Spain Warned It Will Fall Into Italian Trap Without Reforms

Spain risks long-term sluggish growth like Italy if lawmakers don’t respond to the coronavirus crisis with major reforms to address longstanding weaknesses, the country’s central bank warned.

Medium-term growth potential -- only around 1% before the pandemic -- is at risk of falling further with businesses near collapse and some sectors facing weak demand for years.

“In this context, it’s absolutely imperative to put in place measures that compensate for the damage triggered by the crisis, in order to increase growth potential,” Bank of Spain chief economist Oscar Arce said.

Spain’s economy has outperformed Italy’s in recent years, thanks in part to labor market reforms and other measures implemented after Europe’s sovereign debt crisis a decade ago. Investors also favor Spanish bonds, with yields well below Italian counterparts. Spain’s debt ratio is lower, though it’s still been close to 100% of GDP in recent years.

“I think one of the lessons of the last economic expansion is that the capital markets tolerate relatively high levels of debt better if the country in question demonstrates a relatively high potential for growth,” Arce said.

In its annual report, the Bank of Spain called for measures to reduce companies’ over-reliance on short-term precarious labor contracts, as well as education reforms. It also wants tax and regulatory changes to encourage small firms to boost their size and help lift overall productivity.

Nearly 80% of Spanish companies have fewer than five employees -- compared with around 70% in the broader European Union.

“We must urgently design and implement this strategy, because of the gravity of the situation and the magnitude of the challenges that lie ahead,” Bank of Spain Governor Pablo Hernandez de Cos said.

©2020 Bloomberg L.P.

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