Misc 18/11/2020

Brussels approves Sanchez's budgets but warns him of excessive public debt

The government is required to take into account the medium-term risks of indebtedness

Júlia Manresa Nogueras
3 min
La vicepresidenta econòmica, Nadia Calviño, amb el comissari d'Economia, Paolo Gentiloni.

BrusselsThe draft budget that the government of Pedro Sánchez sent to the European Commission has passed the exam, but has returned with a footnote in the form of an alert. Brussels reiterates that it is important to continue fueling the fire of economies which are on standby due to the pandemic, and therefore considers that, "in general terms", the draft is "in line" with the recommendations approved in July. However, the government must be careful because Spain is carrying a public debt equivalent to its entire gross domestic product (GDP), which may be a burden in the medium term. The latest update of the economic forecasts from Brussels already predicted that the State would have problems reducing its debt. In fact, the update considers that the liabilities of the Spanish treasury will rise to 123.9% of GDP in 2022.

"Most of the measures detailed in the draft budget support economic activity against a background of considerable uncertainty", the report says. However, it goes on to say: "Given the level of debt of the Spanish government and the major challenges in terms of medium-term sustainability which were already present before the covid pandemic, it is important for Spain to ensure that, while taking measures to boost the economy, fiscal sustainability is preserved in the medium term". The report also believes that, despite the measures are going in the right direction, the risks to the financial sector have increased, which means Sanchez's government is invited to regularly review the effectiveness of the measures and "be ready" to adapt them to the needs of changing circumstances.

The State is not the only European country that receives this alert. Belgium, France, Greece, Italy, and Portugal are in the same situation despite the fact that, according to the forecasts of the Community executive itself, Spain will be the country most affected by the coronavirus crisis because its structural vulnerabilities are exacerbated by the pandemic, for instance, due to its dependence on sectors such as service and tourism. "Some of the net debtor countries hit hard by the pandemic are also characterized by a relatively high proportion of tourism revenues (e.g. Cyprus, Greece, Portugal, and Spain) that are particularly exposed to the Covid crisis, with implications for their external balances as well. In short, the Covid crisis seems to reinforce existing patterns in the euro area in terms of economic divergence and national and external indebtedness", the report states.

The weak become even weaker

Thus, the economic crisis caused by the virus aggravates the inequalities that already exist in the Eurozone, increasing the indebtedness of countries that are already over-indebted. Italy and Greece have long exceeded the level of liabilities as a proportion of their GDP (137% and 180% respectively in 2020), but, according to Brussels, will be reducing it very slowly once the situation begins to improve. In contrast, Spain will increase its level of liabilities until 2022. The Commission stresses, however, that the success of recent Spanish Treasury debt issues demonstrates confidence in the strength of the country's economy.

Broadly speaking, the budgets presented in Brussels by vice-president Nadia Calviño provide for mostly "temporary" measures to combat the pandemic, as is the case in the vast majority of countries, such as Belgium, Austria, Finland, Germany, and the Netherlands, amongst others. This is why they all get a general approval from Brussels: the Commission considers that support measures have to be "specific and temporary". However, the Commission identifies measures that are neither "temporary" nor compensated in the plans of France, Italy, Lithuania and Slovakia.

All these measures involve raising public expenditure to levels that would have been unthinkable prior to the covid crisis, but one must remember that European fiscal rules are suspended precisely because of the pandemic. This is expected to continue until it is necessary: "The plan to withdraw the emergency measures in 2021 depends on uncertainty. It is hoped that governments will be able to extend the support measures further to provide the necessary lifeline for the economy, in addition to the budgets already reflected in the Brussels forecasts".