“It is a great agreement: we achieved 140,000 million for Spain, 72,700 in transfers,” announced President Pedro Sánchez after the July summit in Brussels, in which a bazooka of 750,000 million was agreed to remove the European economy from the coma induced by the covid. The Spanish Government trusts in the European manna to approve an ultra-expansive Budget that clarifies the gloomy panorama and lengthens the horizon of the legislature. But ultimately it is very likely that Spain will never reach the figure of 140,000 million. The Executive renounces almost half of that figure for now, sources from La Moncloa and Economy confirm: it demands direct non-refundable aid, but will not ask – at least in the short term – the almost 70,000 million in loans.
Biblical translation: Spain already wants, for 2021-2023, the transfers that do not have to be repaid, but declines now to request the credits – which ultimately entail more debt – associated with European funds. “The European Commission allows to request the loans until July 2023. What do we gain by requesting them now? We will do it, if we need it, for the period 2024-2026 ”, admit government sources. Spain is not the only country that tempts the clothes: Portugal and Italy are in the same situation, and even France may come to consider giving up a portion of the funds that correspond to it via credits.
There are compelling reasons for this. One: the multi-million dollar purchases by the European Central Bank (ECB) have reduced the interest rates paid by all countries on their debt to a minimum; The Spanish and Italian Treasuries have issued negative interest bonds this week – in silver: they charge for getting into debt – so the incentives to ask the EU for loans, no matter how cheap, are reduced. Two: the foggy conditionality associated with the funds continues to be a deterrent, as well as the suspicion that sooner or later Brussels will again ask for adjustments from countries that have their debt through the roof (and public indebtedness throughout the South) is above 100% of GDP). And three: it is not even clear that the capitals have the administrative capacity to spend all that money. So Spain and other countries grab the bird in hand for non-refundable aid, and leave the credits in the air. Of course, Newton’s laws (“every action is always opposed by an equal reaction”) are also valid for the economy: the risk is that the European fiscal stimulus will end up having a lower caliber than expected, and if that happens, recovery it will be less vigorous.
The Portuguese Prime Minister, António Costa, has publicly said that he renounces the loans that correspond to him: he demands direct aid but will only ask for the loans if it is strictly necessary. Sánchez and his government have been less explicit, but in the preliminary version of the Recovery Plan sent last week to Brussels it is clear that Spain is also going to request all direct transfers and, for now, not a single cent in loans. The Ministry of Economy clarifies that at the moment there are only plans for 2021-2023, and for that, transfers are enough; the rest is to be determined. Moncloa emphasizes that Spain starts with non-refundable aid for the next three years and adds that there will be time to claim the loans (up to 67,300 million) if necessary. The 140,000 million allowed a fiscal arreón equivalent to 11.2% of the GDP. If that resignation is confirmed, the stimulus from the EU would be limited to 5.8% in six years.
Playing with fire
The sources consulted avoid giving explanations about the reasons for that decision. But it seems clear that the European program – dubbed the pompous Next Generation EU – may be the victim of its own success: “Interest rates across the periphery have fallen due to the combined action of the ECB’s buyout program and prospects for recovery that it provided the strong fiscal stimulus agreed upon by the Twenty-seven; there are fewer incentives to ask for the loan part if countries issue debt at very low interest rates, ”says Lorenzo Codogno, former Italian Treasury secretary. “The real risk is that the European macro-stimulus is much lower than the one agreed in July and that darkens the economic outlook.”
That risk emerges at the worst moment: the outbreaks of the covid that have appeared throughout Europe – with Spain, again, as the gloomy leader in these statistics – will deepen the economic scars in the form of unemployment, falling GDP and rising debt public. But that is not all: the European plan itself is delayed. There is no agreement on the details of that package between the Commission, the German EU presidency and the European Parliament, which may postpone the first disbursements until the second half of 2021.
Europe, in short, is always capable of moving with water around its neck, but continues to play with fire when the situation is less pressing. On the brink of the abyss, in the most acute phase of the pandemic, the ECB began firing all the ammunition, the Commission suspended the fiscal rules and the Twenty-seven took those 750,000 million out of the hat. But the ECB will not always be there. The debate over the reintroduction of fiscal rules will take as long as the recovery takes to appear in Germany, and that will always be long before the green shoots reach the South. To all this is now added the reluctance to use the part of the bazooka corresponding to loans: the strong increase in public debt (250,000 million between 2020 and 2021 only in Spain) causes altitude sickness in some foreign ministries. “Europe’s economic policy mistakes will be studied in the history books,” said French economist Jean Pisani-Ferry of Europe’s disastrous handling of the Great Recession. That was 10 years ago: the current narrative says that governments and Brussels have learned their lesson. But Europe is always in time to shoot itself in the foot.