The Governor of the Spanish Central Bank has warned the new government in the country not to abolish labor reform, which economists say is crucial to rebuilding the country and maintaining its competitiveness.

“The Spanish economy still needs to maintain its high level of competitiveness”, said Pablo Hernandez de Cos. He also expressed his opinion on the Eurozone monetary policy, calling on the European Central Bank to adopt a clear 2% inflation target rather than its current more sophisticated formulation.

Creating more than 2 million jobs between 2014 and 2018 in Spain was one of the latest economic success stories in the Eurozone. These numbers represent about a quarter of all jobs created in the region during the same period.

Pablo Hernandez de Cos noted that the reform of the labor market implemented by the previous center-right government in 2012 has given companies more flexibility to cut costs after the financial crisis. The reform reduced cohabiting benefits and negotiated wages and working conditions at the enterprise level.

The plan to repeal the reform is at the heart of a coalition agreement between the Socialists and the far-left party Podemos, which formed a government last month. They want to ban the sacking of employees due to sickness-related absences and to limit the use of subcontractors. The government also wants to return the sector-level bargaining.

Pablo Hernandez de Cos argues that it would be better for the authorities to focus on issues such as reducing the high proportion of people on temporary contracts who currently account for more than a quarter of the workforce and hold one of the highest levels in the euro area. Another priority, according to Pablo Hernandez de Cos, should be to reduce the number of long-term unemployed in Spain, who currently represent approximately 14% of the working-age population.

The central bank governor has criticized the government’s move to increase the minimum wage in Spain, which rose by 22% in 2019 and 5.5% this year. He explained that this could increase unemployment among people with lower productivity.

Pablo Hernandez de Cos also urged the government to take greater steps to reduce its structural budget deficit by about 2.5% of gross domestic product, as well as its debt, which is just under 100% of GDP.

“The fiscal consolidation over the last four years in terms of reducing the structural deficit has been very small, almost insignificant”, he said. “That’s a fact”, added he.

The suggestion of Pablo Hernandez de Cos that the ECB should move to a clear 2 percent inflation target would align the bank with the goals of the US Federal Reserve and the Central Bank of England.

The Governor of the Spanish Central Bank, who worked as an advisor to the ECB between 2004 and 2007 and is now a member of the Governing Council, said such a change would “give clarity” at a time when “even people working for the ECB financial markets have different interpretations’ of the ECB’s inflation target.

“A specific goal that is used by other institutions is the right move, in my opinion”, added he.

Other members of the Governing Council of the ECB have been pushing for a range for inflation – say between 1.5% and 2%. This may make it more likely that interest rates will rise at a lower inflation rate.