THE EURO ZONE
The Spanish government's ambitious and expensive welfare plans will have to be put on hold, possibly abandoned, in the wake of the Covid-19 pandemic. That was one of the underlying messages conveyed by Bank of Spain governor Pablo Hernández de Cos in his address to Congreso on Monday. De Cos also made a rare excursion into the political realm, calling for the country's opposing forces to unite over a fiscal plan to minimise the damage caused by Covid-19.
According to the Bank of Spain's flexible predictions, public debt could rise from its current level of just under 100% of GDP to around 124% in 2021. Next year could also see the budgetary deficit, which Spain's current government finally brought beneath the EU-imposed ceiling of 3% in 2019, rise to around 11%. The only way to avoid hitting these dangerous levels of debt, said Hernández de Cos, was to "eliminate superfluous spending" and "amend the tax system". In other words, the governor recommends a reduction in public expenditure and tax hikes, only one of which was on the Socialist government's agenda before Covid-19 came along.
The challenge issued by Hernádez de Cos doesn't just extend to Pedro Sánchez's Socialists and their junior partner, leftist Unidas Podemos. He also claimed that the only way Spain could avoid a public debt crisis was by formulating a fiscal programme covering "several terms" (and therefore, potentially, several changes of government) and securing cross-party support for it as soon as possible. But since the pandemic broke, Spain's leading parties haven't even been able to agree on the necessity of lockdown extensions lasting fifteen days, let alone discuss the possibility of a plan spanning years.
In fact, so deep is the animosity between the Spanish left and right over Covid-19 that Vox has promised to take legal action against the government for the way in which it has dealt with the pandemic. Even when faced with increasingly dire economic forecasts, it's highly unlikely that the opposition - represented by Vox as well as the conservative Popular Party - will suddenly drop its criticism of Sánchez and adopt a more conciliatory stance. And why should it? Over the last couple of months, the Spanish government's decision-making has seemed hasty, ill-informed and opaque.
There was, incidentally, a bizarre discrepancy between two of the governor's predictions. Hernández de Cos warned that Spain's economic activity might not even have returned to pre-Covid-19 levels by the end of 2021, but nevertheless also forecast potential growth of 6.1%-8.5% for next year. Combined with a projected contraction of up to 13% this year, that would be a monumental turnaround. But then again, none of these figures is even remotely concrete and will probably be revised several times before this difficult year is finished.