Extraordinary measures for extraordinary times, but without going overboard. Two years after temporarily getting rid of the corset of the stability pact to face the economic consequences of the pandemic, the European Commission yesterday proposed postponing for another year, until 2024, the return to budgetary discipline in order to help governments respond to the coup of the war in Ukraine albeit amidst intense calls for caution.
"We are far from normality" but this does not mean that "we are inviting uncontrolled spending," said the European Commissioner for the Economy, Paolo Gentiloni, at a press conference, aware of the reluctance that the initiative may arouse in certain countries. In reality, the recommendations for Spain and other countries with high levels of debt, such as Italy, Greece and Portugal, are much stricter.
In the case of Spain, Brussels yesterday advised maximum caution in public spending policies in the medium term. Despite the fact that its growth forecasts are lower than those managed by the Government, the European Commission considers that the macroeconomic framework for the year 2022 is "realistic" but views the horizon from 2023 with concern. Its recommendation is that from of that year guarantees "a prudent fiscal policy", in particular making sure that current spending financed with national funds "remains below the growth potential of the economy in the medium term", affirm the recommendations sent yesterday to Madrid.
The main macroeconomic imbalances in Spain identified by Brussels are the high levels of foreign debt and unemployment. Although government policies have made it possible to cut public debt in accordance with European recommendations since 2019, for the period beyond 2023, Brussels expects a fiscal policy that includes measures "to ensure a credible and gradual reduction in debt as well as sustainability". in the medium term”.
At the end of last year, Spain's public debt stood at close to 120% of GDP and, according to the Commission's calculations, without a prudent fiscal policy, when the items in the European stimulus plan run out, the risk that skyrocket to pre-pandemic levels is "very high," according to community services.
However, Brussels recognizes the need for the Government to provide "temporary and specific" support during 2023 to households and companies to cope with the increase in energy costs as well as to provide measures to care for Ukrainian refugees. And he advises the Government to "expand public investment in the ecological and digital transition" by making use of European funds to promote the development of renewable energies and interconnections.
A key element to determine the sustainability of Spanish public finances in the medium term is the pension reform currently under debate. The report published yesterday by the Commission indicates that with the previous legislation (never applied) spending on this item was going to decrease, hence the need for the upcoming reform, which includes an intergenerational solidarity mechanism, "mitigate the risks to medium and long term”.
The analysis refrains from reaching conclusions but both the Government and the community executive indicated yesterday that they maintain an intense dialogue on this point of the Spanish plan. The approval of Brussels will be essential to receive the tranche of aid from the recovery fund that is expected to request at the beginning of 2023, the fourth request scheduled in the Spanish plan. It will be then when its effects are formally assessed, but "we will be evaluating it during all the steps of the process," Gentiloni pointed out.
