18.04.2016 - A team from the European Commission, in liaison with staff from the European Central Bank (ECB), carried out the fifth post-programme surveillance visit to Spain on 11-13 April 2016. The European Stability Mechanism (ESM) participated in the meetings on aspects relating to its early warning system. The mission was limited in scope, and mainly focused on financial sector issues.
In 2015, GDP expanded by a robust 3.2%, significantly above the euro area average. Growth was driven by domestic demand, underpinned by strong job creation, improved access to credit and enhanced confidence, together with declining oil prices and an expansionary fiscal policy. The current account balance has recorded a surplus during the past three years and private sector deleveraging is on track, supported by favourable growth conditions.
Strong job creation was supported by continued wage moderation and the impact of labour market reforms, which have increased the responsiveness of employment to growth. Although unemployment decreased at a very strong pace in 2015, at above 20% of the labour force it remains among the highest in the EU. An increasing share of the unemployed population has been without a job for more than two years, highlighting that high long-term unemployment risks becoming entrenched. Moreover, while job creation on permanent contracts has resumed, labour market duality between permanent and temporary contracts remains high.
Robust growth has accelerated the rebalancing of the economy, but imbalances remain. Despite sizeable progress in private deleveraging and current account adjustment, still high private and public debt and the very high level of net external liabilities expose the country to risks stemming from shifts in market sentiment and is a burden for the economy.
The government debt to GDP ratio decreased slightly in 2015 but its high level remains a burden for the economy. The needed progress on fiscal consolidation has come to a halt, with part of the structural adjustment implemented in earlier years being reversed. In 2015, most regions as well as the social security sector fell significantly short of meeting their domestic fiscal targets, and windfall gains stemming from dynamic growth and a low interest rate environment have not been used to accelerate the deficit reduction. As a result, the deficit target of 4.2 % has been missed by a large margin and the 2015 general government deficit is among the highest in the euro area. The government has recently taken action in response to the autonomous Commission recommendation. While this is a step in the right direction, it is still too early to assess its effectiveness and to what extent it can counteract the slippage.
The stabilisation of the financial sector continues, favoured by low funding costs and the strength of the economic recovery. Banks have ample access to liquidity, and their solvency and the quality of their assets have further strengthened. Sustaining profitability over the medium term remains the main challenge for the banking sector. The outstanding volume of credit is still decreasing, also reflecting the continuation of the deleveraging process by households and enterprises. However, new bank lending to households and to less indebted firms, mainly in the tradable sector and also to SMEs, continues to grow, and supports economic activity.
The implementation of the restructuring plans of the Spanish banks that have received state aid is almost completed. Although FROB has worked on the re-privatisation of the two remaining State owned entities, no new sales have been executed since 2014. Completing the restructuring and privatisation of these state-owned banks is necessary to put the banking sector on a sound long-term footing.
The divestment of SAREB's portfolio has been progressing. The new accounting regime for SAREB, adopted in September 2015, has required higher loan provisions, which have affected SAREB's capital. Consequently part of its subordinated debt is being swapped to equity in order to reinforce its capital.
Overall, past structural reforms, bank recapitalisation and supportive financial conditions are reflected in the further stabilisation of the financial sector, a strong economic recovery and low sovereign risk premia. Nonetheless, significant challenges remain. Additional consolidation efforts to ensure a durable reduction of the general government deficit and strong reform efforts remain paramount to further rebalance the economy.
The next post-programme surveillance mission will take place in autumn 2016.