Business 02/06/2021

Brussels prescribes fiscal prudence for Spain to overcome the crisis

Commission calls for investments through European funds to be prioritised due to the high level of public debt

2 min
The Spanish Vice-President, Nadia Calviño, with the Economic Vice-President of the European Commission, Valdis Dombrovskis.

BrusselsOnly three countries in the European Union meet the limit of 3% of public deficit that was planned before the outbreak of the coronavirus pandemic, because all have focused on curbing the impact of the crisis with public aid. Spain, however, already dragged high levels of debt and deficit which have soared even higher, and that is why the European Commission warns that it needs to be "prudent" when it comes to continue spending from 2022 to underpin the recovery. Brussels thus recommends prioritising the use of European funds to avoid the risks associated with an even greater increase in public debt. Spain finished 2020 with a public debt of 120% of its GDP and the highest deficit in the EU (11%).

The anti-pandemic funds are expected to start arriving next month, after the European Commission already obtained a green light from Member States to be able to start issuing debt in June. Thus, Spain will be able to receive €9bn in July corresponding to its first advance, out of the total €140bn. This is the money that the European Commission recommends using as a priority to continue supporting the economy in 2022 and 2023 and underpin the post-pandemic economic recovery.

The EU executive calls for caution in Spain due to its "imbalances" and "vulnerabilities" in terms of debt, its high unemployment rate and the impact of the crisis on an economy highly dependent on tourism. In particular, Brussels recommends that Spain prioritise "structural reforms" that contribute to the "sustainability" of public finances and also to strengthen public health and social protection systems. Spain plans to reduce public deficit to 5% in 2022 and debt to 115.1% of GDP next year, in line with the European Commission's projections.

Deficit rules, suspended until 2023

And yet, there are no numerical limits in any sense, because it must be remembered that the deficit rules (i.e. the Stability Pact) have been suspended and will remain so until 2023, precisely to allow public institutions to continue to help their economies, as Brussels confirmed on Wednesday. The European Commission's concern is, in fact, that these support policies will be withdrawn prematurely, and therefore calls for avoiding "premature action", as the European Central Bank has repeated several times. In addition, the Commission and some other countries such as Spain expect this waiting period will be used to review and reform these rules, although the same Commissioner for Economic Affairs, Paolo Gentiloni, has acknowledged that achieving consensus will be difficult: "We want to relaunch the discussion and see how we can simplify the rules," said the economic vice-president, Valdis Dombrovskis.

This does not exclude that, at the same time, Brussels ask that, insofar as possible, fiscal policies start to lean towards a greater "sustainability", that is, to start thinking about reducing the deficit and debt from 2022, when the economic recovery will reduce public deficits. The EU executive predicts that, despite doing so at different paces, all EU countries will have recovered pre-pandemic GDP levels by the end of next year. "We are all repeating the mantra of not withdrawing fiscal support measures prematurely, but at the same time we also know that we have to gradually turn to a more targeted policy," said Gentiloni.

"The situation is clearer than we expected, the pace of vaccination is advancing," celebrated Dombrovskis on Wednesday, highlighting the impact of support measures both by European governments and from the EU with the recovery fund.

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