European Commission: Spanish reform delays create risk in banking system

Mariano Rajoy

Mariano Rajoy

The European Commission said that Spain is backtracking on some of its economic reforms, thereby creating risk in its banking system amid a financial overhaul that faces “significant challenges.”

“Progress in delivering of some key product and services market reforms has been slow,” the EC said in its second review of Spain’s bank overhaul, according to Bloomberg. “Persistent efforts are needed to compound the progress achieved to date [with the banking system] to overcome the still significant challenges.”

EC, International Monetary Fund and European Central Bank officials met in Madrid from Jan. 28 to Feb. 1 to participate in the review.

Spanish Prime Minister Mariano Rajoy has been hesitant over demands by the EU to remove the privileges of union members, professional advisers and party operatives as part of an effort to contain the backlash resulting from a number of corruption scandals involving his party. The EC said that Rajoy’s inability to rein in firms that benefited from $38 billion in government-guaranteed debt could compromise economic recovery, Bloomberg reports.

The commission, however, noted the positive parts of the review as the euro-zone area struggles to restore economic growth and prevent a deepening of the financial crisis.

“The commitments of the memorandum are being met despite the ambitious deadlines and thus the repair and reform of the Spanish financial sector is well under way now,” Olli Rehn, the economic and monetary affairs commissioner for the European Union, said, adding that Spain’s efforts are “an essential step toward normalizing lending conditions for Spanish households and businesses,” according to Bloomberg.

The review said that while Rajoy has sought to eliminate reduced sales taxes on some goods and services and has raised fuel taxes, he has made little progress in reforming Spain’s labor market. Under Spanish law, firms absorb the costs of firing older, unionized workers under permanent contract. Young people, therefore, are left to carry the burden of the economic crisis, with 56 percent of individuals under age 25 listed as unemployed.

Additionally, the review said that budget rules lack transparency and that the government has delayed the establishment of an independent fiscal commission, adding that Rajoy’s administration has not yet cut losses derived from the nation’s pension system, Bloomberg reports.

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