The Main Challenges The Spanish Economy Faces In 2017

Spanish budgetSpain's 2023 budget are based on optimistic economic forecasts

It looks like 2017 will present a lot of opportunities and challenges for the Spanish economy. It will grow at a good pace, creating jobs, with a minority government obliged to seek consensus: but on what issues? This was the question we put to experts in different parts of Europe. These are the most interesting answers.

1.-What are three main problems for the Spanish economy in 2017?

2- What three posible reforms – and along what lines – do you suggest for next year?

Francesco Saraceno. Professor in Economy of Sciences PO Paris.

I see two major challenges for the Spanish economy, that are unfortunately going to go well beyond 2017. The first is the normalization of the labour market. The unemployment rate is finally below 20%, and the Spanish economy has been outperforming the rest of the eurozone since 2015. This is certainly good news, even if not completely surprising as Spain was coming from a much deeper slump. But the good labour market performance cannot hide an hysteresis effect that is changing the quality of the labour market. A real long-term unemployment problem is emerging, together with the loss of human capital that this entails. This means that employability  is decreasing, and that much higher growth rates in the future may be needed to keep unemployment on a decreasing trend. The problem of long term unemployment is compounded by youth unemployment, that remains extraordinarily high at more than 40%, and NEET young people can be found especially among the low-skilled, with a serious risk of poverty. Dualism of the labour market is a source of fragility and of insufficient investment and innovation.

The second challenge is the fiscal stance, and it is of course related to the debate in Europe. The Spanish government has strongly reduced its net lending (including the structural deficit) that nevertheless remains at around 5% of GDP.  Yet, the Spanish situation clearly needs a more expansionary environment, that could only come from the rest of the Eurozone. Continued austerity will not help with Spain’s most pressing problem, hysteresis and long term unemployment.
2) The reforms of course stem from the challenges detailed above. The first is to implement more effective active labour market policies, to slow the depreciation of human capital bequeathed by the crisis and by long term unemployment. The second is not specific to Spain, but it needs to be implemented at the European level. Changing a fiscal rule that requires countries to increase government savings (through the requirement of a balanced budget in the medium run), when excess private savings are keeping the economy down. The generalization of the German export-led growth model is not bound to work in the medium to long run.

Valentín Pich. Chairman of the Consejo General de Economistas

The main problem is going to be complying with our deficit commitments with Europe. The deficit targets as a perecentage of GDP are clear: as máximum of 4.6% in 2016, 3.1% in 2017 and 2.2% of GDP in 2018; another question is how to achieve them. According to the data at our disposal – from the first three quarters – everything seems to indicate that the target will indeed be met this year. Another issue is meeting the commitment for 2017, 3.1% of GDP, which will take some effort given that a cut of 1.5 percentage points on 2016 will be required. And there will be no chance of implementing a temporary measure like this year, increasing the installment payments. Whatsmore, we have the sword of Damocles of our problematic pensions system hanging over us, as well as the country’s massive debt – both public and private.

Still pending is the reform which was left out in 2014, that related to those taxes most closely linked with the financing of Spain’s autononmous communities. The reform of the autonomous communities’ finances is urgent and there is also an inherent need for re-organisation in the complex world of environmental taxation.

There is no doubt that education and pensions are two questions which will require State pacts being reached. At the same time, the energy issue will also require special attention, and we will need to foster our industrial model. In short, an effort should be made to implement a battery of measures which will maintain and strengthen the welfare state, as well as increase the number of initiatives taken to make our institutional framework more dignified and efficient.

Chris Williamson. Chief Economist at Markit.

The three key challenges are: the need for a government which functions; which successfully deals with the secessionist demands in Catalonia, given that this secession could bring with it even more important economic challenges; and which can avoid the impact of Brexit and other politically unstable situations emerging as a result of the elections in France, Holland and Germany in 2017.

We expect Spain to see stronger growth than other eurozone countries in the coming years, but this will require additional efforts to increase labour productivity. Improving the education system and encouraging companies to improve their employees skills are key areas for the government to focus on. There is also a need for more R&D spending and for driving innovation and helping to absorb new technologies.


About the Author

The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.