regions, and there are between 2.7 and 5.3 doctors per 1000 population ( 35 ). Although competences for healthcare organisation and delivery are devolved to the regional health ministries, there is an Inter-territorial Council that can serve as a forum for coordination.

4.4. Investment

4.4.1.external competitiveness *

Increasing exports of goods and services have supported a continued current account surplus. In 2017, the Spanish current account is expected to have been in surplus for the fifth year in a row, which is unprecedented for Spain in an expansionary phase. The cyclically adjusted current account (estimated at 2.0 % of GDP in 2017) is now above both the level suggested by the fundamentals (0.4 % of GDP)  and the level required to stabilise the net international investment position (NIIP) at prudential levels in the medium term ( 36 ) (about 0.2 % of GDP) (European Commission, 2017e). Around 80 % of the current account improvement between 2007 and 2017 is explained by the improvement of the balance of trade in goods and services, of about 10 pps of GDP. Exports rose about three times as much as imports declined in absolute terms (see Graph 4.4.1). Although transitory factors, such as low oil prices, contributed to the improvement of the trade balance, structural factors have become increasingly important drivers.

An increase in the number of regular exporting firms and their geographical diversification mark a structural improvement in export performance. The internationalization of Spanish firms has continued, encouraged by the collapse of domestic demand in the early stages of the crisis, and backed by the cost competitiveness gains accumulated since then (see Box 4.4.1). According to ICEX, the Spanish Institute for Foreign Trade, the number of regular exporters grew by 27.3 % between 2007 and 2016, and the geographical diversification of exports to fast-growing emerging markets has increased. Moreover, the composition of exports shifted towards more medium-high technology goods (especially vehicles) and high value added services (by about 2 % of GDP since 2014). These structural factors have led to a steady increase in real export market shares since 2013. Despite their positive performance, Spanish exports are still concentrated on goods competing mainly on price.

The economy's increased reliance on domestically produced goods has restrained import growth. The sectoral rebalancing since the crisis has resulted in a higher weight of export-oriented activities in the Spanish economy (see Box 4.4.2). This has taken place in the context of increasing participation of Spain in Global Value Chains (GVC) (Prades and Villanueva, 2017). Given the traditionally high import content of exports, this should have gone hand in hand with higher import intensity. However, Spanish imports are growing below what their fundamental determinants would suggest (see Box 4.4.1). Although the import content of Spanish GDP components increased at the beginning of the recovery, it remains below the pre-crisis levels, especially for private consumption (see Graph 4.4.2). Firm-level data suggest that imported inputs seem to be increasingly replaced with cheaper domestic ones by Spanish firms (Banco de España, 2017, pp. 80-107). Overall, the impact of Spain's internal devaluation since the beginning of the crisis on households and firms spending decisions seems to explain the modest rebound in imports.

Wage moderation continues to drive cost-competitiveness gains. From 2009 to 2017, Spain's cost competitiveness compared to the EU – as measured by the real effective exchange rate – improved by around 11% based on unit labour costs and around 4% based on export prices. Despite the pickup in inflation, wage moderation has continued in 2017 further to the structural reforms implemented in previous years and, more recently, due to a negative wage drift and composition effects. This evolution is consistent with a wider trend of subdued wage growth among advanced economies. Wages are expected to pick up as the output gap turns positive. Together with aggregate low productivity growth, this is set to lead to modest increases in unit labour costs (ULC). Nevertheless, further cost-competitiveness gains are still expected until 2019 as ULC in Spain are projected to grow more slowly than in the rest of the euro area.

Sectoral wage and productivity developments have not been fully aligned, leading to unit labour costs diverging substantially across sectors. Intense job destruction during the crisis resulted in a marked increase in apparent productivity across all sectors, but during the recovery productivity has continued to increase mostly in "tradable" sectors (i.e. sectors predominantly producing goods and services that can be traded internationally - see Box 4.4.2). At the same time, wages have not been aligned with productivity at the sectoral level. In particular, wages have grown faster than productivity since 2013Q2 mostly in "non-tradable" sectors, whereas the opposite has happened in "tradable" sectors. This has resulted in an uneven development of unit labour costs across sectors (Graph 4.4.3).

4.4.2.PRODUCTIVITY

Some subsectors have recorded sizeable productivity increases since the crisis, largely due to intra-sectoral resource reallocation. In aggregate terms, apparent productivity (i.e. value added per person employed) in Spain is below that of other large euro area countries. However, agriculture, construction, accommodation and food services, as well as telecommunications (a subsector of ICT) are areas which make up a high share of Spanish gross value added (GVA), and where in 2016 productivity was higher than in other euro area peers (Graph 4.4.4). In addition, the productivity gap between Spain and other large euro area countries has been reduced in some subsectors. These include electrical equipment; legal, management and engineering services; furniture and jewellery; transportation and storage, business services; and manufacturing of transport equipment. Some of these subsectors have recorded significant employment growth since the crisis, pointing to an improvement in allocative efficiency. However, for the total economy sectoral reallocation of labour towards more productive sectors has had a limited role in explaining aggregate productivity growth (Box 4.4.8).

