Spain risks an extra adjustment of 5.7 billion with the new fiscal rules

EU Economy and Finance Ministers closed an agreement on economic governance reform on Wednesday. A review that sought to arrive at more realistic fiscal rules than the previous ones, which during the financial crisis proved to be little applicable. The text will now continue to be negotiated with the European Parliament and could change in form although, if executed as agreed in Ecofin, Spain would have to apply an extra adjustment of 5.7 billion euros in 2025.

The perspective is to reach an agreement on the new Stability and Growth Pact in the first quarter of the year, before the European elections. Therefore, the Community Executive could apply the new fiscal rules as early as 2025, explained the economic vice president of the European Commission, Valdis Dombrovskis. The rule maintains the thresholds of 3% deficit over GDP and 60% debt over GDP although it adds additional safeguards.

It foresees that countries must have fiscal buffers to face unforeseen economic events, which is why a deficit objective of 1.5% is set, below that maximum limit of 3% of GDP. To move towards this objective, countries will have to make an annual adjustment of 0.4% of GDP in four-year plans and 0.25%% in those that extend to seven years.

These clauses are protected within the preventive arm of the economic governance reform. It is worth remembering that, in its autumn economic forecasts, the European Commission estimated that Spain will reduce its deficit to 3.2% in 2024. However, the Government was more optimistic and predicted that it will reach that threshold of 3% of GDP on the next year. In which case, Spain would have to make an adjustment of 5.7 billion euros in 2025 to get towards that 1.5% deficit target.

The other safeguard, also within the preventive arm of the new fiscal rules, refers to the pace of debt reduction for countries with high levels. It establishes that Member States that register ratios greater than 90% of GDP must make an annual cut of at least 1%. In the case of those whose debt is below 90% but above the threshold of 60% of GDP, the minimum mandatory reduction will be 0.5%.

Taking into account that the levels of the Spanish debt will be above that 90% threshold, at 106.5% in 2024 and also in 2025, according to the forecasts of the Community Executive, Madrid would have to carry out a debt adjustment of 1% annually, of approximately 15,000 million euros.

In any case, both safeguards will be translated into net primary spending since the new fiscal measures take this indicator into account, excluding debt interest and other expenses considered cyclical. The starting point of the new fiscal rules, proposed by the European Commission, are individual adjustment plans for each country (and proposed by each country) for four years, extendable to seven years in the event that reforms and investments are carried out that would justify

These plans must guarantee that the debt is on a downward path in the medium term, at the end of the adjustment period, or remains below 60% of GDP. But it must also include guarantees for the deficit, to remain below 3% during the adjustment period.

In parallel to the preventive arm, the review of the Stability and Growth Pact has a corrective arm for those Member States that exceed the threshold of 3% of the deficit. In these cases, it will be Brussels who, after an investigation, decides whether to open an excessive deficit procedure.

In this scenario, the rules establish that Member States must carry out a structural adjustment of 0.5% per year. The reform contemplates an exception for the coming years, until 2027, in which the interest on the debt will not be counted when calculating this adjustment. Rome and Paris asked for it in the last Ecofin at the beginning of December, which was opposed by frugal ones like Austria and the Netherlands.

Finally, it was resolved that this adjustment will exclude debt interest to address the atypical context of high interest rates, since it would harm member states with higher debts. To this 0.5% adjustment will be added the debt sustainability analysis that will be carried out by the Community Executive and which, once again, will translate into a spending path for the affected country.

In an attempt to correct past errors, the reform of the fiscal rules currently on the table contemplates sanctions but in amounts substantially lower than those of the previous economic governance so that they can be carried out. It was proven that in previous years the enormous fines were never carried out, but became a reality. That is why the review includes semiannual penalties of 0.05% of GDP, which will not have a maximum per accumulation and will be applied until the Member State takes appropriate measures to comply with the regulations.