Spain promises Brussels it will make more cuts if deficit balloons

Spanish Economy Minister Luis de Guindos (l) with French counterpart Michel Sapin

After missing its deficit targets for five straight years, Spain on Thursday made a commitment in Brussels to make additional adjustments “if necessary.” Speaking at a meeting of Eurogroup finance ministers, who, among other things, discussed Spain’s updated draft budgetary plans for 2017, Spanish Economy Minister Luis de Guindos pledged that if the economy grows at a rate below Madrid’s forecasts, new budget adjustments will be made.

While the Eurogroup on Thursday concluded that “the budget of Spain is broadly compliant with the requirements of the Stability and Growth Pact (SGP),” it also left the door open to future austerity measures.

Asked whether Spain would have to take new measures, Eurogroup chief Jeroen Dijsselbloem replied with an assertive “Not for the moment, no.”

But there was a footnote. “It is always positive for a minister to promise that his government will take more measures if things go wrong,” he said, alluding to De Guindos’ pledge.

Spain has already tweaked its fiscal policy by approving tax hikes, but even this will probably not be enough to bring the deficit down to the target of 3.1%, according to a recent European Commission report. Instead, it will presumably be closer to 3.3%, representing excess expenditure of around €2 billion.

Spain believes that the tax hikes slapped on companies, alcohol, tobacco and sugary drinks, as well as rises in a range of green taxes – together with strong economic growth – will be enough to keep the deficit at 3.1% of GDP. But Brussels is forecasting 3.3% instead.

If the European Commission is right and Spain is forced to make two billion euros’ worth of new cuts, these would probably take the form of either spending cuts or new hikes to its hydrocarbon tax.

That’s supposing that the Spanish executive, which is in a minority government, is able to secure enough parliamentary support to push the budget through in the coming weeks.

Eurogroup President Jeroen Dijsselbloem said Spain needs to take no further measures for the moment.

But De Guindos struck a confident tone at the meeting.

“It is positive that the Eurogroup is validating the Commission’s favorable opinion regarding the budget plan,” he said. “Spain is a little more optimistic than the Commission about growth, and it is possible that the economic inertia will make Brussels raise its forecast.”

Brussels is forecasting GDP growth of 2.3% in 2017 – in line with IMF predictions – while Madrid predicts that growth will be 2.5%.

“The Spanish economy has stopped being a source of instability for Europe,” he added, alluding to strong GDP growth and falling unemployment rates in the last few quarters.

De Guindos has a point. At this juncture, Brussels is concerned about other things, including “political instability” within its borders, Brexit and the new US president, Donald Trump, said Dijsselbloem. And Greece is beginning to shape up as a renewed threat to the euro.

Published Tumbit 27 January 2017

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