The European Commission asked Spain this Wednesday for a budget adjustment of 0.7% of GDP to ensure compliance with its target of a 3% public deficit under the Stability and Growth Agreement. It offers a recommendation for prudent fiscal policy in 2024, limiting the nominal increase in nationally funded net primary expenditure to a maximum of 2.6%. The Commission also calls for the elimination of energy-related measures by the end of 2023, and it urges reductions in fossil fuel dependence while accelerating the use of Recovery and Resilience funds from Next Generation EU. It emphasizes expanding affordable, energy-efficient, social housing and a slate of economic policy proposals. The guidance is issued within Brussels’ annual coordination framework, which confirms that Spain remains among the countries showing macroeconomic imbalances, even as their vulnerability has eased.
Spain’s reform program analysis outlines many requests the European Commission and the Eurogroup have pressed on eurozone governments in recent months. The document proposes ending general energy subsidies by year-end and reallocating savings to further shrink the public deficit. It also recommends that, should energy prices rise again and require new support measures, those measures be temporary, selective, and designed so that they protect vulnerable households and businesses, remain affordable, and maintain incentives for energy conservation.
Brussels continues to stress Europe’s strategic role in the recovery. The emphasis is on speeding up the implementation of Next Generation reforms and investments, while maintaining administrative capacity to support the program’s anticipated growth. The recommendation urges protecting nationally funded public investments and ensuring that bailout grants and other EU funds are channeled toward a green and digital transition. For the 2025 period, the guidance favors a medium-term fiscal strategy centered on gradual and sustainable consolidation, coupled with targeted investments and reforms that can lift sustainable growth and keep the budget on a prudent path.
Finally, the European Commission urges Spain to cut fossil fuel dependence and hasten the rollout of renewable energy. This includes modernizing and digitizing permitting procedures, backing permitting authorities, improving grid access, and investing in energy storage, electricity transmission and distribution, as well as cross-border interconnections. The plan also calls for increasing the availability of energy-efficient, affordable, and social housing by renewing buildings, accelerating electrification, and promoting electromobility.
macroeconomic imbalances
In its latest assessment, the European Commission again lists Spain among the euro-area countries facing macroeconomic imbalances alongside Germany, France, the Netherlands, Portugal, Romania, and Sweden. Yet the report notes that fragility has declined in Germany, France, Spain, and Portugal, suggesting that a continued trend could lead to a final verdict of no imbalance if it persists into the next year. By contrast, Greece and Italy continue to show pronounced macroeconomic imbalances, though their vulnerabilities have diminished thanks to policy advances. Cyprus, Hungary, the Czech Republic, the Baltic states, Luxembourg, and Slovakia are identified as other economies where the situation is gradually stabilizing.
The exercise also includes a fresh post-program audit that confirms the resilience of Spain’s economy. It highlights how Spain has managed to weather the shocks from Russia’s war in Ukraine and records strong growth in the previous year. As the spring forecast unfolds, the Commission anticipates continued growth in 2023, albeit at a slower pace than last year. The analysis also notes improvements in revenue collection and public administration balance in 2022, while acknowledging that the underlying deficit and public debt remain sizable. The banking sector, while faced with inflation and tighter financing conditions, has shown resilience, with asset quality improving and profitability rising through 2021 and 2022. At the same time, authorities emphasize the ongoing need for vigilant fiscal and financial management to sustain gains and support private investment. (citation: European Commission, 2023; governance notes attributed)