Summary: KEY ISSUES Context. Spain has turned the corner. Growth has resumed, labor market trends are improving, the current account is in surplus, banks are healthier, and sovereign yields are at record lows. But unemployment is unacceptably high, incomes have fallen, trend productivity growth is low, and the deleveraging of high debt burdens—public and private—is weighing on growth. Policies. Spain’s overarching policy priority must be to ensure the recovery is strong, long-lasting, and most pressingly, job-rich. This requires: • Reducing the drag on domestic demand from private sector deleveraging with a more comprehensive, coordinated, approach to corporate debt restructuring, and by introducing a personal insolvency framework. • Bolstering banks’ ability to support the recovery by continuing to raise capital levels over time, including by limiting cash dividends and bonuses. • Creating jobs for the low skilled by sharply cutting the fiscal cost of employing them, compensated by higher indirect revenues. • Making the labor market more inclusive and responsive to economic conditions by striking a better balance between highly-protected/permanent and precarious/temporary contracts, and further helping firms adapt working conditions (wages, hours) to their specific circumstances. • Helping the unemployed improve their skills and enhancing the support they receive to find a job. • Removing regulatory barriers that prevent firms from growing, hiring, and becoming more productive, especially at the regional level. • Gradually, but steadily, reducing the fiscal deficit to keep debt on a sustainable path, and making the tax system more growth and job friendly. • Policies by Spain’s European partners, in particular, sufficient monetary easing by the ECB to achieve its inflation targets.

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