The EU forces Spain to reduce its debt by 1% annually

2023-12-21 03:55:02

The Ministers of Economy and Finance of the Twenty-seven have reached an agreement to reform European fiscal rules after calling an emergency meeting by videoconference just before the Christmas break. After two hours of meeting, the long-awaited white smoke arrived. The final text attempts to establish a delicate balance between minimum requirements for fiscal discipline, as Germany and the Northern hawks wanted, and some room for maneuver to set the reduction of debt and deficit, as France and the southern countries requested.

Time was of the essence, since the fiscal rules included in the Stability Pact will come into force again in 2024, after years in the freezer, to address the economic havoc after the pandemic.

The first vice president, Nadia Calviño, explained after the agreement that the last text proposed by Spain had the “unanimous” approval of the community partners and that the final agreement “guarantees the sustained and gradual reduction of the deficit and debt ratios.” while incorporating a “countercyclical” component that “protects” public investments in green transition, digitalization, social policy or security and defense. Until now, European countries have been able to inject public money without restrictions to address the economic ravages, but the bull has come to an end. Despite the changes, the limits on debt and deficit will remain unchanged: 60% and 3%.

Although the agreement seemed on track last week – after the Spanish presidency put on the table a document that included many of the demands of the hawks led by Germany –, at the last moment France showed its disagreements with this approach, in some demands which were also shared by other southern countries, such as Italy. Paris claimed that countries with excessive deficits greater than 3% should be able to reduce their annual structural deficit – not linked to the economic situation – by a lower percentage if they carry out reforms that boost the economy in areas such as the double energy and digital transition. in the interest of not strangling growth.

This reform of fiscal rules was initially intended to adapt the debt reduction paths to the particular circumstances of each country after the tap of public money in recent years, but Germany struggled for this to be accompanied by “measurable objectives.” Furthermore, countries with a deficit of less than 3% of GDP – the limit set by the Pact – will also have to reduce their deficit preventively to be able to face possible crises and establish a cushion in times of prosperity.

Finally, countries like Spain that have more than 90% public debt have to reduce it by 1% a year – which would be equivalent to an adjustment of 15.6 billion in 2024 alone for our country – while those that have a debt between 60 % and 90% must do so at 0.5% annually. Regarding the deficit, those that exceed the 3% threshold must also make an adjustment of at least 0.5% annually. As for those that have not reached this figure, the structural deficit – not linked to the economic situation – must be 1.5% with a primary adjustment speed – not counting interest rates – of 0.4%. each year which may be reduced to 0.25% if the adjustment period is extended to seven years.

Initially, European countries must send four-year plans to Brussels that can be extended to seven if they commit to more investments in the double green and digital transition. Those countries with a low deficit but a high debt will have to reach 1.5% of the deficit while those with a debt of less than 90% will be able to reduce their cushion to 2%.

Paris and Rome believed that the original text of the Spanish presidency did not protect investments at a time of sharp increase in interest rates due to the ECB’s policy. To address this concern, a transitional mechanism has been put in place so that countries with a deficit greater than 3% can reduce the adjustment figure taking into account the increase in interest rates during the period 2025-27 according to the criteria of the European Commission.

This final agreement must now be negotiated with the European Parliament and the European Commission. The new tax rules will come into force during 2024 with repercussions on the 2025 budgets.