The productivity gap between the most productive firms and the others seems partly due to differences in innovation capacity and investment in knowledge-based capital. The productivity gap increased during the crisis, with the largest divergence occurring in the information and communication sector (see Graph 4.4.5). This suggests that digitisation is an important factor at play in this evolution, and points to the existence of obstacles hampering the diffusion of innovation (Adalet McGowan et al., 2017). This interpretation is supported by the relatively low share of firms with product, process, or marketing innovations in Spain, and under-investment on average in ICT assets and intangible capital. Those asset types have been shown to differentiate firms at the global productivity frontier from those lagging behind (Thum-Thysen et al., 2017).

Misallocation of capital also contributed to the productivity gap across firms, but there are signs of improvement in recent years. Spain had a relatively high share of over-indebted firms at the beginning of the recovery (see Section 4.2.1), which in 2013 held over 15 % of the capital stock (Adalet McGowan et al., 2017). Such firms could hamper productivity growth by tying up capital and labour resources that could be allocated to more productive firms, including start-ups. There is also evidence that in the pre-crisis years, capital tended in general not to be allocated to the more innovative firms (Haugh et al., 2017). Recent firm-level data show that new credit is now flowing to the more productive and less indebted firms (Banco de España, 2017d), supporting investment growth in productive capital (see Section 4.2.2).

4.4.3.Research, innovation and digital economy

Spain remains a moderate innovator with a limited share of higher value-added activities in its economic structure. Innovation performance declined from 80.1% of the EU average in 2010 to 78.3% in 2016.( 37 ) Relative strengths of the innovation system are in new doctorate graduates, tertiary education attainment, broadband penetration, international scientific co-publications and trademark applications. Relative weaknesses are in innovative SMEs, public-private collaborations and finance and support. In terms of human resources, Spain has a shortage of ICT specialists that is linked with the low digitisation of SME in sectors such as retail and wholesale ( 38 ), and general lack of digital skills in the population (Section 4.3.2.).

Persistently subdued levels of R&D investment affect Spain's innovation performance and productivity growth. Public R&D investment in 2016 was at the same level as in 2007 (0.55 % of GDP) after a peak in 2009-2010 (at 0.65 %). Despite the strong acceleration in economic activity, current public R&D intensity remains well below the EU average (0.55 % vs. 0.69 % of GDP). R&D intensity (1.19 % of GDP in 2016) is on a decreasing trend since 2009 (1.35 %). This is strongly affected by the low and decreasing level of execution of the public research and innovation (R&I) budget (56.2 % in 2015). In the current context, reaching the national EU2020 R&D intensity target of 2 % appears highly unlikely.

The new State Research Agency for managing public research funding is now operational. The multi-annual framework that secures the resources of the agency ("contrato de gestión") is pending. Nevertheless, in 2017 the agency constituted its Scientific and Technical Committee, established an annual work plan and started to develop evaluation methodologies. Furthermore, Spain increased the amount of funding allocated on the basis of scientific performance in 2017.

Whereas Spain's production of highly-qualified researchers is good, their career perspectives and science-business mobility are limited. Although Spain produces an average number of new doctoral graduates and an above average number of STEM graduates (European Commission, 2018b), its total number of researchers is low, showing the limited labour demand for researchers ( 39 ). Spain has introduced isolated incremental measures to address the most pressing challenges linked to the segmentation of the academic labour market (civil servants versus short-term contracts) and the low employment rate for young PhDs. Public research organisations have been allowed to replace all researchers who retire and post-doctoral support programmes such as Juan de la Cierva and Ramón y Cajal have been reinforced. Programmes for PhD graduates such as Torres Quevedo help incentivise science-industry links and address the limited mobility of researchers to businesses. In contrast, the share of public-private scientific co-publications in total scientific publications is below EU average.

Businesses' innovation capacity remains frail despite some policy action. Knowledge-intensive services have a relatively low share of employment among services in Spain (51.2 % of the employment in the service sector vs. 58 % as EU average). High and medium-high-tech manufacturing represented only 31 % of employment in manufacturing vs. 36.4 % as EU average over the same period. Business R&D intensity has been decreasing from its highest peak of 0.72 % of GDP in 2008 and reached 0.64 % of GDP in 2016. To increase business R&D investments, Spain launched a number of initiatives and support schemes improving access to finance and the business environment (Sections 4.2 and 4.4.2), and developed fiscal incentives for business R&D expenditures. Nevertheless, business-science links remain weak. Public expenditure on R&D financed by the business sector continues its decreasing trend since 2010 and with just 0.034 % of GDP is much lower than the EU average of 0.052 % ( 40 ). Revamped public schemes such as the "NEOTEC" programme supporting the creation of tech-based companies have contributed to strengthening entrepreneurship and knowledge transfer. The latter has also been supported by the "CIEN" programme that funds strategic innovative projects jointly involving SMEs, public bodies and universities. Tax incentives for business R&D are generous on paper, with implied R&D tax subsidy rates among the highest in the OECD. However, their use remains modest in Spain, notably for SMEs, and amounted to EUR 323 million in 2017 (OECD, 2017d). Their incremental nature and a long time span between application and reimbursement decision may partly explain the low uptake.

Governance of national-level R&I policy is being streamlined. In 2017 the national-level competences for policies and private R&I support instruments were unified under one department. The new National Plan for Science, Technology and Innovation 2017-2020 includes for the first time a mapping of all support schemes from different funding bodies. The action plans on Industry 4.0 and digital economy and society similarly aim to strengthen synergies and avoid duplications of efforts.

