At the end of a terrible 2020, Pedro Sanchez has something
to celebrate. Spain’s prime minister has succeeded in passing the country’s
first full-year budget since 2016 even though he presides over a minority
government. A string of regional parties suddenly warmed to his left-wing
coalition of the Socialists and Podemos — and especially to the nearly 140
billion euros ($170 billion) in grants and loans that Spain is set to receive
from the European Union to counter the shock of Covid-19.
This political success means Sanchez doesn’t have to fear a
new election. But it’s unclear whether such renewed political stability can
help Spain’s long-term economic recovery. The government has been busy
unpicking many of the structural changes that had contributed to its
pre-pandemic economic success. And unfortunately, the EU is unlikely to obtain
any commitments to reform in return for the recovery money.
On Thursday, Spain’s lower house passed a classic left-wing
budget, which raises taxes on corporations and the rich, while increasing
social spending. The measures, which the Senate is widely expected to approve
by the end of the year, also include taxes on digital services and financial
transactions. Several regional forces, including the Basque and Catalan
secessionist parties, backed the budget, which earmarks 27 billion euros in
investment spending from the “Next Generation EU” fund in 2021 alone.
Spain had been forced into a cycle of weak governments and
snap elections in part because Sanchez hadn’t managed to pass a budget since he
became prime minister in June 2018. The pattern looked set to continue after
the Socialists cobbled together a feeble alliance with Podemos after the
November 2019 general election. But the EU’s 750 billion-euro pandemic recovery
fund has proven a game changer. The Spanish government can now draw on
unexpected support thanks to the EU cash it can spread around.
There’s no doubt Spain deserves significant solidarity from
its European partners. Its economy is set to shrink by 12.4% this year, the
most in the EU according to the European Commission, and the budget deficit is
expected to soar to 12.2% of gross domestic product. Spain’s 10-year sovereign
bond yields hover around zero, thanks to the European Central Bank’s
large-scale asset purchase programs. But the provision of more than 70 billion
euros in EU grants will limit the increase in public debt, which is set to rise
to 123.9% of national income by 2022.
The long-term issue for the EU is whether countries such as
Spain will be able to run on their own legs again after receiving help.
In theory, Spain is a model of how this can be achieved. In
2012 and 2013, Madrid obtained 41.3 billion euros in loans from the European
Stability Mechanism, the euro-zone rescue fund, to support its crumbling
banking system. In return, then Prime Minister Mariano Rajoy passed an
ambitious structural-reform program that included injecting greater flexibility
into the labor market, helping turn Spain into one of the fastest-growing
economies in western Europe. Much like in Ireland and Portugal, the exchange of
European financial help for measures aimed at improving competitiveness worked.
The European Commission has vowed it will only disburse
recovery fund money if countries earmark it for useful investment. But it’s
very hard to see countries such as Spain or Italy immediately engaging in
efforts to overhaul their economies in order to lift their growth rate in the
long run.
In Spain, for example, the government has pledged to dismantle Rajoy’s labor market
reforms, is now vowing to go even further. Deputy Prime Minister Pablo
Iglesias, also Podemos’s leader, has floated the idea of introducing a
four-day, 32-hour workweek to boost employment. As a study on France’s
35-hour week has shown, there’s no evidence that reducing the number of working
days can lead to more jobs.
The Spanish government has the right to make the choices it
sees fit with regard to redistribution. If it wants to be a high-tax,
high-spend economy, so be it. But the EU should be very careful about what
countries are doing with regard to their long-term competitiveness. The
recovery fund is meant to be a temporary instrument, but there’s a strong case
for having a permanent fiscal tool to help countries in difficulty, at least
within the euro region. Such a budget can only work politically if it’s not
always the same countries that seek to draw from it. The future of the EU
hinges on the long-term success of countries such as Spain.
This column does not necessarily reflect the opinion of the
editorial board or Bloomberg LP and its owners.
To contact the author of this story:
Ferdinando Giugliano at fgiugliano@bloomberg.net
To contact the editor responsible for this story:
Melissa Pozsgay at mpozsgay@bloomberg.net
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