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25/09/2016

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

Euro & Finance

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

The Spanish minister Guindos questioned the concept of structural effort requested to Spain as it is a “debatable concept”.

[CONSILIUM]

“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).

Sustaining growth in the medium to long term is more important that “one, two or three decimal points” of deficit, he added.

The Commission has clashed with both Spain and Italy over their fiscal targets, as Rome and Madrid warned against the recessionary impact of Brussels’ tight fiscal discipline.

Europe is now facing a gloomy scenario, with growing risks, turbulences emerging from the markets and doubts about the banking system.

Against this backdrop, Italy and Spain are on a crusade to ease the fiscal path agreed with the EU, as the third and the fourth largest eurozone economies consider that additional cuts on their public expenditure could hamper their output.

>>Read: Member states limit new flexibility clauses in EU fiscal pact

Guindos, seen as a member of the austerity-driven camp led by Germany, admitted that he considered himself as “quite orthodox” when it comes to economic policy. But he warned that “[economic] adjustments affect growth in the short term”. Any effort of around 0,6% of GDP could damage economic growth up to 1% of GDP.

Spain is requested to cut its deficit from 4.5% GDP in 2015 to 2.8% of GDP this year. This would represent an adjustment of around €17 billion, and additional €8 billion compared to what Spain has included in his draft budget for 2016.

The ‘Titanic’

Meanwhile, the Italian Prime Minister, Matteo Renzi, has criticized the EU fiscal rules – and the Commission- for not granting more fiscal leeway to the Italian economy.

The former mayor of Florence referred to the stability and growth pact as the “stupidity pact”, and said that “the EU is like the orchestra playing on the Titanic,” as the EU apparently fails to come up with pragmatic solutions for the numerous crises affecting the continent.

While Italy and Spain are in the same boat to get extra time to balance their public accounts, Madrid may find it more difficult.

Italy is in the preventive arm of the stability and growth pact, where the Commission may be more flexible to consider different factors such as structural reforms, investment or the macroeconomic cycle to grant additional time to achieve sustainable debt levels.

Meanwhile, Spain is in the corrective arm of the pact and struggling to forge a government after the elections held on 20 December.

The three leading parties in the country (PP, PSOE and Ciudadanos) have joint forces to gain additional time from Brussels. But Commission officials stressed that the country would get some margin only if the country has adopted sufficient structural efforts, as the country would not meet its headline deficit target either in 2015 or 2016.

According to the Commission’s estimates, the country is far from the requested fiscal effort for 2015. Therefore, it would be difficult for the country to get more time to cut the deficit below the 3% of GDP without stepping up the infringement procedure.

No flexibility for Spain

The Commission’s recent interpretation of the stability and growth pact said that structural reforms with a credible timeline for adoption could be considered as a factor to determine “the length of any extension” to cut the deficit for countries in the corrective arm. But only sufficient structural effort would trigger the extension.

Guindos questioned the concept of structural effort itself as it is a “debatable concept”. “The central element to meet the targets is to maintain the economic growth”, he insisted. Despite the worsened economic situation, he said that it is “feasible” to growth at 3.5% of GDP this year.

Firm hand

The arguments of Italy and Spain fell on deaf ears among the institutions.

“In phase of market volatility, what it is very important is to ensure financial stability and sound position of public finances,” Commission vice-president for the euro, Valdis Dombrovskis said on 12 February. He added that the Commission is not preparing any “major change” to Italy’s medium term objective.

In a similar tone, the Eurogroup president, Jeroen Dijsselbloem, said after the Eurogroup meeting on 11 February that “when markets are volatile you need to have a firm hand. And the firm hand is: ‘Let’s stick to what we have agreed and try to fulfil our obligations’,” he said referring to the Spanish case.

The Commission will assess the Italian and Spanish case again in May, in the context of the review of the member states’ fiscal and reform programmes.

The verdict on the Portuguese budget for 2016, accepted by the executive after an intense discussion in the college, predicts that bigger clouds are looming ahead just when the refugee crisis and the referendum in the United Kingdom are putting the integrity of the European project at stake.

>>Read: Portuguese budget gets green light – after last-minute adjustments

Background

The interpretative communication on the Stability and Growth Pact, adopted by the College of Commissioners on 13 January,  was a promise made to the Socialist group by European Commission President Jean-Claude Juncker in exchange for their support during his nomination.

Experts consider that the new interpretation brought “real progress” in reviewing the EU’s existing fiscal rules, in particular in the case of allowing a temporary deviation for member states under the excessive deficit procedure (EDP), when reforms are planned but are yet to be legally endorsed.

The European Commission’s communication confirmed that the implementation of structural reforms will be considered a relevant factor under the EDP to ease the adjustment path. In the absence of a sound methodological framework to estimate the budgetary effects of structural reforms, the EU executive assesses eligibility for the structural reform clause on the basis of a dedicated reform plan – submitted by the Member State in spring in the context of the annual update of the Stability and Convergence Programmes. The programme needs to include detailed and verifiable information, as well as a credible timeline for adoption and delivery of the envisaged reforms.

The European Council's legal service issued an opinion in early April in which it questioned this point of the Commission's communication. The legal opinion pointed out that, in order to consider structural reforms as a “relevant factor” in easing the fiscal targets, they must be adopted by the national authorities “through provisions of binding force, whether legislative or not”. Therefore, a simple announcement of upcoming reforms, no matter how credible and detailed they are, is not enough.

The executive has insisted since then that its communication is legally sound and that it acts within its scope of interpretation.