Despite recent improvements, national-regional coordination in the design, implementation and evaluation of R&I policy remains weak. A National Coalition for Jobs and Digital Skills has been created and the “R+D+I Public Policy Network” (REDIDI) has been reactivated. It is intended to create synergies in the implementation of the national and regional smart specialisation strategies, improve the use of ESIF funds and avoid duplications. Its thematic committees (on R&I in energy, health, water, tourism, design and evaluation and monitoring systems) have achieved first results. 2017 also witnessed the birth of the new CERVERA network to boost the transfer of knowledge and science-business links between accredited institutions. Other examples for successful national-regional coordination are the second map of Unique Scientific and Technical Infrastructures and cross-regional initiatives on public procurement for innovation.

An under-developed evaluation culture hampers policy learning to improve R&I support. Quality, impact and efficiency of public funding are not systematically assessed with comparable methodologies, which translates into forgone opportunities to improve the quality and competitiveness of the Spanish R&I system (Fernández-Zubieta et al., 2018). Positive exceptions are some science-business cooperation schemes (such as CENIT or Torres Quevedo) and grants for excellent researchers (such as Ramón y Cajal). The evaluation of successful programmes aligned to international peer review standards, such as Severo Ochoa and María de Maeztu, or relevant schemes to reinforce human resources and science-business links such as the Industrial PhDs programme, constitute a solid basis for extending systematic evaluation approaches to other programmes.

High fast broadband connectivity strengthens Spain's readiness for the digital economy. Growth in coverage is particularly strong in networks that support access at 100 Mbps or more, available to 83.6 % of the population. The deployment of fibre networks (FTTP) constitutes an important asset of the Spanish digital society, covering 71.4 % of population. Yet this percentage is only 20.9 % in the more sparsely populated rural areas. 59 % of subscriptions offer speeds of at least 30 Mbps and 24 % are providing 100 Mbps or more. The vigorous implementation of policies to improve take up of high-speed broadband connections will strengthen the position of Spain in the Digital Economy.

Spain has made progress in business digitisation but does not yet fully exploit its potential. The comparatively low digitisation level of Spanish SMEs, with 20 % of small firms selling online, contrasts with 38 % for big firms (European Commission, 2018b), and appears to constrain their potential for innovation absorption and growth. A new digital strategy ("Estrategia Digital para una España Inteligente") is currently being developed by the Ministry of Energy, Tourism and Digital Agenda.

4.4.4.Business environment

Reforms to the business environment have stalled over the past three years. Spain introduced important regulatory reforms in recent years to enhance the business environment. Yet, Spain continues to underperform in entrepreneurship and other business environment indicators (European Commission 2017d). Despite these challenges, there has been a noticeable slowdown in the adoption of reforms in this area over the past few years.

Regulatory disparities across regions continue to constitute a burden for businesses. Differences and overlaps in regulations governing the access to and exercise of economic activities in Spain can hamper the free movement of goods and services, as well as the establishment of firms in all sectors, from traditional retail to the collaborative economy. The Law on Market Unity aims at facilitating access to economic activities and their expansion throughout Spain. While the government has taken steps, for example, by requiring an ex ante assessment of impact of draft legislation on market unity and by publishing a catalogue of good and bad practices, its implementation has been slow, especially at the regional level. Between June and November 2017, the Spanish Constitutional Court delivered four judgements on the Law on Market Unity. While the Court has endorsed the law, it has declared null and void selected articles, among others the provisions setting out the principle of nation-wide effectiveness of licences and prior declarations granted by or submitted to any given region. The practical consequences of the rulings for the application of the law remain to be seen, since other principles laid down therein – namely, the principles of “necessity and proportionality of the actions of the competent authorities” - can be used by economic operators affected by barriers to achieve outcomes similar to that of the "nation-wide effectiveness".

The Government is considering measures to remove obstacles to business growth. The prevalence of small firms in Spain is a factor explaining the low productivity of the economy (European Commission, 2016c and Huertas Arribas and Salas Fumás 2017). A government report discusses regulatory barriers to business growth (Ministry of Economy, 2017) and identifies three areas for potential policy intervention: removing regulatory thresholds, improving the business environment, and enhancing the implementation of the law of market unity. At the time of writing, no follow-up to this report is being given.

Lowering service restrictions would increase productivity beyond the services sector (van der Marel et al., 2016). In Spain, the value added originating from the services sectors which is incorporated in manufacturing accounts for 33 % of the latter sector's value added (DG Joint Research Centre, 2017). Tackling restrictions in the services sector would thus increase the added value and productivity in manufacturing. Namely, it is estimated that eliminating regulatory barriers in services would increase the productivity of several manufacturing industries in Spain by more than 10 % (Curnis and Manjón Antolín, 2017).

Restrictions in retail services remain high. Regulatory restrictions are high both for the establishment and operation of retail outlets, labour productivity is very low and mark-ups are relatively high. Previous legislative reforms removed the requirement for retail outlets to have both local and regional licences and introduced more flexible opening hours. However, the measures to simplify establishment are not fully implemented yet in all regions.

Restrictions in professional services exceed the EU levels for various professions, e.g. civil engineers and architects (European Commission, 2017j). While certain regulated professions have modified their statutes, no progress has been made on the regulatory reform of professional services. In particular, regional disparities on membership to a professional association may hamper the free movement and efficient allocation of these services throughout the territory. A law is pending since 2010, as mandated by the fourth transitory provision of Law 25/2009. The rationalisation of membership to professional bodies is one of the goals of the still-to-be-adopted reform.

