The draft budgets that Spain moved to Brussels last October is “in line with the recommendations of the European Semester, because “Support economic activity in a context of considerable uncertainty”. The assertion, in fact, would have a generalized validity because, given the special circumstances of the pandemic context, all club members would get a pass. Now, since Spain has already entered the health crisis with a high level of indebtedness, the recommendation for the country is that “When supportive budgetary measures are taken, fiscal sustainability is preserved in the medium term”. Public debt, which started at 95% before the pandemic, is expected to skyrocket above 120% this year and climb to 123.9% in 2022).
In this sense, the autumn package in the Alert Mechanism, the procedure integrated in the European Semester that aims at the early detection of macroeconomic imbalances, recommends that the European Commission prepare ‘In-depth reviews’ of 12 Member States to ‘identify and assess the severity’ of their imbalances. And this group includes the big four of the euro (Germany, France, Italy and Spain), in addition to Croatia, Cyprus, Greece, Ireland, the Netherlands, Portugal, Romania and Sweden. “The same ones that had already been identified with imbalances or excessive imbalances (the case of Cyprus, Greece and Italy) in February 2020”.
With regard to the follow-up reports that follow Spain’s exit from the excessive deficit procedure (the mechanism in which it remained until last year and for a decade after exceeding the 3% threshold), it is suggested that “The support schemes of the Spanish and European authorities have mitigated the strong economic impact of the pandemic and the credit risks”. Noting that “the challenges for the real economy and the financial sector have increased”, he points out that “Recent debt auctions have reflected the continued market confidence in Spain’s economy and sovereign debt despite the coronavirus outbreak”.
The cushion effect of the stimulus measures of the European Central Bank (ECB), mainly through its emergency debt purchase program (endowed with 1.35 billion euros), is playing a key role in this confidence. Brussels posits, in fact, that all four member states “retain their ability to service their outstanding debt and that sovereign financing conditions remain favorable amid record bond yields.”
What is emphasized is the divergences that will mark the way out of the crisis. Taking into account the previous starting point with regard to economic muscle and public debt and the impact that countries such as Spain, in which tourism accounts for 14.6% of GDP and on which nearly three million jobs depend.
In February, the European Commission already advanced that Spain was experiencing imbalances related to high external and internal debt, both in the public and private sectors, in a context of high unemployment. Beyond justified policies to address the pandemic, the report argues that the measures taken in 2020 to address imbalances are related to the job training, education and innovation. And the latest forecasts are recalled, which placed the country as the country with the greatest drop in GDP due to the impact of the pathogen. It will fall “substantially” as a result of the crisis, from 2% in 2019 to -12.4% in 2020. Real growth of 5.4% is forecast in 2021, leaving the nominal GDP level 6.1% lower than 2019.
The report issued has the peculiarity of being carried out under the general escape clause, or what is the same, the temporary suspension of the Stability and Growth Pact, which is the one that obliges States to keep their deficit (below or aligned at 3%) and public debt (based on 60% of GDP). The pandemic has forced a free bar on spending to face the health crisis. So when it comes to recommendations for the euro zone, the European Commission technicians focus on urgent short-term priorities and recommend “strong and coordinated action” to support the recovery.
It especially affects the recovery and resilience mechanism, the central pillar of ‘Next Generation EU’, the EU recovery instrument. It highlights areas in which States could work collectively to “create the right conditions for recovery and effectively contribute to accelerating ecological and digital transitions.” The recommendation focuses on five policy areas: ensuring a supportive aggregate structural and fiscal policy stance for the euro area; continue to improve convergence, resilience and sustainable and inclusive growth; address investment bottlenecks and efficient use of EU funds; maintain strong credit flows and bank balance sheets; and complete the Banking Union to strengthen the international role of the euro.