Spain Faces Stringent EU Fiscal Reforms

The European Union is on the verge of implementing new fiscal rules, demanding more stringent adjustments from Spain, Italy, and France due to their elevated levels of deficit and public debt.

According to a report from El Español, the new EU rules are set to be approved ‘in the coming days,’ these rules will retain the existing thresholds of three per cent for the deficit and 60 per cent for the debt. Spain, with a deficit of 4.1 per cent and a public debt ratio of 107.5 per cent, is particularly impacted.

The year 2024 will mark a significant shift from the era of free public spending, with Brussels initiating a sanctioning file against Spain for excessive deficit next spring.

Increased Financial Discipline

For countries exceeding the deficit limit, an annual structural adjustment equivalent to 0.5 per cent of GDP is required, translating to €6.6 billion for Spain.

Efforts by Nadia Calviño, president of Ecofin, to relax these measures were vetoed by Germany and other economising nations.

Despite attempts by French Finance Minister, Bruno Le Maire, to introduce a flexibility margin, Germany’s firm stance has remained unaltered.

Transitional Period And Debt Reduction

A three-year transitional period (2025-2027) has been agreed upon, allowing some leniency in adjustments, considering the varying impacts of interest rate rises.

Additionally, countries with a debt ratio exceeding 90 per cent, like Spain, are required to decrease their debt by one point of GDP annually. Even upon reducing the deficit to three per cent, Spain must maintain a fiscal policy with a safety margin of 1.5 points below three per cent.

Investment And Reforms

The new rules also focus on investment safeguards. Investments committed in the Next Generation recovery plans will extend the adjustment period to seven years.

Investments funded by Next Gen loans and co-financing of structural funds can delay part of the adjustment, creating room for further investments. Defence investments are also recognized as significant in the current geopolitical climate.

Calviño summarises the situation, saying, ‘I don’t think the rules are stricter or looser. They are better… What we want is a more realistic set of rules, which adjust to the different profiles of different countries.’

Spain must now incorporate these changes into its medium-term adjustment plan for submission to Brussels by April next year, aligning with the EU’s fiscal expectations.