Heads turned toward the government over public finances as high-ranking officials warned that Spain must gear up for a fiscal consolidation in line with forthcoming European fiscal rules. Luis de Guindos, vice president of the European Central Bank, and Pablo Hernández de Cos, governor of the Bank of Spain, both urged the government to start preparing the required budget adjustments now. They stressed that the new stability and growth pact will demand a credible consolidation plan, and that authorities should treat the process with the seriousness it deserves.
Hernández de Cos pointed out that the country’s main economic fragility lies in its fiscal stance, citing a structural deficit estimated between 3.5% and 4% and public debt exceeding 100% of GDP. He warned that such a deficit and debt position could leave little room for maneuver in fiscal policy if markets suddenly correct, and that high financing needs would magnify any negative shocks. This message came during a conference hosted by Invertia, where he cautioned against underestimating the vulnerability of public finances.
In a separate interview, the governor emphasized that the magnitude of the required adjustments in the coming years would be substantial and should be accompanied by structural reforms to limit the short-term impact on growth. He stressed the importance of broad political consensus across parties to implement these measures effectively, a point he has reiterated for years as a condition for success.
The uncertainty surrounding economic policy has become a central concern for Spanish businesses. A majority of firms report that policy uncertainty weighs on their plans, with a significant majority indicating that it affects investment decisions, which have already been running at historically low levels. If this uncertainty persists, it risks dampening investment and productivity growth across the economy.
Spain Faces Fiscal Tightening
The vice president of the ECB echoed similar sentiments, noting that market risk premia have generally tightened, with notable reductions in risk spreads in Greece and Portugal. He observed a strong market reaction to credible budget consolidation programs and noted a similar trend in Italy and Spain, underscoring the link between credible fiscal plans and market stability. He also cautioned that political stability and timely approval of budgets remain crucial for sustained confidence in fiscal reforms.
Guindos highlighted that while current risk premia do not cause immediate alarm, it is essential to monitor debt levels and the structural deficit across various countries. He noted that by September, countries will need to present budget adjustment programs spanning four to seven years, designed to reduce high debt gradually and prudently. He warned that markets may remain calm for now, but there is no guarantee that this environment will persist indefinitely.
Both Guindos and Hernández de Cos supported the idea that if the government adopts a permanent tax on the banking sector along lines agreed by major parties, it should be reformed in a way similar to Italy, allowing banks to deduct from the levy the capital and reserves they allocate toward strengthening their balance sheets. They also indicated that if inflation declines as projected by the ECB, the central bank could begin lowering official interest rates in the euro area as early as June.