Behind the year 2008 and the era of austerity that pressed southern European economies, the arrival of covid-19 marked a turning point in government thinking. Social democratic administrations, pressed by diverse populist currents, leaned on a Keynesian frame of mind: public budgets, swollen by substantial debt, were mobilized to prevent a systemic collapse in the developed world. All instruments—monetary policy, financial measures, budgetary steps, and fiscal actions—were deployed to achieve that end. In practice, the plan treated the crisis with decisive intervention, and the approach stood as the default response for a long period. Yet the aftermath brought inflation that had not been seen since the 1970s, a development that helped widen budget deficits while the heavy leverage accumulated over the past decade threatened household savings and social stability. Wages faced erosion, savings diminished, and the cost of living rose, feeding social tensions across many economies.
The war in Ukraine, recent inflation data, and political tremors such as the crisis in Italy have accelerated a more aggressive stance from the European Central Bank. Rate increases moved from a cautious start to levels near two percent, with the objective of sustaining growth, supporting employment, and preserving social cohesion. For southern economies, including Spain, this path requires careful budgetary adjustments to counter the effects of tighter financial conditions. The challenge is to balance the need for growth with the demand to avoid deeper damage in countries already hit hard by prior crises. The approach—conservative in nature—aims to shield economies from shocks while gradually restoring fiscal stability.
In this context, the ECB has activated an anti-fragmentation mechanism that enables direct intervention by purchasing the debts of countries seen as vulnerable to speculative attacks. The purpose is to prevent spirals in risk premiums that would endanger weaker members such as Italy and Spain. Will the program deliver? It is likely to reduce fragmentation, yet it comes with costs that governments must shoulder. Reducing deficits and managing debt will be necessary steps, and inflation may help widen incomes slightly to cushion the debt burden on GDP. Still, the gap remains substantial. The annual CPI compensation for retirees, currently estimated at around fourteen thousand euros, illustrates the scale of the challenge facing public budgets. The plan emphasizes relying on tourism, a traditional pillar of the national economy, to sustain growth and avert a deeper downturn. After a run of challenging years and cycles, a renewed focus on resilience and diversification becomes essential for stability and long-term prosperity, especially in economies where strong tourism remains a key driver of employment and economic activity.