Restrictions to the collaborative economy vary across regions. This is the case in the accommodation sector. The Canary Islands legislation required prior authorisation and prohibited the renting out of "single rooms" within "holiday dwellings/lettings". This legislation was challenged in court, and the ruling declared null and void provisions such as the interdiction to rent-out a room only, the prohibition to offer short-term rental accommodation services in touristic zones/areas and the obligation of registration. However, the regulation of short-term rental market in other regions (such as Valencia and the Balearic Islands) remains restrictive, with specific requirements imposed on the services offered by individuals and on the activities of collaborative economy platforms. Regional authorisation requirements for transportation services restrict the business of collaborative platforms organising the sharing of private transport (Frazzani et al., 2016). The Spanish competition authority challenged national and regional regulations on transport and accommodation services several times (the last time in September 2017), arguing that it hinders competition by creating unnecessary and discriminatory barriers.

4.5.    Public administration

A new law on public sector contracts has been adopted. The new law intends to address the need for a consistent framework ensuring transparency and effective control mechanisms. It also aims to strengthen coordination across government levels in the field of public procurement, as sub-national procurement accounts for the lion’s share of the total value and number of procurement contracts ( 41 ).

The law sets up a new procurement governance structure. The Junta Consultiva, i.e., the central government’s advisory council on public procurement will host a Cooperation Committee of central, regional and local public authorities on procurement matters. This committee will elaborate a National Public Procurement Strategy, which is intended to reflect a common strategic vision for all administrative levels, with a view to combating corruption, improving professionalization, promoting economic efficiency, enhancing the use of electronic procurement and strategic procurement, and boosting the participation of SMEs.

The law also aims to enhance ex-ante and ex-post controls on contracting authorities. A new Independent Office for Regulation and Supervision will carry out investigations and issue instructions that are binding for contracting authorities of the central government. However, it will not be competent to lodge legal actions, annul decisions or impose sanctions.

The effectiveness of the measures included in the law will depend on the degree of ambition at the implementation phase. A considerable amount of detail in defining the strategy, including the controls to be carried out, is left to the decision of the Cooperation Committee and the Independent Office for Regulation and Supervision. At the same time, the way the new governance structure is set up and operates is crucial for delivering effective results. Moreover, the effectiveness of the current system of remedies could be hampered by the creation of numerous Administrative Courts for Public Procurement at local level.

The latest data show modest improvements on the efficiency of justice. The length of proceedings in first instance civil and commercial cases has been reduced according to the 2018 EU Scoreboard, but Spain remains in the lower third of Member States as regards the length of those proceedings. It is also ranks low in terms of length of proceedings to solve cases in the specified fields of EU legislation for electronic communications. On the positive side, the rate of resolving litigious civil and commercial cases has for the first time exceeded the rate of incoming cases, as it is above 100%. To help improve the court system's efficiency, 54 Courts of First Instance have been given exclusive competence in litigation related to the general conditions of financing agreements with real estate guarantee rights when the borrower is an individual person and additional human and material resources for them have been allocated. More generally, the government intends to increase the number of posts in the justice system by 2019.

The perceived independence of the judiciary has improved coming, however, from a rather low level. According to the 2018 EU Justice Scoreboard, during the past year the perceived independence of the judiciary improved both amongst companies and among the general public in Spain. It still remains though below the EU average, as confirmed by a survey among judges carried out by the European Network of Councils for the Judiciary (ENCJ). With a view to addressing this concern, the General Council for the Judiciary endorsed "principles of judicial ethics", including on independence, impartiality, integrity and transparency in December 2016. The Consultative Council of European Judges expressed concerns on the appointment regime of the judges-members of the General Council for the Judiciary. The planned reform of the Organic Law on the Judiciary could address this issue.

Spain ranks at the EU average on quality of justice. On some indicators, such as the IT use for case management and arrangements for online publication of judgments, Spain is above the EU average. The "Justicia Digital" project allowing the electronic treatment of information by judicial offices enables them to move towards zero paper. The 2018 EU Justice Scoreboard also shows below-average indicators such as the number of judges per 100 000 inhabitants (which could however increase given the announced increase in overall posts, see above).

Citizens' and business perceptions of corruption have improved compared to 2013, but remain among the highest in the EU. 89 % of respondents in a Eurobarometer survey think that corruption is widespread in Spain (EU average 72 %) (European Commission, 2017f). Corruption is considered a problem for doing business by 44 % of Spanish business representatives (EU average 34 %). The proportions of Spanish citizens who believe that bribe-taking is widespread among politicians and political parties are the highest in the EU (78 % and 80 % respectively compared to 53 % and 56 % in the EU average). Whereas the prosecution of corruption cases continues at a sustained pace, the percentage of citizens who believe that high-level corruption cases are not sufficiently pursued remains one of the highest in the EU (81 %). An important issue in Spain has been the protracted judicial procedure for such cases. A revision of the Criminal Procedure law in 2015 limited the time allocated to criminal investigations to reduce undue procedural delays. The Constitutional Court confirmed the constitutionality of these new time limits in July 2017. So far the new rules have not impeded investigations by the Specialised Service for the Prosecution of Corruption and Organised Crime but it is too early to assess their impact on complex corruption cases.

