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27/08/2016

Brussels piles pressure on Spain and Italy to balance their budgets

Euro & Finance

Brussels piles pressure on Spain and Italy to balance their budgets

Pierre Moscovici

[Consilium]

The European Commission will send a series of warnings to Spain, Italy, Finland, Romania, Croatia and Belgium today (8 March) because of their “serious” deviations from agreed-on fiscal paths, EurActiv.com has learned.

The most serious warning will be addressed to Spain, with the Commission warning the country is in “serious risk of non compliance” with its target to cut public deficits below the mandatory 3% of GDP by the end of this year.

The College of Commissioners will approve the sending of an autonomous recommendation, to urge the Spanish authorities to reach a previously agreed on deficit of 2.8% of GDP, which would represent at least €8 billion in fresh cuts, or new taxes.

EU sources explained that the letter does not include new demands from Madrid. It does not step up the infringement procedure against Spain, either.

Instead, the “autonomous” recommendation represents an “alert” against deviations from the fiscal path agreed on with the European Commission, and Council.

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The move will pour cold water on Spanish efforts to gain one additional year to cut the  country’s deficit below the 3% threshold.

The Socialist Party (PSOE), the liberal Ciudadanos party, and other left-wing parties, including Podemos and the United Left, are calling for more breathing space to balance the country’s public accounts.

Meanwhile, the acting Minister of Economy from the center-right Partido Popular, Luis de Guindos, said on Monday (7 March) that Spain “could perfectly achieve” its deficit target for this year if the outstanding growth rate of at least 3% of GDP is maintained.

But Spain faces numerous obstacles ahead. The country is still affected by various macroeconomic imbalances, including a high level of public and private debt and the second highest level of unemployment in Europe.

On top of this, Spain’s party leaders are incapable of forging a coalition. The elections held on 20 December left a highly fragmented parliament, a situation never seen since the country returned to democracy four decades ago.

Revolt against fiscal rules

The move on Spain will not be the Commission’s only attempt to try and quell a fresh revolt against EU fiscal rules, seen over the last months.

The executive is also expected to submit a letter today to the Italian government warning of its deviation from the trajectory agreed with the EU to bring down its stratospheric public debt, currently sitting at around 132% of GDP.

Italian Prime Minister Matteo Renzi, has been a vocal critic of what he branded the “stupidity pact”, in reference to the EU’s Stability and Growth Pact, while calling for more flexibility to reduce Italy’s public debt.

Guindos: Growth is more important than few decimal points of deficit

“Given the global situation, the most important thing is economic growth”, Spain’s Economic Affairs minister, Luis de Guindos, said after the Ecofin council on Friday (12 February).

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More warnings

The executive is also expected to send similar letters to Finland, Belgium, Croatia and Romania, as the Commission is also concerned about their “serious” deviation from agreed-on fiscal adjustment paths.

Meanwhile, Portugal, also in the group of laggards, will not receive any notification because the European Commission recently adopted a decision on the country’s national budget. Pierre Moscovici, the Commissioner for Economic Affairs, is expected to discuss a new round of measures with the Portuguese authorities when he visits Lisbon on Thursday (10 March).

With this series of warnings, EU authorities are trying to quash a revolt from an important group of member states against the fiscal rules.

Varoufakis urges next Spanish leader to defy Brussels

Greece’s far-left former finance minister Yanis Varoufakis called yesterday (21 February) on the next leader of Spain to defy the European Union, speaking to hundreds of cheering onlookers during an anti-austerity gathering in Madrid.

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A senior EU official recently told EurActiv that the executive would not hesitate to act forcefully this year to ensure the credibility of the Stability and Growth Pact.

But with numerous challenges piling up on the EU’s horizon ― in particular the refugee crisis and the Brexit referendum in the UK ― some inside the Commission are reluctant to open a new battlefront with the member states.

The executive expects that national governments will take these warnings into account when they submit their national reform programmes in April.

The European Commission will issue its country-specific recommendations in May, based on these national programmes and its own country reports published on 26 February.

[Update: European Commission Vice-President for the euro, Valdis Dombrovskis, said on 8 March that the letters on the member states’ fiscal position would be sent to the capitals the following day.]

Background

As part of the strengthened macroeconomic governance rules, the EU introduced a system of graduated monitoring by the Council and the Commission to secure an early detection and “a timely and durable correction” for member states that are not complying with agreed fiscal rules.

This includes the possibility for the Commission to provide autonomous recommendations to member states with excessive deficits, and the well-known analysis of eurozone member states' draft budgetary plans each autumn.

The College of Commissioners will adopt  the European semester package on Tuesday (8 March), grouping EU member states according to their macroeconomic imbalances.

Timeline

  • 8 March: college of commissioners adopt European Semester package.
  • April: member states submit national reform programmes.
  • May: Commission issues country specific recommendations.

Further Reading