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European fiscal authorities issue warning over Catalonia crisis, Brexit

New report says political uncertainty in the region could hurt financial growth in the eurozone

The president of AIReF, Jose Luis Escriva, speaks before Congress.
The president of AIReF, Jose Luis Escriva, speaks before Congress.

Independent fiscal authorities in Europe have warned that the eurozone is still at risk of slipping into another crisis, with the situation in Catalonia and the United Kingdom’s exit from the European Union considered the two greatest threats.

Just as the eurozone appears to finally be on the brink of recovering from the 2008 financial crisis, European authorities are warning the economy is at risk of overheating – a situation that occurs when production cannot keep up with demand.

Based on a report from euro-member countries, there is a widespread shortage of skilled labor, even though unemployment stands at 8% (topping 15% in Spain and Greece). In some countries, salaries have won back their purchasing power but in other countries pay has not increased despite growing Gross Domestic Product (GDP) and falling unemployment in various economies in the center and east of Europe.

Spain may not be able to meet its 2018 fiscal goals because of  political uncertainty in Catalonia and budget difficulties

Fiscal policies have done little to help, the independent authorities argue, particularly in countries such as Lithuania, Bulgaria, Estonia and Romania. The authorities criticize “pro-cycle” policies that applied cuts during the crisis (which deepened the recession) and are now approving budget-stimulus packages instead of saving and building a financial cushion to buffer them from the next crisis as inappropriate.

The two biggest internal risks to the eurozone are political: Brexit – the exit of the United Kingdom from the European Union, which may be particularly hard for Ireland – and the independence movement in Catalonia, say the European authorities.

According to the Independent Authority for Spanish Fiscal Responsibility (AIReF), Spain may not be able to meet its fiscal goals for 2018 because of the political uncertainty in Catalonia and its current budget difficulties. Madrid is still struggling to get its 2018 budget plan approved. The government has set a deadline of March 31. Anything later than that means that the budget would only be in effect for four or five months, with the summer recess in between.

Fiscal non-compliance

Spain is not expected to meet its fiscal obligations until 2035. Public debt, which stands at an alarming 100% of GDP, will not drop to the 60% mark for another 17 years – 15 years later than the plan agreed to. The country “lacks a solid medium- and long-term financial plan,” according to AIReF. “It is one of the biggest drawbacks of the Spanish financial system.”

Unemployment stands at 8% even though there is a shortage of skilled labor

But Spain is not the only country with financial difficulties. The report identifies problems in Italy for “repeatedly delaying the adoption of increased taxes” in an economy loaded with debt that is headed for a general election in March. “The fiscal plans [of the Italian government] are excessively confused,” according to the report by independent European fiscal authorities. The elevated level of debt is also a source of concern for Portugal and Cyprus. Greece, which is in the middle of revising its third bailout, also continues to be a potential risk.

English version by Melissa Kitson.

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