Spanish businesses wary of shifting political priorities

What happens when one of the eurozone’s most left-wing governments leads one of the region’s fastest growing economies? Spanish companies should find out in the coming months.

The coalition that took office in Madrid this year is the first since the Spanish Civil War to include Communist ministers.

The new government, led by Socialist Prime Minister Pedro Sánchez, comes as Spain’s economy gradually slows after its supercharged recovery from the depths of recession. Gross domestic product grew 2 percent last year – still well above the euro area average – but still the lowest rate in five years.

Business leaders complain that such a sensitive stage in the business cycle is not the time to experiment with new rules and taxes – before even taking into account the possible effects of the coronavirus outbreak.

Yet in the past 10 days the government has announced plans to allow local authorities to limit rent increases and has responded to pressure from farmers by banning the sale of food at a loss at nearly every step of the chain. supply. The new government’s stance on regulation is all the more closely watched as more than half of the companies in the Ibex 35 index of major stocks are in highly regulated sectors such as banking, energy, transport and construction. . The coalition also plans to raise taxes on top earners and set a minimum effective tax rate of 15 percent for large corporations.

There is another, larger problem: the main concern of many companies is Madrid’s plan to change labor laws in Spain. In 2012, at the height of the last recession, the then-center-right government pushed through changes that reduced labor costs through measures such as reduced severance pay and shifting to company level rather than sectoral negotiations on wages and terms.

Many economists link the changes to Spain’s increased competitiveness and its export-led recovery, but Sánchez’s coalition argues that the country’s workers have paid too high a price for the return of the country. countries in economic health. It plans to reverse the “most damaging effects” of the 2012 labor reforms.

Some manufacturers warn that returning to sector-level negotiations with unions could increase costs not so much for larger groups – which typically offer workers better terms than the industry baseline – but for their suppliers. . Others say the real risk is a proposed crackdown on outsourcing. “The real tragedy is if they make the contracting rules rigid,” Antonio Garamendi, president of the Spanish Confederation of Professional Organizations, told FT last month.

His organization maintains that economic activity in Spain and the euro zone is based on a decentralized economic model heavily dependent on subcontracting. The head of Spain’s central bank also warned that failure to choose labor reforms could hurt the country’s competitiveness.

However, business leaders recognize that they cannot reject the government’s agenda outright. The center-right Spanish opposition is at its lowest; Ciudadanos, a pro-market party favored by many Ibex 35 bosses, crashed and burned in the elections last November and the coalition between the socialists and the radical left Podemos could remain in power for years, despite its lack of majority.

Business leaders across the country recognize the need to respond on inclusion, worker participation and transparency. After the government raised the minimum wage in 2019 by 22%, Garamendi took the initiative to negotiate a more modest 5% increase for this year with some of the most left-wing ministers in the government.

Further crucial discussions on labor law changes are to come. Centrist members of the government such as Nadia Calviño, deputy prime minister responsible for the economy, seek reassurance, insisting that the administration will consult with businesses on almost all aspects of the reforms.

Mr Garamendi believes the next three months or so will reveal the effect these changes will have on Spain’s economic model. “The competitiveness of our businesses is at stake,” he said. “The future of our businesses is at stake.

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