Brussels reminds Spain to make €5.5 billion cuts “as soon as possible”

Following the prospect of a second term in office for acting Prime Minister Mariano Rajoy, Brussels has called for the incoming government to approve a new budget “as soon as possible.”

This budget should include cuts of some €5.5 billion, equivalent to 0.5% of GDP.

Brussels’ missive comes as no surprise to the government of acting Prime Minister Mariano Rajoy

The European Commission has told Spain, along with seven other EU members, that its 2017 budget doesn’t meet the country’s commitments.

In a letter sent on Tuesday, Brussels warned that next year’s deficit goals were not “assured,” adding: “There are risks to the necessary and tough correction of the excessive deficit between now and 2018,” by which time another €5.5 billion will need to be cut.

EU member states sent their budget proposals to the Commission on October 15. This body has responded by once again including Spain among those it says are at risk of not meeting their objectives.

The letter sent on Tuesday accepts that “an interim government doesn’t have full budgetary powers,” but nevertheless urges Spain to come up with a new budget “as soon as possible,” which means before the end of the year.

Brussels’ missive comes as no surprise to the government of acting Prime Minister Mariano Rajoy, who will almost certainly resume a second term in office this weekend.

Spain was forced to roll over its 2016 budget plan instead of presenting a new one for 2017, putting it on course to overshoot a deficit target set by Brussels for next year.

It is expected to come in at 3.6% of national output, missing the 3.1% deficit goal.

The gap implies that savings worth 0.5% of GDP will be needed to get the deficit back on track, requiring an agreement between the new government and the opposition on cuts or reforms to improve waning tax and social security revenues.

Last year, Brussels warned Spain of the “serious risk” that it wouldn’t meet its commitments, prompting a defiant response from Spain’s Finance Minister, Cristóbal Montero, who said: “Spain’s economy is growing fastest and of course it will meet its commitments.”

In a letter sent on Tuesday, Brussels warned that next year’s deficit goals were not “assured”

Economy Minister Luis de Guindos added: “We always end up meeting our commitments.” De Guindos has since had to apologize: he promised that the deficit for 2016 would be “below 3%,” a figure he now puts at around 4.6%, and which may rise. Successive failures to meet its deficit targets nearly saw Spain fined.

The gradual shift towards less strict monetary policy began in 2015, although in public Brussels insists that rules are rules, even if nobody plays by them.

The eurozone may not be in the midst of an increase in government spending, but neither is it in the grip of austerity either. Germany has approved tax reductions. Brussels looks the other way when France takes unilateral measures. Nobody is going to tell Italy what to do, and Spain is finally emerging from years of austerity: when Rajoy took his foot off the brake in the run up to the June elections, there were no consequences.

But the Commission’s letter is nevertheless a warning, and particularly to Spain, which after Greece, still has the highest unemployment and the largest deficit in the EU.

English version by Nick Lyne.