Spain struggles against EU deficit targets

Cristina Ares is Professor of political science at the University of Santiago de Compostela

On 3rd May, the same day as the European Commission Directorate-General for Economic and Financial Affairs published the spring Economic Forecast, King Felipe VI dissolved the Spanish Parliament and called for new elections on 26th June. Three days later, acting Prime Minister Mariano Rajoy sent a letter to Commission President Jean-Claude Juncker in an attempt to save Spain from being the first member state sanctioned under the Excessive Deficit Procedure. The letter highlighted the effort taken since 2011 to reduce Spain’s deficit from 9% to 5% of GDP, and that the European growth forecast itself projects the Spanish economy to grow by 2.6% in 2016 and 2.5% in 2017, above the eurozone average.

The spring economic forecast paints a picture of Spain in which the deficit will decrease mainly thanks to improved financial conditions, cheaper oil prices and job creation. The Commission expects the unemployment rate of 20.9% in the fourth quarter of 2015 will be reduced to 18% by 2017. But attention is drawn to the ‘amount of fiscal policy measures needed to correct the budgetary slippage registered in 2015’ and ‘the uncertainty surrounding the formation of the new government’.

The Commission will allow the new elections to pass before setting the sanction for Spain’s breach of the 2015 deficit target, which was set at 4.2%, and finally stood at 5% due to tax rebates and unbalanced expenditure decisions. In addition to the electoral impact the possible penalty could have, we cannot ignore the fact that Spain is already the member state that has recorded the largest drop in popular EU support over the course of the Great Recession, from 65% to 20%, while the average fall in Europe was 57% to 31%.

The Spanish Administration that settles in after the elections, most likely to be led by Rajoy’s People’s Party (PP) with the support of Ciudadanos and perhaps the abstention of the Socialist Workers’ Party (PSOE), will face a new timetable to reduce the deficit to 3%. The first task must be approving further budget adjustments on the side of income and/or expenses. The struggle of Spain’s economic recovery is cause for especial concern for European politicians in the less-likely scenario of structural reforms introduced by a government not led by the PP, but is instead under the command of Podemos.

The PP, PSOE and Ciudadanos are in favour of fiscal consolidation. But Podemos, which reached an electoral agreement with the United Left in order to defeat the PSOE in the June elections, is hoping to lead a leftist government. This party would require the revision of the deficit targets to expand social spending. And while Podemos would also defend more nationalist positions, the PP, PSOE and Ciudadanos prefer ‘more Europe’, and will be receptive to the proposal for greater integration in the eurozone, which France intends to secure after holding the UK´s EU referendum on 23rd June.