Back to reality

From a pragmatic viewpoint, few steps taken by the European Union have been as important for the Spanish economy as Brussels’ decision to allow a deficit objective of between six and 6.5 percent for 2013, and the granting of two more years (until 2016) to achieve the final deficit-reduction objective of three percent. This is exactly what is about to happen. If these new conditions take shape, their consequences for the Spanish economy will undoubtedly be beneficial: a greater margin to use spending policies for growth strategies; less internal pressure on the regional governments; and a less-strained perception on the part of investors and markets — who, reasonably enough, considered that certain cuts being imposed on Spain were going to be hard to achieve.

The example of Spain has been decisive in terms of this rectification — or modulation — of extreme austerity measures, which, however they are viewed, have failed. The spending cuts implemented by the Spanish government have turned out to be a massive disappointment. They have not managed to bring the deficit within the desired target area (Eurostat on Monday indicated a deficit of 6.98 percent of GDP, or 10.6 percent if the bailout of the banks is taken into account). Nor have they succeeded in stabilizing public debt, or generating even a glimmer of economic recovery. Indeed, Spain’s economy minister, Luis de Guindos, has already announced that the contraction of GDP in 2013 will be 1.5 percent, instead of the moderate 0.5 percent initially forecast.

Austerity policies aggravate recessions in countries whose finances are short on credibility

The government’s rectification is far from complete. It is hard to believe that the economy will see “slight growth” in 2014, in Guindos’s words. The minister would do well to explain just what factors this forecast is based on. The end of the crisis may take the form of a sharp upturn; but, in view of the total lack of lending, it may also be that the economy remains stagnant throughout next year.

As was pointed out at the time, and as the International Monetary Fund has reiterated in recent reports, austerity policies — however imperative their application may be in the very short term — do aggravate recessions in countries whose finances are short on credibility, and exacerbate public discontent. For the EU, this two-year concession is a calculated move that, if sustained politically during some time, may amount to a radical rectification of economic policy that will benefit other countries, such as France and Portugal. If duly accompanied by the European Central Bank, the euro zone will cease to be an island of restrictive policy between economic areas that in one way or another have opted for expansion.

A new scenario may also have its dangers. The first and most important of these is that, by forgetting policies of radical austerity, those of moderate austerity may also be forgotten. Precisely because they will be more attainable, deficit reduction objectives must be complied with scrupulously. The margins for stimulus policies must be used sensibly, without fomenting new sectorial or regional bubbles.