Spanish Regions Sabotage Rajoy’s Competitiveness: Euro Credit

Spain’s 17 semi-autonomous regions are hobbling Prime Minister Mariano Rajoy’s efforts to drag the euro region’s fourth-largest economy out of a six-year slump.

Rajoy’s government is struggling to implement laws recommended by the European Central Bank and the International Monetary Fund. ECB President Mario Draghi, who spared Spain a full bailout a year ago by pledging to support the euro, told European Union lawmakers last week that “greater effort has to be put into structural reforms to restore competitiveness.” Spain’s 10-year borrowing cost today climbed as high as 4.76 percent, after reaching a low for the year of 3.94 percent on May 3.

“The government is under pressure from companies to remove obstacles to trade, but some regions refuse to give up their regulatory power,” said Ramon Nieto, who helps oversee 1.3 billion euros ($1.7 billion) at Geroa EPSV Fondos in San Sebastian, Spain. “Delaying reforms isn’t helping Spain’s credibility at a time when its bonds are falling.”

Three regions are opposing a so-called market unity law approved by Spain’s Cabinet on July 5 to make it easier for companies to do business across the country without being bound by local rules and license requirements. Economy Minister Luis de Guindos estimates the change may add 1.5 percent to gross domestic product in the coming decade.

Power Division

“This is a question of who decides what,” Gustavo Adolfo Matos Exposito, director at the Canary Islands Ministry of Commerce and consumer issues, said in a telephone interview. “It’s up to the government of each region to decide what economic model it wants for its territory, whether it wants to protect small and medium enterprises or not, liberalize rules or be more protectionist, because that’s the way power has been divided.”

According to the government’s Tourism Institute, the Canary Islands are the second-most visited by foreigners. The islands, governed by a regionalist party that has had alliances with both Spain’s Socialists and Rajoy’s People’s Party, will file an appeal with the Constitutional Court if talks fail, Matos said. The region is already waiting for it to rule on a law that made shops’ opening hours more flexible last year, infringing upon regional prerogatives, he said.

Trade Barriers

The market unity law, to be approved by Congress in the coming months, will enable companies to operate in all regions once they have a license with one. About 4,000 municipal rules may require tweaking to remove trade barriers, said a spokesman for the economy ministry, who asked not to be identified, in accordance with government policy.

“This would give companies access to more clients and business opportunities,” said Itziar Galindo Jimenez, corporate tax director at the Spanish unit of accounting firm KPMG LLP in Madrid. “At the moment, companies are giving up entering markets other than the regions they are based in because potential revenue might not cover the administrative costs entailed.”

Catalonia, which contributes the most to Spain’s GDP, opposes the change, as does the Basque Country, one of the richest regions measured by GDP-per-capita. Both already confronted the government in Madrid last year about the tax-funded health-care system. The former charged patients more than was planned by the government, while the second ignored the changes, becoming the only region not to register a double-digit drop in pharmaceutical spending.

Schoolyard Fight

“One would think these were children fighting in a schoolyard,” said Maria Yolanda Fernandez Jurado, associate professor of the Faculty of Economic and Business Sciences at Madrid’s Universidad Pontificia Comillas. “There is tension because regions are afraid of losing revenue at a time when they are up to their necks in debt and have all these unemployed people on their hands.”

While a sixth consecutive quarter of economic contraction has pushed unemployment to a record 27 percent, Spain’s public debt load has more than doubled from 2007, when the country’s real-estate boom ended, to 88 percent of GDP in the first quarter. The European Commission forecasts the nation’s ratio will rise above the euro zone’s average next year for the first time in the single currency’s history.

Guindos today said he expects a good result at the Treasury’s next bond auction on July 18, after it sold 4.05 billion euros of six-month and 12-month bills today in line with its maximum target. Spain’s funding costs are lower than expected, he said during an event in Barcelona.

Risking Discontent

Rajoy is increasing taxes as his government struggles to deepen the toughest spending cuts the nation has experienced in its democratic history, said Eduardo Berche Moreno, specialist in tax law and professor at the Esade Law School in Barcelona.

Spain’s budget deficit was the largest in the European Union in 2012. Still, the government is more than six months late in implementing a public-sector overhaul and centralized buying of medical products announced last year to save 4.5 billion euros.

“Confronting the regions means taking the risk of creating discontent throughout the population,” Berche Moreno said in a telephone interview. “Spain’s specificity is a complex multiple-layer system that generates a certain selfishness: people are happy to see another region’s ombudsman dismantled but they’ll shout if you touch theirs, it takes a lot of courage to deal with that.”

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