An empty hall of the Madrid-Barajas Adolfo Suarez Airport in Barajas, Spain on May 5 2020 amid the national coronavirus lockdown. Picture: AFP/OSCAR DEL POZO
An empty hall of the Madrid-Barajas Adolfo Suarez Airport in Barajas, Spain on May 5 2020 amid the national coronavirus lockdown. Picture: AFP/OSCAR DEL POZO

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

Medium-term growth potential — only about 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, 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 labour market reforms and other measures implemented after Europe’s sovereign debt crisis a decade ago. Investors also favour 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 labour 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 about 70% in the broader EU.

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

Bloomberg