The implementation of the recently adopted provisions on transparency and the fight against corruption is now in full motion. The Council of Transparency noted a significant reduction in the share of requests for information that are left unanswered by public institutions. The government announced implementing rules for the law on transparency to address a high number of exceptions to justify refusal of access to information. The Council of Transparency is also elaborating a methodology to evaluate compliance. The implementation of the law on political party financing shows clear signs of improvements in financial accountability and the disclosure of relevant financial information by political parties. The Court of Auditors has completed several verifications and expects to produce the first sanctions for non-compliance with the law in 2018. The Office of Conflicts of Interest is competent to investigate alleged incompatibilities of high-level officials, mainly related to revolving-doors practices. While the Office does not have the power to apply sanctions, it can propose them to the competent authorities, which has already resulted in eleven sanctioning procedures under the new law, with a clearance rate of 80 %. Currently there are no plans to extend the law to other categories of public officials. Many regions have equivalent systems but there is no formal cooperation framework between them and the national Office.

New legislative initiatives to improve whistle-blower protection and to regulate lobbying are currently examined by the Parliament. While some provisions do exist to protect whistle-blowers in Spain, they are scattered across various sectorial and regional laws and do not ensure full protection at the pre-trial investigation phase. One of the draft initiatives includes a lobby register covering public administration bodies, while another proposal concerns setting up a dedicated register for the Parliament. Some institutions or regional authorities have set up their own lobbying registry. A good-practice example is the registry of the National Competition Authority, which publishes all meetings of board members, provides voluntary integrity questionnaires for businesses and has set up an electronic channel for anonymously reporting breaches of competition law.

Improvements in institutional quality would amplify the gains from removing restrictions in services. The benefits from structural reforms are smaller if governance is poor and the quality of legislation and institutions is not of a high standard. Raising governance indicator values to the level of the best performing EU Member State would multiply productivity gains from structural reforms (Curnis and Manjón Antolín, 2017). This highlights the complementarity of regulatory and institutional reforms in maximising their economic and social impact.

4.6. Sectoral policies

4.6.1.Transport

Transport and energy infrastructure plays an essential role in ensuring territorial cohesion and economic development of Spain. Investment in physical infrastructure facilitates firms' business activities and workers' mobility, thereby contributing to productivity growth. The quality of Spain's transport infrastructure endowment is above EU average. Efforts to improve its efficiency are guided by the "Infrastructures, Transport and Housing Plan" 2012-2024.

Plans to open the rail passenger market for competition before the prescribed deadline have not been pursued in 2017. Spain has decided to wait until the statutory deadline laid down in the 4th Railway Package. Work on the transposition of the market pillar of the 4th Railway Package is underway: a draft law with amendments to the current railway sector legislative framework is in public consultation and its adoption is expected in 2018. The completion of Spain's rail core network by 2030 could raise concerns if the pace of implementation is not stepped up. Nevertheless, progress has been made with the completion of the Atlantic and the Mediterranean Corridors, supported by EUR 724 million of EU contributions from the Connecting Europe Facility. Cross-border rail traffic of freight trains from Spain into France and Portugal remains a bottleneck. The two different gauges (UIC and Iberian) coexisting in Spain, and the difference of gauges between Portugal and France, constitute a key barrier for better rail connectivity, although new sections using the internationally prevalent UIC gauge have been completed recently. Increased cooperation between Spain, France and Portugal in pursuing rail interoperability would help to overcome such obstacles.

As regards network connectivity, investment actions aim at improving the land connections of the state-owned port system in the short and medium term. The Port Accessibility Investment Plan consists of a provision for the next five years of EUR  1.418 million of public investment. This Plan is supported by a Port Land Accessibility Financial Fund, an innovative financial tool which has brought additional resources from Port Authorities to the improvement and development of port rail and road hinterland connections. It provides a EUR 559,7 million in funding partially under the EFSI program framework.

The implementation of rail projects supported by the Connecting Europe Facility and Structural Funds has been delayed. Timelines for several projects were rescheduled. While further delays could affect the allocated EU contribution, cooperation between the relevant national authorities and the European Commission is ongoing and should help detect shortcomings early and identify solutions to meet targets by end of the period. 

The treatment of several insolvent toll motorways is still to be solved. The Spanish government has defined a solution for the insolvent toll motorways and a roadmap to re-tender them in 2018 is in progress. The State will take over their operation temporarily through SEITTSA, in case it is necessary, until the tender is successfully completed.

A new regulation for airport charges was adopted in January 2017 to implement the Airport Charges Directive. The new Regulation aims at improving efficiency and competitiveness in the management of Spanish airports by the listed state company Aena. It is based on regulatory best practices and should create a more predictable, stable and flexible framework based on a 5-year action plan. The framework incorporates a new tariff model with more incentives for efficient management of the airport infrastructure.

Increasing competition in port services can raise ports' efficiency and competitiveness. Maritime transport contributes significantly to the Spanish economy. In May 2017, the Spanish government adopted a Royal Decree Law reforming the Spanish port labour system with a view to complying with a 2014 judgement by the European Court of Justice, but the implementing law is still pending adoption.

Spain's National Policy Framework sets moderate targets for low emission mobility. It envisages a comparatively low share of 0.5% electric vehicles on the road by 2020. Furthermore, Spain has not defined targets for publicly accessible recharging points for 2020. The Framework however estimates a significant growth in vehicles running with natural or petroleum gas, and establishes appropriate refuelling infrastructure targets for these fuels. For maritime transport, LNG mobile refuelling is available for all maritime ports in the TEN-T Core Network and in several ports of the Comprehensive Network, and additional bunkering terminals and ship-to-ship refuelling are planned. The deployment of 20 publicly accessible hydrogen refuelling points by 2020 is also planned.

