The recent actions by the European Central Bank to raise interest rates are not enough on their own to defeat inflation. Without additional measures, household purchasing power continues to erode. This week, Francisco Menargues, dean of the Alicante College of Economists, urged the pursuit of rental contract reforms to curb the inflationary runoff and supported VAT relief on essential goods to ease cost pressures for families.
While not wanting to sound overly pessimistic, Menargues warned that the next two quarters could show negative results despite optimistic forecasts. He stressed that it is still premature to declare a recession, noting that a recovery in the Spanish economy is anticipated in the coming spring.
The head of the Alicante economists raised concerns about a hidden tax effect, arguing that inflation benefits the state by increasing fiscal revenues with every uptick in prices. In his view, the relationship is straightforward: higher prices translate into higher tax intake for public coffers.
College treasurer Carmelo Rivers disagreed with the notion that the inflation surge could be blamed solely on the Ukraine war. He pointed out that inflation was already around seven percent by February, before the war began, and he highlighted other contributing factors.
Rivers explained that the crisis began as a demand shock during the Covid-19 health crisis and then evolved into a supply shock. As restrictions eased, consumption surged faster than production could adjust, creating a unique, dual-pressure scenario on the economy.
Another factor cited by the dean is the rising cost of CO2 emission rights, which has pushed energy prices higher. He noted that the price of emission allowances jumped from about 25 euros in 2020 to around 90 euros in 2022, a trend that preceded the war in Ukraine. Menargues also remarked that increases to the minimum interprofessional wage did not help inflationary dynamics.
Economists, however, believe the crisis may be faced with greater resilience than before, thanks to a healthier banking system and a reduction in household and corporate debt. On the fiscal front, Antonio Villalobos, the college board’s accounting economist, described proposed budget measures as limited in their impact. He argued that revaluing pensions to align with CPI would be a broad, uniform adjustment that would not meaningfully curb inflation.
Spain currently spends around 170 billion euros on pensions, while Social Security records a deficit of roughly 27 billion. The College notes that some retirees receive higher payments than many active workers, highlighting the need to address this imbalance. Economists contend that the current system is unsustainable and requires thoughtful, substantial reform to enable new funding models, as the existing framework is approaching its expiration date.
The dean also pointed to the broader fiscal implications of inflation, including how rising costs effectively act as taxes that reduce disposable income for families. Analysts emphasize the importance of policy clarity and targeted relief to protect household budgets while maintaining fiscal stability.
Looking ahead, experts argue for a balanced approach that combines prudent monetary policy with structural reforms. The aim is to strengthen the economy against future shocks, stabilize public finances, and preserve the purchasing power of households across the region and the broader economy. The conversation continues among policymakers and economists seeking solutions that support sustained growth and social equity.
As the situation evolves, the Alicante College of Economists advocates for measures that complement monetary tightening with reforms that address wage dynamics, energy costs, and pension sustainability. The goal is to create a more resilient economic framework capable of withstanding inflationary pressures without sacrificing growth or social protections. The discussion remains ongoing among economists who stress the need for proactive, evidence-based policy choices that can guide Spain toward a stable and inclusive recovery. [Alicante College of Economists, 2024]