Crisis pushes Spain to seek "new economic model" (Feature)

Madrid - For years, there had been a widespread agreement that Spain's economy needed a radical structural overhaul, but the onset of the country's worst economic crisis in decades has lent such plans a new urgency. Prime Minister Jose Luis Rodriguez Zapatero's socialist government intends to seek a wide social agreement with trade unions, employers and other partners on a 'new economic model,' but its margin of manoeuvre is seen as limited. The government can mainly just eliminate obstacles to the market transforming itself, analysts say, calling for bold reforms towards that end. 'Other countries, such as Ireland or Finland, have managed to change their economic models,' says economist Rafael Pampillon from the IE Business School in Madrid. Yet the reforms needed in Spain, such as making the labour market more flexible, would have a high political cost, Pampillon told the German Press Agency dpa. Spain's current recession is regarded as the deepest in more than half a century, with unemployment at 17 per cent and growing, and the Bank of Spain expecting the economy to shrink 3 per cent this year. The impact of the global crisis has been aggravated by the meltdown of the housing sector, which started building as many as 800,000 new homes in 2006, contributing about 11 per cent of gross domestic product (GDP). The construction boom helped to keep the economy growing at rates above the European Union average for over a decade, making governments reluctant to question its role. Spain now has more than a million new homes which are unable to find buyers, Pampillon observes. Even the tourism sector, which contributes about 10 per cent of GDP, is facing increasing competition from cheaper Mediterranean destinations such as Morocco, Croatia or Turkey. The crisis has made Spain's economic structures appear outdated and rigid, over-reliant on sectors with a lowly qualified workforce, with some notable exceptions such as banks, telecommunications or renewable energy. 'Spain is internationally competitive in many service sectors, ranging from hotels to airport management,' but it has not reached a sufficient level of industrialization, Pampillon says. Industry only contributes about 17 per cent of GDP, while services bring in a whopping 68 per cent. 'Spain needs to re-orientate its economy towards internationally more competitive, export-oriented sectors,' Pampillon stresses. The government is planning a 'law of sustainable economy' as a basis for a new economic model. It has already announced some measures, such as an end to tax breaks for wealthy home buyers in 2011 to reduce the weight of the housing sector, or subsidies to car buyers. Most analysts, however, dismiss the measures partly as political propaganda from a government trying to fend off criticism over its handling of the economic crisis, which is regarded as the main reason for the socialists' defeat in Sunday's European elections. Spain needs nothing less than far-reaching reforms of the educational system, labour market, pension and taxation systems, and bureaucracy in moves to increase technological know-how, productivity and flexibility, economic experts say. 'Firing workers, for instance, has been made so expensive and difficult, that it makes companies more reluctant to hire them' in secure conditions and to train them, Pampillon says. Nearly a third of Spanish work contracts are temporary, one of the highest rates in Europe. 'We also need to improve the educational system, investing in technological education, in research and development, seeking a culture of effort and excellence,' Pampillon emphasizes. Many of the reforms to create a more dynamic business environment, however, would be socially and politically sensitive, and the government has steered clear of a labour reform for fear of union protests. 'Such reforms can only succeed on the basis of an agreement between the government and the opposition,' Pampillon says.