The EU endorses Spain’s PGE but asks to limit aid only to the vulnerable
The European Commission has given its approval of the budget plan presented by the Spanish Government for the financial year 2023 considering that it follows the recommendation of prudence in current spending while the common fiscal rules that set a maximum public deficit of 3% of GDP and a debt of 60% remain suspended, but warns against the need to focus energy measures on vulnerable households. This recommendation urged Belgium, France, Greece, Spain and Portugal to ensure prudent fiscal policy by limiting the growth of domestically financed primary current spending below potential output growth over the medium term, a suggestion that all five countries have followed.
Nevertheless, although Spain deployed energy measures as part of the emergency policy response to exceptional increases in energy prices, a prolongation of these or the introduction of new ones can contribute to a higher growth of net current expenditure financed by the State and, consequently, to an increase in the deficit and public debt forecast for 2023. For this reason, the Commission urges governments to better focus these measures on the most vulnerable households and in exposed companies, to preserve incentives to reduce energy demand, and to be withdrawn when energy price pressures subside.
The public debt to GDP ratio is very high and the fiscal deficit is sizeable, despite a slight improvement, while the unemployment rate, while still high, it is already below the levels prior to the crisis and is expected to remain stable next year. Brussels has verified that the Spanish economy continued to expand in 2022 to Despite the growing disturbances caused by Russia’s aggression against Ukraine, but a rapid slowdown is expected in 2023 amid heightened uncertainty with downside risks.
According to the Commission, the general government balance in 2022 has improved thanks to good revenue performance, but the high underlying deficit and high level of high debt remain a source of vulnerability. Meanwhile, the banking sector has remained resilient, as potential cliff effects following the expiration of public support measures deployed during the pandemic period have not materialized, but Brussels indicates that the side effects derived from rising energy prices and rising interest rates warrant close monitoring.
That is why the Report of the Alert Mechanism this year concludes that the in-depth reviews of both Spain and nine other Member States that were the subject of an in-depth review in the previous annual surveillance cycle of the macroeconomic imbalance procedure are justified, as well as Czechia, Estonia, Hungary, Latvia, Lithuania Luxembourg and Slovakia, which were not subject to an in-depth review in 2021-2022.
On the other hand, the post-programme monitoring reports for Cyprus, Spain, Greece, Ireland and Portugal conclude that the five Member States retain the ability to repay their debt. In addition, the recommendation asks the countries of the euro area to take individual measures, including the application of their Recovery and Resilience Plans, and also collective measures within the framework of the Eurogroup, in the period 2023-2024, to guarantee a common and coordinated fiscal policy. , maintain public investment, monitor salary and social policiesimprove the business environment and preserve macro-financial stability.
The European Commission will present its proposed recommendation on the euro area at the Economic and Financial Affairs Council (Ecofin) on December 6. The proposal is expected to be discussed by the Eurogroup next January, that the Council approve it in March 2023 and, later, the formal adoption by Ecofin. Member States will have to take measures based on the recommendation both individually and collectively within the Eurogroup to implement the recommendation of the euro area in the period 2023-2024.
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