The drumbeat of reductions is ringing out again in the European Union (EU). The worst nightmares of the austerity policies that followed the great financial crisis of 2008 are sweeping across the Old Continent. Among the latest warnings, a study by the Vienna Institute for International Economic Studies, published on Monday, indicates that the new EU budgetary rules “underestimate” the damage of budget cuts – or budgetary consolidation, in more precise terms. techniques – on the growth of economies.
The warning, which includes the threat of recessions, job destruction and political and financial unrest, comes just days before European partners are due to send Brussels their first budget plans for the post-pandemic era. The Spanish government “is committed to presenting the medium-term structural budget plan on October 15,” as the Minister of Economy, Trade and Business, Carlos Body, recalled this Monday.
Austrian economist Philipp Heimberger, author of the study entitled “Fiscal consolidation and its effects on growth in Eurozone countries: past, present and future perspectives”, calculated how many billions will have to be “adjusted” or “cleaned up” their budget. budgets – some euphemisms in tax jargon, alongside “consolidation”, to speak of tax cuts and increases – the main EU countries in the next four years to respect the “renewed” limits to growth public spending and debt reduction targets.
“In all likelihood, the reformed framework underestimates the negative effects of fiscal consolidation on growth. [En la investigación] conclude that implementing the multiannual budgetary adjustments needed to meet EU standards may not reduce public debt ratios in all EU member countries, as expected by the European Commission, and that the The economic and political implications of austerity “can complicate the governance of a fragile EU”, says Heimberger in the abstract of the academic article, which is still in the revision phase.
According to this researcher, budgetary “adjustments” in our country will have to reach 3.6 points of gross domestic product (GDP) between 2025 and 2028. This figure represents a little less than half of all the cuts that were made between 2011 and 2014, as can be seen in the graph. The estimate is similar to those previously carried out by the Independent Authority for Budgetary Responsibility (AIReF) or by the Bank of Spain.
This time, Spain starts from a privileged position compared to the rest of the major EU economies. The recovery after the COVID shock has been more intense in our country due to the “pull” of tourism, the strength of exports of other services and, above all, policies to protect the income of families and businesses ( increase in the SMI, financing of the ERTE, anti-inflation measures, etc.) and for positive structural transformations of the labor market thanks to labor reform.
Most of the measures that supported the end of the pandemic were possible precisely because, in the face of the health, social and economic blow suffered in 2020, the European Commission lifted budgetary rules and allowed governments to trigger their budgetary imbalances. (the deficit) and its debts to finance increased spending – the sustainability of both is measured against GDP.
After reaching record highs in 2020, these deficit and public debt ratios have been rapidly reduced in Spain thanks to the record pace of job creation and economic growth: as GDP increases, imbalances automatically reduce, and this was the case during the last upward correction of GDP. the INE national accounts, as shown in the second and third graphs of this information.
Now the government must present to the European Commission a four-year plan which extends this reduction in the public debt rate and which undertakes to limit the growth of public spending (the deficit must be less than 3%, but it has ceased to be the main reference in the new budgetary rules). In other words, in the near future, the constraints with which public budgets will have to comply will be defined.
The advanced GDP projections, which exceed 2% for both 2025 and 2026, favor the task of our country. But the government has more problems at the political level: the lack of support from Congress to achieve the general state budgets (PGE) of 2025 will prevent Spain from including “the budgetary plan” in the presentation of the structural plan of the October 15 in Brussels.
“In a normal environment, for which on October 15 we do not have this draft of general state budgets, we are not going to present a budgetary plan because the Commission has requested that the plans be presented with measures of economic policy”, explained this Monday. the Body of Ministers upon his arrival in Luxembourg, where he participated in a meeting with his counterparts from the euro zone (Eurogroup).
This political uncertainty is also not foreign to France and Italy, where demands for relaxation of the new budgetary rules are even stronger than in the years of austerity which followed the bursting of the real estate bubble , as shown in the first graph of this report. information. For researcher Heimberger, “tax consolidation [prevista en las nuevas reglas fiscales de la UE puede dar lugar a recesiones económicas o al menos a un estancamiento, lo que puede desencadenar un aumento mayor de lo previsto de los ratios de deuda pública a corto plazo”.
Bruselas “utiliza hipótesis de base (excesivamente) optimistas sobre la rápida disipación de los efectos negativos de la austeridad sobre el crecimiento y la inexistencia de efectos indirectos entre países”, prosigue este economista en su informe. En su opinión, los riesgos de fondo son el aumento de las desconfianza de los ciudadanos en los gobiernos y de turbulencias en los mercados financieros.
El FMI ya renegó de la austeridad
En las conclusiones de su investigación, Heimberger recuerda que en abril de 2023, el Fondo Monetario Internacional (FMI) ya llegó a la conclusión de que “la consolidación fiscal [la austeridad o, lo que es lo mismo, los recortes en el gasto público] has on average insignificant effects on debt [de los estados]”.
“Timely (during a period of economic expansion) and well-designed budgetary consolidations (based more on expenditure than on income) have a strong chance of sustainably reducing the debt” of States, as detailed by the IMF. But “if these conditions are not met, and partly because fiscal consolidation tends to slow down GDP growth, [la austeridad] on average, this has insignificant effects on debt.
“The renewed EU budgetary rules guarantee neither a favorable economic environment nor an appropriate mix of fiscal consolidation,” regrets Heimberger.
In May, our country’s Economic and Social Council (CES) published a report in which it also emphasized that budgetary rules “will aggravate the consequences of recessions”, as happened after the bursting of the real estate bubble in 2008, despite the fact that the new framework “represents progress compared to the budgetary surveillance framework in force until now because it considerably simplifies it, focuses on the medium term, promotes the involvement of States by taking into account the characteristics of each country and allows for a better reconciliation between fiscal sustainability and growth by giving more fiscal space to the most indebted countries to make investments and reforms.
“However, it does not completely resolve the main problems that the previous system suffered from: complexity, procyclicality and lack of investment protection,” continues the CES report, chaired by Antón Costas.
The role of the ECB
“Planned budgetary contractions are expected to be implemented in a more orderly manner than during the euro crisis, as multi-annual budgetary plans negotiated between the European Commission and each member country increase the degree of predictability for external observers when they judge. the necessary annual adjustments and deviations. However, it remains to be seen how financial markets will react if governments have difficulty agreeing on an adjustment plan with the European Commission or if governments are unwilling or unable to implement their plans when conditions internal or external changes,” analyzes Heimberger.
“The EU is now better prepared to deal with short-term turbulence thanks to institutional reforms implemented after the financial crisis, although significant gaps remain. Importantly, the ECB is now a more credible supporter of government debt markets than it was at the start of the euro crisis. As long as investors continue to believe that the ECB will do “whatever it takes” to stabilize financial markets, sharp rises in bond yields can be avoided. [el coste de la deuda en los mercados financieros] for the various member countries which must embark on politically difficult and economically painful tax adjustments,” explains the Austrian economist.
“Given that the ECB can only carry out public debt purchases under its TPI (Monetary Policy Transmission Protection Instrument) if the member country in difficulty respects EU fiscal rules and when public debt is considered sustainable, it may be difficult for The central bank to act as credible support if a government acts in such a way that the European Commission and member countries lose confidence in that government’s ambitions for fiscal consolidation », concludes Heimberger.
