Brussels asks Spain not to spend €22 billion it could save from low interest rates

The European Central Bank’s stimulus policy will create significant savings from lower borrowing costs, but the EU wants Madrid to use that money to reduce its debt

Nadia Calviño, the acting economy minister, with EC vice-president Valdis Dombrovskis.
Nadia Calviño, the acting economy minister, with EC vice-president Valdis Dombrovskis.JULIEN WARNAND / EFE

Thanks to the policies of the European Central Bank (ECB), Spain could save up to €22.3 billion over the next four years if interest rates remain stable.

Such savings would create a significant buffer for the next government, which will have to deal with persistently high debt levels. Madrid will also have to send Brussels a new budget plan with corrective measures that are not included in the latest draft it gave to EU authorities.

In fact, Brussels is already telling Madrid to use those savings exclusively to reduce the debt-to-GDP ratio, which is close to 100% and has barely come down in the last five years.

Spain still has no budget, and it must send one in as soon as possible detailing how any additional spending is going to be financed

Carlos Martínez Mongay, ex-deputy director general at the EU Commission

With the economy now showing signs of a slowdown, it is unlikely that the state will be collecting extra tax revenue, so any additional income is expected to come from the historically low interest rates, as it has never been this easy for Spain to borrow money.

Following the ECB’s round of stimulus for the eurozone, Spain has even issued five-year bonds at negative rates of -0.084%, in sharp contrast with the year 2012, when soaring borrowing costs at the height of the crisis fueled fears of a full-blown bailout. Its 10-year bond is now going for a rate of 0.54%.

Brussels had already made its debt reduction recommendation last year, extending it to Spain and other countries. But last week, at the annual assessment of national budgets known as the Autumn Fiscal Package, European Commission Vice President Valdis Dombrovskis made a point of underscoring it.

“Belgium, Spain and France have very high debt-to-GDP ratios, of almost 100%. Italy’s exceeds 136% of GDP. And these countries are not expected to meet the debt rule,” he said. “These four countries have not sufficiently used favorable economic times to put their public finances in order. In 2020, they plan either no meaningful fiscal adjustment or even a fiscal expansion.”

The Independent Authority for Spanish Fiscal Responsibility (AIReF), an oversight agency created in 2013, believes that if rates remain at current levels, savings could reach €22.3 billion in four years: around €2.3 billion in 2020, €4.5 billion in 2021, €6.8 billion in 2022 and €8.7 billion in 2023.

Five wasted years

Little has been done to reduce the debt in the last five years despite the rate cuts and the robust economic growth. AIReF notes that if the debt level had remained the same, sustained GDP growth would have made the ratio drop by 18 points. But deficit has been generated every year, and the only reason why the ratio did not rise is because of the interest rate cuts.

It has never been this easy for Spain to borrow money

It has been five years since Spain took any effective debt-reduction measures, save for 2016 when it was facing a fine from Brussels. In 2018, the EU was flexible with Spain because it was finally emerging from the Excessive Deficit Procedure, a program to monitor the accounts of member states that exceed the EU’s budgetary deficit ceiling.

In 2018, Madrid should have taken steps to make a structural adjustment of 0.65% of GDP, representing around €8 billion. Similar action should have been taken this year. But given the political situation in Spain, which has been under a caretaker administration since April and has yet to form a government following the repeat election of November 10, little has been done.

“The Commission notes that Spain still has no budget, and that it must send one in as soon as possible detailing how any additional spending is going to be financed,” said Carlos Martínez Mongay, a former deputy director general at the EC.

Spain will have to do something to compensate the additional spending on pensions and civil servant salaries, representing around 0.5% of GDP. Madrid was expecting to collect around €5 billion by raising diesel, wealth and corporate taxes, as well as through the so-called “Google tax” that targets tax avoidance by multinationals. But even this will not be enough. AIReF is proposing eliminating the bonuses that companies receive for new hirings.

English version by Susana Urra.

More information