4.6.2.Energy and climate change

Insufficient connectivity prevents Spain from fully reaping the benefits of the EU's internal electricity market. In 2017, Spain's electricity interconnection level was 5.8 %, well below the 2020 target of 10%; impeding for example the reduction of day-ahead electricity prices that are high by EU comparison ( 42 ) and the optimization of renewable energy. Low connectivity also prevents the rest of the European grid from tapping Spain's vast renewable energy sources. Despite the opening of additional cross-border power lines, the electricity interconnection capacity with France is only 2.8 GW. New interconnections with Portugal will increase the interconnection capacity with this neighbouring country to 3.2 GW by the end of 2020. Three projects (across the Biscay Bay and the Pyrenees) committed to in the 2015 Madrid declaration should significantly increase the interconnection level by 2026. The Biscay Bay Project is planned to be commissioned by 2026 and its completion will contribute decisively to better plugging the Iberian Peninsula into the internal electricity market.

The integration of gas markets on the Iberian Peninsula is advancing, if only slowly. The Iberian Gas Market MIBGAS is intended to eventually create one single market with Portugal. During 2016, its first full year of operation, market activity expanded. Although MIBGAS's liquidity is below that of the main European gas hubs, several measures implemented since then have resulted in increasing MIBGAS’s liquidity.

Transparency and clarity for consumers as regards the cost of electricity is increasing. The Spanish electricity market has implemented the ‘Voluntary Price for the Small Consumer’ (PVPC) since mid-2014, which sets the cost of producing electricity in a fair and transparent way (it directly takes the electricity cost from the wholesale market). This is contributing to save money to consumers in their electricity bills compared to other types of contracts (as the NRA has stated in recent reports). The PVPC is increasing clarity and transparency of supply contracting processes since contract alternatives comparison is made simpler to consumers.

Investment in energy infrastructure is expected to peak in 2019-20 and then continue on a sustained level. The main individual projects are two gas Projects of Common Interest commissioned for after 2020 ("STEP", "Midcat" and the 3rd interconnection between Spain and Portugal), the three cross-border interconnections mentioned above and three hydro-pumped electricity storage facilities.

With a renewable energy share of 17.3 % in 2016, Spain is on track towards its 2020 target ( 43 ). The tenders organised in 2016 and 2017 for allocating support to renewable electricity projects are seen as a step forward in fostering sustainable investment in renewables and meeting the 2020 target. They are expected to counteract the 2014-2015 slowdown in renewables' share growth.

Between 2005 and 2016, Spain decreased its primary energy consumption by 13.8 % to 117.2 million tons of oil equivalent (Mtoe). Over the same period, final energy consumption also decreased by 18.1 % to 82.5 Mtoe in 2016. However, the 2016 figures show an increase in both primary and final energy consumption as compared to 2014 levels. This highlights the importance of maintaining the commitment to energy efficiency policies to ensure that targets are met also during the current period of high economic growth.

The Spanish government expects positive side-effects on employment from investment in energy efficiency. The employment potential of improving energy efficiency in buildings is estimated at about 55 jobs for every million euros of public investment (assuming a 300% multiplier for leveraging private investment).

Spain is on track towards its EU2020 CO2 emissions targets. Emissions from sectors not covered by the EU Emission Trading System were reduced by 16.2% between 2005 and 2015, which is above Spain's target of -10%. According to the latest national projections taking into account existing measures, the 2020 target is expected to be met by a margin of 9.1 pps. The challenge is to keep emissions decoupled from the current strong economic growth. Work on the draft Law of Climate Change and Energy Transition has started in April 2017.

4.6.3.Environment

Spain still faces considerable environmental challenges, mainly in water and waste management as well as air quality. Regarding governance, the potential for coordination among the different competent levels of government is sometimes not exploited, and sustainable development is not strongly mainstreamed into other policy areas (European Commission, 2017g). The transition to a green, circular and low-carbon economy holds the potential of opening up significant new sources of employment in Spain ( 44 ).

Circular economy issues are starting to receive greater policy attention. Spain is still far from the EU recycling target of 50% of municipal waste by 2020. The concept of circular economy is generally embedded in national and regional policies targeting resource efficiency, environmental innovations, clean technologies, and sustainable development. In addition, the government has started to prepare a national circular economy strategy in 2017.

Certain areas in Spain are water-stressed, meaning that water demand exceeds the available water resources under sustainable conditions. Water management challenges have increased and become more prominent during the severe drought Spain has been suffering in the last years. Decoupling economic growth from water use remains a challenge in Spain, since sectors like agriculture, tourism, and energy are heavily dependent on water supply.

The current water-pricing policy gives few incentives for efficient use, and the supply and wastewater infrastructure faces investment gaps. Current pricing does not ensure the recovery of the cost of all water services, and prices and subsidies are not always transparent. This encourages water waste, especially in the agriculture sector, the largest consumer of water. The problem is compounded by outdated irrigation systems and loose control of water abstraction. Moreover, even though wastewater reuse is relatively high in Spain, its potential is not fully exploited. Gaps in urban wastewater treatment suggest under-investment in the water infrastructure (European Commission, 2017h). Furthermore, flood-prevention measures are sometimes disregarded, although flooding is a recurrent problem and prevention cheaper than the cost of flood recovery.

