Should rest of Europe adopt Spain’s economic reforms?

Spain’s economy is returning to health thanks to recent reforms

A report this week by the Bank of Spain has revealed that the country’s economy grew 0.5 per cent in the third quarter of the year, setting Spain on track to exceed its projected 1.3 per cent growth for 2014 and prompting economists to ponder – should other European countries follow the Spanish example?

For the past six or seven painful years, Spain’s economy was harshly viewed as the template of ‘what not to do’: unemployment was high, job creation was low, labour laws were inflexible and the stench of immovable nepotism hung in the air…

Spain had to act, and act it did. A series of at-the-time painful reforms were introduced by Spanish Prime Minister Mariano Rajoy that have had the desired effect of lubricating the job market, raising taxes in the right places and injecting hope where once only despair trod.

This year, an extra 151,000 jobs have been created, dragging unemployment down to 23 per cent – still high, but much healthier than at this stage last year, when that figure stood at over 26 per cent.

The key reform introduced by Rajoy and Finance Minister Cristobal Montoro was to amend the supply side labour laws. Spain’s previously rigid Derecho Laboral has been loosened, enabling employers to more easily dismiss underperforming workers.

Now, in isolation that might not sound like a good thing, but its manifold effects have all been positive: staff upped their game, ‘unfair’ dismissal claims became less expensive for companies, which compelled them to ‘take a chance’ on more applicants. The downside has been a slight suppression in wages as companies have wrested control back from employees, but economists believe that this will only be a short-term suppression as confidence slowly ebbs back into the veins of Spain’s economy.

A further reform was the lowering of Spain’s corporate tax rate, which will fall each year from 30 per cent today to 25 per by 2016. This lower rate is helping to attract multinationals to the country, swelling the job market in the process, while a cut in personal income tax for most wage earners has also proven effective: with more cash in their pockets, Spaniards are spending more, further turning the wheels of the economy.

These reforms are also helping Spain to tackle its black market. Previously unwieldy employment contracts, stagnant hierarchies and high taxes have meant that many Spaniards have purposefully ‘opted out’ of the labour market, with some leading economists estimating that as much as 25 per cent of the country’s potential GDP goes unaccounted for, wheeling around the black and grey markets and remaining out of the reach of the taxman.

This is changing, which is bringing more Spaniards on to official figures, and in turn helping to boost the economy.

The net result? Spain’s economic turnaround has been the true success story of 2014 for the EU, prompting observers to posit whether similar measures should be applied in struggling France, Italy, Portugal and Ireland.