Surprise calls for early elections to be held on 23 July follow the defeat of the PSOE in regional and municipal ballots conducted this Sunday. Fiscal challenges loom for the coming government, no matter which party forms it. Beyond internal law changes, three major European-driven priorities shape the political and economic landscape for Spain, with implications for the wider North American audience observing European policy shifts.
1.- Accelerate the use of European funds
European funds were designed to be a major engine for Spain’s post pandemic recovery. A total of 144 billion euros were allocated from European sources, including 69 billion in non-repayable grants and the remainder as loans to be repaid through favorable terms by 2058. These funds do not automatically energize the economy; they require effective deployment. Government figures by late March show that only about 9.111 million out of 23.5 million allocated have been awarded so far. Moreover, none of the 84 billion euros in available loans has yet been requested. The reasons cited include excessive bureaucracy and slow decision making. For example, only 1.55 billion of the 6.8 billion budgeted for building rehabilitation was approved, and only 2.6 billion of the 6.0 billion planned for rail networks has been resolved. These bottlenecks illustrate how timely utilization matters as much as the funds themselves.
Improving the allocation of European funds will be a priority for the next administration. The European Union expects a reform plan to accompany continued funding, and the government will be scrutinized from day one. The Budget Control Commission in the European Parliament, led by Monika Hohlmeier, has criticized how current funds have been managed, underscoring the need for stronger oversight and faster execution. This is a situation with broad implications for trade, investment and infrastructure planning not only in Spain but across the EU and allied markets including Canada and the United States, where policymakers watch such reforms for their ripple effects on global supply chains.
2.- Align with the Stability and Growth Pact in 2024
After years of pandemic-driven spending and debt expansion, there is renewed focus on fiscal discipline. The European Union has reiterated that the Stability and Growth Pact should be respected again, aiming for a general deficit around 3 percent, down from 4.8 percent at the end of 2022. The government has argued that a 3 percent target can be met by 2024 with adjustments that emphasize revenue generation rather than expenditure cuts. The central bank and Spain’s own institutions have highlighted the tension between ambitious targets and the current economic reality. The Bank of Spain and independent bodies have called for cautious implementation, noting that sudden 1.8 percentage point adjustments could spark inflationary pressures if revenue is relied upon too heavily. In 2022, additional revenues did contribute to the budget, yet the path to 3 percent remains contested and is viewed by many analysts as challenging within the current economic framework. The debt, approaching or even exceeding 115 percent of GDP, complicates the convergence to any strict 60 percent ceiling. EU discussions continue on how to recalibrate debt rules, reflecting a broader debate about fiscal discipline in highly indebted economies and the potential implications for member states and global markets including North American observers.
The main economic authorities are skeptical about a swift move to 3 percent in the near term. The Independent Accountability Authority has warned that deficits could settle around 4.2 percent in the current year, compared with the optimistic 3.9 percent projected by the government. This gap raises questions about the feasibility of rapid deficit reduction and the broader impact on public services and social programs. When debt levels rise toward historical highs, the prospects for rapid consolidation diminish, making cautious, credible reforms essential. The European Union is examining changes to debt rules, but the essential question remains whether Spain and other high-debt economies can enact credible plans to reduce debt without triggering recessionary pressures.
Current debt dynamics complicate the forecast for 2024 and 2025, with broad consensus that a firm 60 percent debt-to-GDP ratio is unlikely in the near term. The EU’s ongoing deliberations about reforming fiscal rules signal that governments will need credible, growth-friendly plans to stabilize budgets while preserving essential public services. These developments carry potential spillovers for global markets and investors observing Europe from North American capitals.
3.- Manage stimulus withdrawal and curb inflation
A broad set of supports has been in place to cushion the impact of inflation and the pandemic era on workers. Temporary layoff schemes, activity cessation subsidies, diesel subsidies for transport workers, train discounts, and measures on electricity bills contributed to offset cost-of-living pressures. These supports are estimated to have amounted to around 37 billion euros in total, though estimates vary. As Brussels has insisted, the withdrawal of these supports must be managed carefully, as it will affect social and political stability in the near term. Governments are expected to wind down VAT reductions on electricity and gas and the VAT relief on food, which together will reduce revenue by several billion euros in the current year. Extending delays or halting programs risks disrupting business continuity and could impact employment, especially given that Spain’s unemployment rate remains well above the euro area average.
Historical measures saved jobs during the worst of the crisis, protecting the livelihoods of millions in the 2020 period. Looking ahead, careful phasing out of aid is crucial to avoid a sudden negative shock to business and consumers. As the economy gradually reopens and investment resumes, policymakers in Canada and the United States monitor these transitions for lessons on balancing social protection with budget realities. The lesson is clear: a measured withdrawal of supports, paired with targeted reforms, can help stabilize inflation without derailing growth.