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The following is the Executive summary of the OECD assessment and recommendations, taken from the Economic survey of Spain, published on 23 January 2007.
Spain’s economy has managed a remarkable performance in terms of growth, employment and public finances over more than a decade. A combination of expansionary monetary conditions, fiscal prudence, beneficial structural reforms and the positive supply-side effects of the strong rise in immigration has contributed to these outcomes. But these favourable developments are tempered by deterioration in several areas: the still high inflation differential has harmed competitiveness, and the resulting low real interest rates entail excessive domestic demand, which has been supported, jointly with employment growth and immigration, by ongoing rapid increases in household indebtedness and house prices. Despite some improvement, growth has therefore remained unbalanced as manifest in the large external deficit. Looking ahead, productivity gains are still modest, risking a substantial weakening in output and per capita income growth in the coming years.
Taking advantage of a still favourable conjuncture, the authorities have rightly opted to tackle these medium-term problems in the context of their National Reform Programme. It sensibly aims at improving infrastructure, human and technological capital and the functioning of product and labour markets. If fully implemented, it should go a long way towards dealing with three major challenges over the longer run.
Narrowing the inflation differential and reinforcing the resilience of the economy. It will be a difficult challenge to sustain high growth while reining in the inflation differential. With activity still expanding beyond potential rates according to OECD estimates, in the absence of an independent monetary policy a more restrictive fiscal stance would be desirable so as to moderate domestic demand. Phasing out the various forms of assistance to home ownership to balance the incentives between renting and purchasing, and enhancing legal security of relations between owners and tenants would also help to stabilise the housing market and dampen demand pressures. However, further efforts are also required to change the way the economy behaves: Spain’s economy must have exemplary supply-side features not only to continue to grow faster than its euro-area partners with lower inflation but also to enhance its resilience in the event of a future weakening of domestic and overall demand requiring an adjustment in relative prices and labour costs. That should entail above all further strengthening product-market competition, notably in some sheltered sectors such as retail trade, in order to lower mark-ups, reduce costs and boost productivity. Labour market flexibility would be enhanced if the conditions for firms to opt out of collective wage agreements were eased.
Strengthening productivity performance. The authorities have adopted measures to make up for Spain’s shortfall in innovation and the use of new technologies, strengthen entrepreneurship and bolster the education system. It is important to implement the ambitious draft reform of tertiary education, based on a greater independence of universities, more rigorous evaluation procedures and extensive diffusion of results. It should be complemented with additional measures to reduce labour market segmentation between temporary and permanent workers by moving towards a single contract with severance protection growing steadily with seniority in order to foster the emergence of innovative sectors and the creation of better quality and more productive jobs.
Preparing more actively for the fiscal consequences of ageing. Reforms are needed to maintain sound public finances in the long term. Here, the solution probably rests both in a parametric reform of the pension system, for example increasing the contribution period to qualify for a full benefit, and in further reduction of public debt before the demographic shock occurs. Additional efforts are needed to raise the public awareness of the challenge posed by the ageing process and build a consensus around the preferred strategy to tackle it.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded (also available in Spanish). It contains the OECD assessment and recommendations but not all of the charts included on the above pages.
The complete edition of the Economic survey of Spain 2007 is available from:
For further information please contact the Spain Desk at the OECD Economics Department at email@example.com. The OECD Secretariat's report was prepared by Claude Giorno and Eduardo Camero under the supervision of Peter Jarrett.