The Economic Brake of Overregulation and Polarisation
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April 14, 2024
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First published in The Objective,1 on April 18, 2024. The entire article is available at https://theobjective.com/elsubjetivo/opinion/2024-04-18/freno-economico-sobrerregulacion/
In times like these, when political confrontation both dominates and contaminates the conversation, a document such as the European Commission’s “In-Depth Review 2024 – Spain,” offers a deep analysis of the Spanish government’s achievements in very relevant matters. The report also reflects the need for continuous and coordinated actions to mitigate macroeconomic vulnerabilities in the country, pointing towards structural reforms and policies focused on long-term sustainability and financial stability.
The European Commission acknowledges the progress the country has made due to “the significant reductions in vulnerabilities associated with Spain’s high levels of private and external debt, as well as public debt, which has also declined in recent years.” However, the commission goes on to state that it expects this improvement to continue “in the near future, supported by continued surpluses in the current account thanks to the growing positive contribution of tourism and non-tourism service exports, as well as net capital transfers.” Nevertheless, the commission did issue a warning: “More efforts are needed to reduce high public debt,” a problem for which Europe has recommended Spain remove reduced value-added tax rates, increase green taxes and withdraw tax benefits.
Europe fulfils its role in highlighting the dark points of Spain’s economic recovery, but the commission should also reconsider its policy of excessive regulation, as it may represent a significant risk to economic dynamism. It is important to remember that the European Union consists of 27 member states, some of which do not always transpose EU regulations swiftly.
The imposition of extremely strict regulations by the commission can hinder innovation, increase costs for companies and reduce competitiveness in global markets. Additionally, complexity and administrative burden can discourage entrepreneurs and hinder the growth of small and medium-sized enterprises, which are essential for the economy. This regulatory environment can limit the EU economies’ ability to adapt and respond quickly to global changes and challenges, affecting their long-term growth and sustainability.
The Spanish report highlights both past and current measures regarding the labour market because, it states, “they have proven to be effective in reducing the number of temporary employees and labour market duality. They also have the potential to boost labour productivity.”
The report calls for improvements that facilitate, for example, hiring and firing, thus reducing the duality between temporary and permanent contracts that characterises the Spanish labour market. It also advocates for promoting training and requalification programs for workers and fostering labour mobility.
The document also emphasises the importance of encouraging innovation through more public-private collaboration and support for startups and entrepreneurs. Commission economists point out that the level of private investment in research and development in Spain “remains one of the lowest in the Union” (0.8% of gross domestic product compared with the EU average of 1.5%).
Furthermore, it calls for measures to improve competitiveness, such as reducing production costs (unit labour costs) through greater efficiency and productivity as well as reducing energy and raw materials costs.
Additionally, Brussels demands improvements in infrastructure and logistics and the simplification of regulatory and administrative procedures for the creation and operation of companies, with the goal of improving the business environment and attracting foreign direct investment.
The report recalls the tools created to alleviate one of the endemic problems of Spain’s regional autonomy: market fragmentation. The document highlights the functionality of observing good regulatory practices and the sectoral conference on improving the business environment. However, Brussels calls for additional political initiatives to reduce the time needed to resolve civil and commercial cases, which would further contribute to avoiding existing economic distortions that hinder business creation and growth, impede entrepreneurship, negatively affect investment rates, and stifle productivity growth.
This point, the administrative simplification of processes, has been one of the most complained about by businesses for years. Sectors such as renewables have highlighted the problems that arise from regional legislation, especially in territories governed by nationalist forces, as well as from the creation of regional bodies dedicated to regulatory or competition oversight, which play an intimidating role.
Regarding improvements in legislative quality and judicial efficiency (some of them after being listed as a condition for receiving NextGen funds), the report points out that there is room for improvement. But one topic praised is the approval and implementation of the new bankruptcy law that includes a restructuring framework aligned with the practices of the rest of Europe.
Throughout, the document emphasises that the effective implementation of these measures will require coordinated efforts between the government, the private sector and other relevant actors. Unfortunately, such efforts do not seem feasible today, evidence that the political climate is hindering the economic momentum that Spain needs and has a prime opportunity to take advantage of.
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Published
April 14, 2024
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Senior Managing Director, Head of Spain Strategic Communications