The Bank of Spain on Thursday urged the country's regions to keep a tight rein on spending and said Spain, which faces the prospect of a political shake-up in an election this year, needed to press on with reforms to get the economy on track. The central bank said in its annual report that the process of adjusting and rebalancing the economy had not yet finished.
"There are still big challenges for economic policies to overcome the consequences of the crisis and to achieve sustainable economic growth," Bank of Spain governor Luis Maria Linde said in a speech accompanying the bank's annual report. The call for more reforms was made with a national election due around November which promises to bring Spain's most fragmented political landscape since the return of democracy in the mid-1970s, casting more uncertainty over what direction policies will take. New parties, including anti-austerity forces such as Podemos ('We Can'), are expected to gain traction.
Prime Minister Mariano Rajoy's pitch to voters is that his centre-right People's Party (PP) can generate the stability needed to keep the economy on the right footing, now it is growing again after six years in and out of recession.
But many Spaniards have yet to feel the recovery. One in four eligible to work are still unemployed, just one sign that key imbalances remain. The PP suffered its worst result in more than 20 years in local elections last month held in 13 of Spain's 17 highly-devolved regions, and some critics also say the pace of reforms has already slowed ahead of the polls. The Bank of Spain asked for responsibility throughout all levels of government to maintain fiscal discipline.
It asked for strict adherence to early warning systems put in place during the crisis to spot and curb overspending by regions on time, and urged these to keep reducing debt. Chronic over-spending by regions had spooked creditors during the euro zone crisis. "It is essential to maintain fiscal consolidation over the short to medium term in order to meet the challenge of stabilising and reducing the public debt," the central bank said. The regions overspent by 7 billion euros ($7.9 billion) last year and are expected to overrun by another 7 billion euros this year putting in jeopardy the deficit goal of 4.2 percent of economic output, the fiscal watchdog says.
The Bank of Spain also urged more adjustments to labour laws, in addition to a sweeping reform passed in 2012, such as making it cheaper to hire and fire people on long-term contracts so that employers can recruit on better and more stable terms.
"The challenge still remains to reduce unemployment and increase productivity in the labour market," Linde said in his speech. "To that end, it is essential to keep up reforms." The central bank's recommendations echoed the comments of the International Monetary Fund (IMF) which on Monday said Spain should press on with reforms while it benefited from lower oil prices and a weak euro.
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