Economic Survey - Spain 2005: Preserving macroeconomic stability and competitiveness

 

In several sectors, competition needs to be encouraged

Since the late 1990s, reforms of goods and services markets have been timid, even though competitive pressures appear limited in several sheltered sectors. The numerous barriers to the establishment of new hypermarkets and shopping centres in retail distribution that have been put in place by regional governments should be dismantled. The recent change in the framework law that regulates retail opening hours, although it has allowed the settling of an ongoing legal dispute, has been a step in the wrong direction as it allows regional governments to reduce maximum opening time for large outlets. This not only protects small, less-productive shops, but also impinges on welfare by limiting shopping time and thus reduces opportunities to reconcile work with family life. In network industries, further reforms are necessary to reduce the still considerable market power wielded by a small number of firms. Liberalisation of network industries has resulted in efficiency gains and important price reductions in recent years, but some segments of the energy sector are still de facto vertically integrated, with incumbents controlling prices and raising barriers to the entry of new competitors and there is little price competition in mobile telephony. While the general competition authorities have handed down tough decisions in a number of high-profile cases, their effectiveness should be raised further by granting greater independence and by enhancing their advocacy role, which could be used to investigate service sectors where prices are high. Competition policy would also be strengthened by merging the Competition Tribunal and the Competition Service as this would lead to synergies in investigations. Leniency programmes have been successful in other countries and should also be introduced in Spain. The government has adopted, after the finalisation of this Survey, a set of measures aiming at improving the functioning of the product market and strengthening productivity.

Reducing nominal wage rigidities calls for a reform of the wage bargaining system

Real wage gains have been broadly in line with aggregate productivity developments, thus underpinning job creation. But nominal wage growth has remained relatively high, partly reflecting catch-up clauses for inflation surprises in many collective agreements. Ex-post indexation should be eliminated, as it induces nominal wage inertia and inflation persistence. Indeed, present levels of real wage growth should be compatible with lower nominal wage growth and inflation. If catch-up clauses cannot be eliminated, they should be linked to core rather than headline inflation to avoid a price-wage spiral following an oil price hike. These changes should be accompanied by other measures that would help to reduce inflation expectations, which are above the 2% reference value, including further liberalisation in some goods and services markets. Moreover, wage negotiations should take into account wage developments in the euro area. The present wage bargaining system is outdated and is too focused on intermediate level agreements at the sectoral and provincial level. As such, it does not allow for sufficient wage differentiation across firms, while the possibility of firms to opt out of sectoral wage agreements is very limited. Greater decentralisation of bargaining, which has been debated but never implemented, is needed. Higher level agreements could still play a role, as negotiations in small firms may be costly, but the clause that obliges all firms to adhere to higher level agreements should be substituted by an opt-in clause. If this is not feasible, at least opt-out clauses should be made more flexible and not be limited to wages, but extended to other matters.

Housing policy reform is needed to stabilise the property market

Cooling the property market is another important task. A narrowing of the inflation differential with the euro area would help, as it would lead to higher real interest rates. However, easing the pressures in this sector also means improving the way it operates, and this will first and foremost involve developing the rental market which is much too limited, whereas the proportion of unoccupied homes is very high. A plan has been adopted to alleviate the tensions in the housing market. These measures go in the right direction, but they need to be complemented by additional reforms. For instance, new tax incentives to encourage rental supply and demand were recently introduced, but gradually abolishing the various forms of assistance to home ownership would be more effective as these tend to push up property prices, have a high budgetary cost and debatable redistributive effects. Improving the legal position of tenants and owners, and reducing the minimum 5 year duration of rental contracts would also contribute to a better utilisation of the housing stock and help to build up private rental supply in a less costly way than by means of the incentives adopted. Such measures should be accompanied by more flexible town planning regulations at the local level, while the compulsory transfer of 10% of developable land sold to the municipalities should be abolished, to do away with the incentives for these authorities to keep the price of land high. In addition, the cost effectiveness of the present system of low cost housing subsidies, which rests to a large extent on the sale of homes below the market price, warrants scrutiny. Letting rather than selling low cost dwellings could be envisaged as a way of solving access problems for a growing number of households because of increasingly unaffordable prices, but it would probably be better to facilitate access to the private rental market for disadvantaged groups by introducing a system of housing vouchers for tenants.

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