Spain is finally saying goodbye to a decade’s worth of austerity.
The efforts are bearing fruit, even if we are aware of the difficulties that remain
EU Commissioner Pierre Moscovici
On Wednesday, Brussels greenlighted a report recommending Spain’s exit from the Excessive Deficit Procedure (EDP), also known as the “corrective arm” of the Stability and Growth Pact.
Spain entered this procedure in 2009, during the economic crisis, when its budget deficit shot over the ceiling imposed by the EU. Member states are expected to ratify the exit next week.
Pierre Moscovici, the EU commissioner for economic and financial affairs, has already congratulated Spain and encouraged its government to continue down the path of responsible budget management.
A decade under scrutiny
On February 18, 2009, the European Commission launched proceedings to place Spain in an Excessive Deficit Procedure, a system to closely follow the accounts of a member state whose deficit has ballooned to over 3% of GDP. At that point, five months after the fall of Lehman Brothers, Spain’s deficit had shot up to 4.4%, representing around €50 billion. The global crisis dried up the sources of funding, and the property bust deprived the state of significant revenues. The deficit was out of control, reaching up to 11% of GDP, or around €100 billion, and it stayed that way until 2013. Under the Mariano Rajoy administration, there were tax hikes, a bank bailout and major budget cuts under pressure from Brussels. The deficit fell to 7% of GDP. There were renewed efforts at reforms in 2014, but none since then. Most of the improvement has come from a rise in revenues thanks to the economic recovery.
“The efforts are bearing fruit, even if we are aware of the difficulties that remain, particularly in terms of unemployment,” he said on Wednesday.
After emerging from the EDP, Spain is being asked for a €15 billion adjustment over the next two years, although there is some room for flexibility. The European Commission has warned about “a significant risk” of deviation from the deficit and debt targets for 2019 and 2020.
Spain was the last member state to be caught up in a program that affected 24 countries at one point or another. But there is a chance that Italy could be soon slapped with an EDP in order to address a ballooning debt that is now over 132% of GDP.
The European Commission said that Spain’s deficit-to-GDP ratio, which currently stands at 2.48%, will not rise beyond the reference value of 3% over the next two years. This means the conditions are in place for Spain to transition from the corrective arm to the preventive arm of the Stability and Growth Pact.
From now on, Brussels will keep close tabs on Spain’s efforts to achieve a structural balance adjusted for the economic cycle and one-off and other temporary measures. The EU wants member states to enact meaningful reforms rather than simply trust in economic growth to balance out their accounts.
Brussels wants to see a 0.65% deficit reduction this year and the next, equivalent to around €15 billion, although there is a margin of half a percentage point.
Commission vice-president Valdis Dombrovskis said that, based on Stability Plan figures, there is no certainty that these targets will be met, and warned that Brussels will follow the moves made by the next administration in Spain, where there is an acting government following the April 28 elections.
Spain’s acting economy minister, Nadia Calviño, expressed “satisfaction” at the Commission’s decision to support Spain’s exit from the EDP, and pledged to follow recommendations to use any savings arising from lower interest rates and additional tax revenues to reduce the public debt “as quickly as possible.”
Spain’s debt-to-GDP ratio is now 97.1%, while the target figure is below 60%. Some EU sources said that Spain should reduce its debt by 0.5% this year and 1.1% in 2020.
English version by Susana Urra.