The Bank of Spain in Madrid. SUR
Balancing act
The Euro Zone - Opinion

Balancing act

Fiscal forecasts are revised so frequently throughout the year that they function more as real-time reports rather than informed divination

Friday, 21 June 2024, 17:07

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'Spain is no longer experiencing macroeconomic imbalances." That's the conclusion of part of a report released this week by the EU Commission into several member states' economic situations, specifically their debt-to-GDP ratio and budgetary deficit. That assessment, although offered with a couple of caveats, will help ease strained relations between Madrid and Brussels, largely owed to the latter's concerns about the Spanish government's ineffective spending of its Next Generation Covid recovery funds.

I've previously expressed scepticism about the constantly changing fiscal 'forecasts' made by the Bank of Spain, Spanish government and IMF. They're revised so frequently throughout the year that they function more as real-time reports rather than informed divination. But I think I'm going to have to change my line on that.

On further reflection, that changeability is unavoidable, because a country's economy is constantly fluctuating - just like the weather. It also seems that there is at least one respect in which these mercurial predictions can make a practical difference to a country's macroeconomic situation.

The EU Commission's report on Spain was mainly based on projections for the country's fiscal performance throughout the rest of 2024 and 2025: it is expected to finish both years having further reduced its public debt (which soared to 120% of GDP in the first year of the pandemic) and its budgetary deficit to or beneath the 3% limit set by Brussels.

As a result, Spain won't be placed under the EU's dreaded excessive debt procedures, a set of stringent measures designed to force recalcitrant economies into one-size-fits-all templates. However, there are two substantial qualifiers to this let-off: first, the EU predicts that Spain's debt will increase significantly over the medium term, returning to 2020 levels by 2034; and secondly, that "timely completion" of projects under the Next Gen scheme "requires increased efforts".

To translate that from report-speak: Brussels is still not entirely satisfied that Spain is spending its Covid recovery cash as effectively as possible (a criticism it has also made of several other countries besides Spain).

And then there's unemployment. Although not the focus of the EU's latest report, this remains Spain's major structural problem. It now has the highest adult and youth unemployment rates amongst OECD members, at 11.9% and 27.9% respectively, having just bumped Greece off the latter position.

The EU report notes that Spain has channelled some of its Next Gen funds into "new vocation education and training places", although such investment will need to be sustained for years before it starts to show in the unemployment figures. The country's macroeconomics might look good for now, but they don't tell the whole story.

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