The Minister of Economy, Carlos Body, assured last Tuesday that “the ‘men in black’ will no longer come from the year 2025.” The latest surveillance “mission” of the European Commission regarding the 2012 bank rescue coincides with an absolute change in the role of our country in the ‘community club’. From being one of the PIIGS – the acronym that brought together Portugal, Italy, Ireland, Greece and Spain and which in English translates as pigs – of the financial crisis, to leading the economic growth of the EU and reducing financial imbalances by marking distance with Italy and, what is more relevant, with France.
Without counting Germany, our country is positioned as the outstanding student among the large European economies before the first examination of the new EU fiscal rules, which were activated in 2024, after being suspended since 2020 to favor multi-million dollar spending policies. public of the countries that were necessary to respond to the shock of COVID first, and the Russian invasion of Ukraine, later.
Ratio by ratio, Spain fiscally improves France, besieged by multiple political and economic uncertainties. Our country has a budget deficit (the imbalance between income and expenses of the entire State) controlled and decreasing. An indebtedness that is also lower —“more than 20 percentage points below the maximum reached in the first quarter of 2021,” as Carlos Body himself recalled this Tuesday—. And, as predicted by S&P Global – one of the most important debt rating agencies worldwide – the financial burden (the interest we pay each year) will remain stable and will remain below that of the neighboring country, as observed in the first graph.
The Minister of Economy said goodbye to the ‘men in black’ just the same day that the Public Treasury presented its 2025 financing strategy, in which it confirmed that Spain will comply with the commitment to reduce the budget deficit to 2.5% of the GDP (Gross Domestic Product) this year, from the 3% at which 2024 would have closed — in this case, S&P Global’s expectations are somewhat more pessimistic than those of the Government, as can be seen in the second graph. The new fiscal rules no longer focus on this ratio, but rather on a limit to the growth of public spending, although the final objective remains to reduce the deficit and debt.
“The financing strategy [de España] It will take place in an international situation that continues to be complex and in a context of ‘quantitative tightening’ by the European Central Bank (ECB), which is gradually reducing its debt holdings of the eurozone countries. In this situation, the positive evolution of the Spanish economy is especially relevant, which, together with the Government’s commitment to fiscal consolidation and the prudent management carried out by the Treasury in recent years, are allowing it to maintain a solid and diversified investor base. and financing costs contained,” details the Ministry of Economy.
In other words, solid economic growth and the creation of jobs – in short, the advance of GDP – are allowing the improvement of the main ratios that serve to measure the sustainability of public accounts. Indicators that, in addition, the rating agencies and international investors focus on, whose appetite for Spain’s debt is key to reducing its cost – the interest rates at which we finance ourselves and which translate into the final bill that is paid.
The role of the ECB in the worst moments of the pandemic was crucial to guarantee that this interest burden did not skyrocket in any eurozone country. In 2020, the monetary institution decided to intensify state debt purchases to avoid a crisis like the one that followed the bursting of the real estate bubble in 2008. Since 2022, the ECB has taken the opposite path as part of the strategy to fight against the inflation, along with increases in official interest rates, the reference at which banks lend money and which is automatically transferred to the Euribor (the mortgage index) and the rest of the loans.
In this new context, of monetary austerity – which has especially harmed us, as explained in this information – and return of fiscal rules, Spain’s new fiscal role is evident. “The Public Treasury closed the 2024 financing program with solid access to the market and high investor confidence, which translated into the containment of financing costs and the reduction of the risk premium.” [el diferencial entre el interés de referencia que se exige a la deuda de España respecto al de Alemania, considerado el mejor pagador de la eurozona]which was reduced by more than 30 basis points compared to 2023, around 65 basis points at the end of the year, its lowest level in the last three years,” states the Ministry of Economy.
In this situation, the cost of the total debt as a whole stands at 2.21% – that is, the average interest rate in Spain -, only 12 basis points above the end of 2023. Meanwhile, the average cost of the debt in issue – the interest on new bonds and bills that are placed to finance the needs of the State – also continued to reduce in 2024 to 3.16%, 28 basis points below the 3.44% of 2023 and 80 below the peak (3.96%) reached in October 2023, a reduction in line with the accumulated lowering of ECB rates.
These costs determine the bill or interest burden of the debt, which amounts to around 40,000 million, which remains stable at 2.5 points with respect to GDP thanks to economic growth. A crucial factor so that the State’s expenditure items for the most important public services, such as health or education, or pensions, are not harmed, and which leaves room to address other priorities such as housing or the reduction of inequalities. .
The threat of fiscal rules to growth
At this point, this same Friday, the economist Paul De Grauwe published an article in which he warns precisely of the damage of fiscal rules and limits on public spending to economic growth and job creation, in a situation of weakness in the EU, especially in Germany and with the positive exception of Spain. “The consequences are clear: austerity policies have long-term consequences for the economy. By reducing investment, they limit potential production and reduce productivity growth,” he laments.
“Much of Europe’s fiscal strategy has been dominated by the belief (or ideology) that growth can only be achieved through structural reforms aimed at making the economy’s supply side more flexible and efficient. However, there is little evidence to support the idea that such policies significantly improve long-term growth. At the same time, the crucial role of demand-side policies in fostering sustained growth has been largely overlooked,” explains this expert.
“In conclusion, Europe’s relative economic decline is, in part, a direct result of austerity policies. Reorienting fiscal strategies towards more active demand-side measures that prioritize public and private investment could play a key role in reversing this decline and revitalizing Europe’s growth potential. The new European Commission must face this challenge head-on, as there is a lot at stake economically and politically,” concludes Paul De Grauwe.
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