Brussels urges Spain to form “stable government” to deal with high debt

The European Commission on Wednesday urged Spain to “form a stable government” that is able to come up with a budget plan that complies with EU rules.

Following months of political stalemate, the country remains under a caretaker administration and could be facing a new repeat election if no governing majority emerges soon. Spaniards went to the polls on November 10, giving an inconclusive victory to the incumbent Socialist Party (PSOE).

These four countries have not sufficiently used favorable economic times to put their public finances in order

EC Vice-President Valdis Dombrovskis

The Commission is warning Spain about the “risk of significant non-compliance with the Stability and Growth Pact” after Madrid sent in a draft budgetary plan for 2020 that is not updated with additional measures.

Pierre Moscovici, the EU commissioner for economic and financial affairs, called on Spain to pass a budget and introduce the kind of reforms required to address long-standing issues such as the structural deficit and high debt levels.

His statements were part of an annual assessment of national budgets in the euro zone known as the Autumn Fiscal Package. Moscovici noted that “Spain, Portugal and Belgium presented budgetary plans based on unchanged policies; their new governments must present updated budget projects as soon as possible.” Other countries at risk of non-compliance are France, Italy, Slovenia, Slovakia and Finland.

Commission Vice President Valdis Dombrovskis was particularly harsh in his assessment of Belgium, France, Spain and Italy, all of whom have high debt levels but few plans to bring them down.

“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,” said Dombrovskis.

“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,” he added, explaining that this is a matter for concern because very high debt levels limit the capacity to respond to economic shocks and market pressures.

The Commission believes that increased public spending is the main barrier to debt reduction

The EU has also asked Spain to reduce its structural deficit – the one that does not depend on cyclical economic changes – and to use any unexpected earnings from increased tax collection or interest rate savings to reduce the pile of debt.

The Commission believes that increased public spending is the main barrier to debt reduction, but its economic chiefs would not comment on the possibility of an expansive budget in Spain if the preliminary deal between the Socialists and the anti-austerity Unidas Podemos for a governing coalition becomes a reality. But they insisted that Madrid’s draft budget plan must comply with the rules.

Brussels believes that Spain’s structural balance will deteriorate, and wants its budget to include €9.6 billion in adjustments to cover this gap. “Belgium and Spain, which submitted budgetary plans based on a no-policy-change scenario, have been invited to submit updated plans in compliance with the SGP,” said Dombrovskis.

These views are aligned with those of the International Monetary Fund (IMF), which said in a November 2018 report that growth in Spain has been driven mostly by “strong private consumption and investment demand,” while the country has failed to introduce structural reforms to offset any future downturn.

English version by Susana Urra.