Steps are being taken to improve water governance. To address the main water management challenges in Spain the Ministry for Agriculture, Fisheries, Food and Environment has launched a process in 2017 to reach a "National Water Deal" (Pacto Nacional por el Agua), which is now under consultation with regional governments and stakeholders.

Annex A

Overview Table

Annex B

Macroeconomic Imbalance Procedure Scoreboard

Annex C

Standard Tables

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(1) ()    This report assesses Spain’s economy in the light of the European Commission’s Annual Growth Survey published on 22 November 2017. In the survey, the Commission calls on EU Member States to implement reforms to make the European economy more productive, resilient and inclusive. In so doing, Member States should focus their efforts on the three elements of the virtuous triangle of economic policy - boosting investment, pursuing structural reforms and ensuring responsible fiscal policies. At the same time, the Commission published the Alert Mechanism Report (AMR) that initiated the seventh round of the macroeconomic imbalance procedure. The AMR found that Spain warranted an in-depth review, which is presented in this report.

(2) ()    GDP growth and inflation forecasts are based on the Commission 2018 interim winter forecast. All other variables and GDP components are based on the Commission 2017 autumn forecast

(3) ()     Income data from EU-SILC in a given release refer to the previous year for all Member States except IE and UK.

(4) ()    To provide timelier data on the effectiveness of social policies, Eurostat has produced experimental flash estimates for income reference year 2016. These complement the EU-SILC data and can be used in preliminary analysis until the final EU-SILC data becomes available.

(5) ()    The Gini coefficient ranges between 0 and 1. Lower values indicate higher equality. To take into account differences in household size and composition, the total disposable household income is "equivalised".

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

(7) ()    The current account 'norm' benchmark is derived from regressions capturing the main fundamental determinants of the saving-investment balance (e.g. demographics, resources), as well as policy factors and global financial conditions. See also European Commission, 2017, 'Empirical current account benchmarks: modelling the impact of demographic variables', LIME Working Group, 24 April 2017.

(8) ()    The recent widening of Target 2 balances is mainly due to the impact of quantitative easing, rather than to capital flight, as was the case in 2012.

(9) ()    The country-specific prudential threshold for the NIIP is derived from a univariate signalling approach that identifies at which NIIP level an external crisis is likely to begin. The NIIP level explained by fundamentals represents the NIIP that would result if a country had run its current account in line with fundamentals since 1995. See European Commission, 2016, 'Refining the methodology for NIIP benchmarks', LIME Working Group, 21 Nov 2016.

(10) ()    For details on the European Commission's assessment of fiscal sustainability risks in the short-, medium- and long-term, see European Commission (2018), ‘Debt Sustainability Monitor 2017’ Directorate-General for Economic and Financial Affairs, European Economy, Institutional Paper 071/2018.

(11) ()    The tax wedge on labour represents the difference between the total labour cost of employing a worker and the worker’s net earnings. It is defined as personal income tax and employer and employee social contributions (net of family benefits) as a percentage of total labour costs (the wage and employer social contributions).

(12) ()    The European Commission conducts the monitoring of the Spanish financial sector under Post-Programme Surveillance (PPS), in liaison with the ECB (DG Economic and Financial Affairs, 2017).

(13) ()    Source: Instituto Nacional de Estadística (INE)

(14) ()    Source: Associación española de capital, crecimiento e inversión (ASCRI)

(15) ()    Source: SAFE Survey

(16) ()    Fundamental-based benchmarks are derived from regressions capturing the main determinants of credit growth and taking into account a given initial stock of debt. Prudential thresholds represent the debt threshold beyond which the probability of a banking crisis is high, minimising the probability of missed crisis and that of false alerts. See European Commission, 2017, 'Benchmarks for the assessment of private debt', Note for the Economic Policy Committee (not publicly available).

(17) ()    Debt sustainability indicators correspond to the permanent adjustment in the savings rate to (i) reach the fundamental benchmark for debt within 15 years (S1) and (ii) ensure that net financial liabilities are eventually reimbursed (S2). See European Commission, 2017, 'Benchmarks for the assessment of private debt', Note for the Economic Policy Committee (not publicly available).

(18) ()    Source: Spanish Official Body of Registrars.

(19) ()    Level of qualification ranging from (pre-) primary to lower secondary education (ISCED 0-2).

(20) ()    Workers marginally attached to the labour market include persons available to work but not seeking work and those seeking work but not immediately available; while underemployed workers are those working part-time but wishing to work longer hours.

(21) () A key change in the Youth Guarantee (YG) is the simplification of the registration process that allowed more jobseekers to participate, including those who were already enrolled in activities compatible with the YG scheme.

(22) () In 2017, a total of 10 500 new self-employed were registered, which represents a net increase of 0.33 % (the lowest figure since 2014).

(23) ()    Source: Ministry of Employment and Social Security (Register of Self-employed)

(24) ()    Source: Eurostat. Figures for Q3-2017.

(25) ()    Source: Ministry of Employment and Social Security.

(26) ()    Source: European Union statistics on income and living conditions (EU-SILC)

(27) ()    Source: EU-SILC

(28) ()    Income data from EU-SILC in a given release refer to the previous year for all Member States except IE and UK.

(29) ()    Eurostat flash estimates, see Chapter 1.

(30) ()    The share of people with an equivalised disposable income below the risk-of-poverty threshold in the current year and in at least two of the preceding three years. The threshold is set at 60 % of the national median equivalised disposable income. Source: Eurostat (EU-SILC).

