10 July 2012

European Council: Spain is given an extra year to correct its deficit

Setting 2014 as the new deadline for bringing its deficit below the EU's 3 per cent of GDP reference value, the recommendation establishes headline deficit targets of 6.3 per cent for 2012, 4.5 per cent of GDP for 2013 and 2.8 per cent of GDP for 2014. Spain has been subject to an excessive deficit procedure since April 2009, when the Council issued a recommendation calling for the deficit to be corrected in 2012. In December 2009, the Council extended this deadline to 2013, on the basis of a Commission forecast that Spain's 2009 deficit would reach 11.2  per cent of GDP, five percentage points more than its previous estimate. This was explained by a steeper-than-expected decline in economic activity, with consequent effect on budgetary revenue.

Although Spain has taken effective action to comply with the Council's recommendations, the latest Commission projections indicate that its general government deficit is likely to amount to 6.3 per cent of GDP in 2012, compared to the expected 5.3 per cent cited in its stability programme and budget law. And a further deepening of the economic crisis and implementation risks at regional level could imply an even larger deviation. While the forecast underlying the Council's 2009 recommendation assumed growth rates over 1 per cent per year in 2012 and 2013, the Commission's latest forecasts point to negative growth rates of -1.9 per cent and -0.3 per cent respectively, on a no-policy-change basis. Furthermore, the growth composition is likely to remain biased towards net external demand, with continued negative domestic demand affecting tax revenues.

Spain's gross public debt rose to 68.5 per cent of GDP in 2011, and is projected by the Commission to reach 80.9 per cent of GDP in 2012 and 86.8 per cent in 2013 on a no-policy-change basis, thus exceeding the EU's 60 per cent of GDP reference value throughout the period. The increase in the debt ratio is mainly driven by higher interest payments. Considering all these factors, and given in particular the deterioration in the fiscal Outlook since the Council's 2009 recommendation, the Council considers that an additional year for correction of the deficit is warranted. To achieve this, it calls on Spain to achieve a 2.7 per cent of GDP improvement in its structural fiscal balance in 2012, a 2.5 per cent of GDP improvement in 2013 and a 1.9 per cent improvement in 2014.

Given the current market pressure on Spanish sovereign debt, the Council calls on Spain to underpin the credibility of its consolidation effort by adopting its announced budget plan for 2013 and 2014 by the end of July 2012. And in parallel to reviews of the announced eurozone financial assistance for the recapitalisation of Spain's financial services industry, it calls for the monitoring of progress on a three-monthly basis. Additionally, the Council asks Spain to establish an independent fiscal institution to provide analysis and advice and to monitor fiscal policy. The Council's recommendation sets a three-month deadline for Spain to take effective action.

Press release

© European Council