Spain pledges to ‘square the circle’ on public finances in Eurogroup debut

Spain's new minister of Economy Nadia Calviño, speaks with European Commission's director-general for Economic and Financial Affairs Marco Buti. Ms Calviño was director-general for Budget at the Commission. [Council]

Spain’s new Socialist government said on Thursday (21 June) it had “no reasons” to believe that it would miss its deficit target, despite a planned increase to pensioners’ benefits  being questioned by the EU institutions.

The eurozone’s finance ministers (Eurogroup) discussed Spain’s draft budget for 2018 on Thursday. 

The expenditure plan was drafted by the previous PP government, but Socialist Prime Minister Pedro Sanchez promised to respect it.

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Prime Minister Mariano Rajoy, plagued by corruption scandals, lost a confidence vote in the Spanish parliament on Friday (1 June) and will be replaced by opposition leader Pedro Sánchez, a socialist who vowed to call elections soon.

The European Commission concluded in late May that the budget was “broadly in compliance” with the EU’s fiscal rules as Spain was on track to exit the EU’s excessive deficit procedure.

But the Commission warned that the fourth largest eurozone economy would miss its deficit target of 2.2% of GDP by half a point, and would be close to the 3% of GDP threshold partly because of increased spending on pensions.

Ten years after the financial crisis started, Spain is the only country remaining in the excessive deficit procedure, the EU´s public finance ‘red zone’.

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Despite the warnings, the new Spanish minister of Economy, Nadia Calviño, says that the Socialist government will meet its target.

“The minister of Finance [María Jesus Montoro] is working day and night to see how the budgetary execution evolves, and I have no reasons to change that objective [of 2.2%]”, she told reporters on her way to her first Eurogroup meeting. 

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The EU’s director-general for budget, Nadia Calviño, was picked on Tuesday (5 June) for the post of the economy minister by the new Spanish prime minister, Pedro Sanchez, signalling the Socialist government’s readiness to meet the EU’s fiscal commitments in times of market instability.

Unraveling reforms

But the government’s intention to unpick some labour market reforms and to reverse pension reforms made in 2013, both of which were measures praised by the EU institutions and eurozone partners, would place Madrid on a collision course with Brussels.

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Spanish opposition parties have stepped up their challenge to Prime Minister Mariano Rajoy’s minority government, passing a motion in parliament urging him to reverse a labour reform which cheapened the cost of hiring and firing.

The Commission warned that unravelling the pension reforms would affect the sustainability of the system, pointing out that Spanish pensions are among the highest in the EU compared with the average salary.

Speaking to reporters on her way into the first Council meeting with her European colleagues on Thursday, Labour and Social Security minister, Magdalena Valerio, defended the pension increase because the 2013 reform “did not guarantee the sustainability of the system”.

She expressed hope that Spain “could square the circle” of higher pensions and meeting the EU’s fiscal targets.

Pensions will increase by 1.6% of GDP this year, which would add €1 billion to the deficit. The Socialist government also wants to reintroduce the indexation of pensioners’ benefits to the inflation rate.

Valerio argued that the issue was not higher benefits but the lack of additional revenues.

To that end, she said that the solution would be “more and better jobs, better salaries, and an intensified fight against fraud in the social security”; which costs around €2 billion to the public coffers. 

“I am sure we are going to make the system sustainable, both socially and financially”, she claimed.

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