By Andrew Atkinson

Spain risks long-term sluggish growth – if lawmakers don’t respond to the coronavirus crisis with major reforms – to address longstanding weaknesses, the country’s central bank warned.

Medium-term growth potential, which was approximately 1% prior to the coronavirus pandemic, is at risk of falling further, with businesses near collapse. Some sectors are 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, in order to increase growth potential,” said Bank of Spain chief economist Oscar Arce.

Spain’s economy has outperformed Italy’s in recent years and investors favour Spanish bonds, with yields 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,” said Arce.

In its annual report, the Bank of Spain called for measures to reduce companies’ over-reliance on short-term precarious labour contracts, along with 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 around 70% in the broader European Union.

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

Businessman Graham Stephen, proprietor of The Oasis bar and Restaurant in Los Montesinos Alicante, told The Leader: “The COVID-19 pandemic has done terrible damage to the business industry in general and I think it will take years to fully recover.”

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