(31) According to the benchmarking exercise in the area of unemployment benefits and active labour market policies conducted within the EMCO Committee. See the draft Joint Employment Report 2018 for details (European Commission, 2017b).

(32) ()    Indicador Público de Renta de Efectos Múltiples – Public Indicator of Income for Multiple Purposes, used since 2004 as a reference of income for social protection programmes.

(33) ()    Share of people living in households where total housing costs make up over 40 % of the total disposable household income (both figures net of housing allowances). Source: EU-SILC.

(34) ()    Source: National Health Barometer (2016)

(35) ()    2015 Atlas on Variations in Medical Practice

(36) ()    I.e. at -36 % of GDP by 2025.

(37) ()    Source: European Innovation Scoreboard 2017.

(38) ()     http://digital-agenda-data.eu/charts/analyse-one-indicator-and-compare-countries

(39) ()    Data: Eurostat.

(40) ()    Source: Eurostat

(41) ()    According to the Spanish Public Procurement Registry shows that in 2016, the central administration accounted for 13.90% of the public contracts awarded and 29.87% of the value of those contracts, regions for 54.43% of the public contracts awarded and 47.41% of the their value and municipalities for 23.59% and 18.54%, respectively (universities and social security mutual societies accounted for the remaining values).

(42) ()    The interconnection level is the ratio between import interconnection and net generation capacities.

(43) ()    Source: Eurostat SHARES

(44) ()     http://ec.europa.eu/environment/circular-economy/index_en.htm

(45) ()    The following categories are used to assess progress in implementing the 2017 country-specific recommendations (CSRs):No progress:The Member State has not credibly announced nor adopted any measures to address the CSR. This category covers a number of typical situations, to be interpreted on a case-by-case basis taking into account country-specific conditions. They include the following:•    no legal, administrative, or budgetary measures have been announced •    in the national reform programme,•    in any other official communication to the national Parliament/relevant parliamentary committees or the European Commission, •    publicly (e.g. in a press statement or on the government's website); •    no non-legislative acts have been presented by the governing or legislative body; •    the Member State has taken initial steps in addressing the CSR, such as commissioning a study or setting up a study group to analyse possible measures to be taken (unless the CSR explicitly asks for orientations or exploratory actions). However, it has not proposed any clearly-specified measure(s) to address the CSR.Limited progress:The Member State has:•    announced certain measures but these only address the CSR to a limited extent;and/or•    presented legislative acts in the governing or legislator body but these have not been adopted yet and substantial non-legislative further work is needed before the CSR will be implemented;•    presented non-legislative acts, yet with no further follow-up in terms of implementation which is needed to address the CSR.Some progress:The Member State has adopted measures •    that partly address the CSR and/or •    the Member State has adopted measures that address the CSR, but a fair amount of work is still needed to fully address the CSR as only a few of the adopted measures have been implemented. For instance: adopted by national parliament; by ministerial decision; but no implementing decisions are in place. Substantial progress:The Member State has adopted measures that go a long way in addressing the CSR and most of which have been implemented.Full implementation: The Member State has implemented all measures needed to address the CSR appropriately.

(I) ()In this box, regional dispersion is measured for the 17 regions in Spain and for the NUTS-2 regions of DE, FR (including the overseas departments and territories), IT and NL.

(II) ()Detailed information on the QUEST model and applications is available at: http://ec.europa.eu/economy_finance/research/macroeconomic_models_en.htm.

(III) ()Total administrative costs (fixed costs) are immediately and permanently reduced by 1.3% of GDP. Calibration based on Más Rodríguez and Herrero García (2013).

(IV) ()See Thum-Thysen and Canton (2015), and Canton et al. (2015). The simulated size of the reduction roughly corresponds to a reduction of the OECD PMR indicator in professional services from 2.1 to 1.3, which translates into a permanent economywide reduction of mark-ups by 0.27 pps.

(V) Other institutions have reached similar conclusions, e.g. Fedea (Fuente, García Díaz and Sánchez, 2017) and the Bank of Spain (Hernández de Cos, Francisco Jimeno and Ramos, 2017).

(VI) According to analysis carried out for the 2018 Pension Adequacy Report (forthcoming), average earnings may differ by 35.3 pp. between a full 40-year career and a shorter 20-year career.

(VII) () The Social Scoreboard includes 14 headline indicators, of which 12 are currently used to compare Member States performance. The indicators "participants in active labour market policies per 100 persons wanting to work" and "compensation of employees per hour worked (in EUR)" are not used due to technical concerns by Member States. Possible alternatives will be discussed in the relevant Committees. GDHI: gross disposable household income.

(VIII) ()The estimated sample period extends from Q1-1995 to Q4-2015. As the series are non-stationary in levels, but they are in first differences, an error correction model is estimated, using non-linear least squares in a single step.

(IX) (), where X represents Spanish exports of goods and services, FD foreign demand, Comp competitiveness and PC private consumption.

(X) ()By contrast, the long-run elasticity of Spanish exports to foreign demand is close to one.

(XI) ()The specification of imports equation is given by To take into account the different import content of domestic demand (DD) and exports (X), both variables are included separately in the equation, as well as a competitiveness indicator.

(XII)  Tradable sectors: Agriculture, manufacturing, energy and related, trade, transport, food and accommodation, ICT. Non-tradable sectors: Construction, financial services, real estate, professional services, administrative services, entertainment and household services, non-market services.