The current market turmoil and the end-of-the-eurozone prophecies raise two questions in my mind:
Are the prescriptions given in the latest spate of Council opinions wrong?
If not, do the governments lack credibility when it comes to restoring sustainable growth and budget discipline?
These questions are especially acute with regard to the PIIGS.
This long blog series invites readers to judge the Council opinions and the prospects for corrective action for themselves.
The economic policies of the EU member states are regarded as a matter of common concern, but left to be coordinated among the governments (Article 121 TFEU).
With markets suddenly distrustful and many economists appearing as doomsday prophets, the economic policies have become a real concern – for everyone.
Stability programmes for eurozone countries on the one hand, and convergence programmes for member states still without the euro on the other hand, are part of the ongoing dialogue between the European Union and the member states.
There are some background remarks on economic policy coordination in the European Union in the blog post EU: Useful stability and convergence programmes? (3 June 2010). For a fuller view, you can read the provisions on economic policy in the Treaty on the Functioning of the European Union as well as the relevant protocols.
The Council issues its assessments and recommendations individually for each member state.
Now in turn is the EU Council opinion on the stability programme of Spain, which has been a member of the eurozone since 1999:
COUNCIL OPINION on the updated stability programme of Spain, 2009-2013; published OJEU 4.6.2010 C 146/1
Even if it has taken the European Union more than a month to publish the Council opinions officially in the OJEU, they concern the economic prospects in the medium term. As such, they should be useful with regard to our initial questions.
On 26 April 2010 the Council of the European Union examined the updated stability programme of Spain, which covers the period 2009 to 2013. The Council began its assessment with a brief description of the economic situation:
After more than a decade of strong GDP growth, Spain went through a severe recession in 2009. The downturn was caused by a sharp fall in domestic demand mirroring the narrowing of macroeconomic imbalances accumulated during the boom phase and was aggravated by the global financial crisis. Notably, the credit boom has ended and the private sector has quickly increased its saving rate; the oversized housing sector has been shrinking with both lower prices and activity; the external deficit has declined from high levels; and, inflationary pressures have softened.
The downturn has led to dramatic employment losses and unemployment rates. The current crisis is taking a heavy toll also on Spanish public finances. Besides falling activity, fiscal developments reflect an accommodative policy response with the implementation of sizeable stimulus measures. Already in 2008, the government deficit exceeded 3 % of GDP and on that basis an excessive deficit procedure was opened in March 2009. The most recent step in this procedure was the issuance by the Council of a revised recommendation under Article 126(7) of the Treaty on the functioning of the European Union (TFEU) in December 2009, whereby Spain is called to end its excessive deficit situation by 2013. The main challenges ahead are the continuation of the adjustments, including the narrowing of the external deficit and rebalancing of the sources of GDP growth away from domestic demand, in particular the housing sector, and towards the external sector. That will require reforms to boost productivity and potential GDP growth, as well as to create jobs in a sustained way. At the same time, competitiveness has to be enhanced, also by means of appropriate cost-reducing policies, i.e. contained wage growth and mark-ups vis-à-vis trading partners. These structural competitiveness problems, together with cyclical factors, reflecting strong economic growth above its main trading partners, fuelled a sizeable current account deficit, which widened rapidly over the last decade, peaking in 2007, when it reached double-digit figures, before dipping to about half in 2009. Finally, if up to now the government sector has cushioned the sharp private sector retrenchment, there is no room to continuing doing so without further compromising fiscal sustainability. Thus, proceeding with a credible and sustained fiscal consolidation strategy is a main challenge for the years ahead.
After a detailed discussion, and in the light of the Recommendation under Article 126(7) TFEU of 2 December 2009, the Council of the European Union invited Spain to:
(i) implement with rigour the ambitious fiscal plans envisaged in the programme so as to correct the excessive deficit by 2013, backing it up with concrete measures in the years beyond 2010, and stand ready to adopt further consolidation measures in case risks related to the fact that the macroeconomic scenario of the programme is more favourable than the scenario underpinning the Article 126(7) Recommendation materialise; seize as prescribed in the EDP [excessive deficit procedure] recommendation any further opportunity beyond the fiscal efforts, including from better economic conditions, to accelerate the reduction of the gross debt ratio towards the 60 % of GDP reference value;
(ii) in view of the projected increase in age-related expenditure and the rapid rise of the government debt ratio, improve the long-term sustainability of public finances also by implementing reforms to the old-age pension scheme as proposed by the Government;
(iii) ensure that the budgetary framework effectively supports the achievement of the outlined medium-term fiscal plans at all levels of the general government sector, and closely monitor adherence to the budgetary targets throughout the year;
(iv) ensure that fiscal consolidation measures are also geared towards continuing the improvement of the quality of the public finances in the light of the need for further adjustment of existing macroeconomic imbalances.
Spain is also invited to improve compliance with the data requirements of the code of conduct.
Eurozone financial stability
On 31 May the European Central Bank (ECB) published its Financial Stability Review June 2010, which assesses the stability of the euro area financial system both with regard to the role it plays in facilitating economic processes and with respect to its ability to prevent adverse shocks from having inordinately disruptive impacts (page 7).
The Financial Stability Review (225 pages) offers a view of the inter-related financial markets and the consolidation measures of eurozone governments.
Spain is currently the holder of the rotating Council presidency, including the Ecofin Council. Naturally, Spain is represented in the unofficial Euro Group, which plays an important part in the efforts to restore fiscal stability in the euro area. The Euro Group president is Jean-Claude Juncker, the prime minister of Luxembourg, where the next meeting is going to take place today, Monday 7 June 2010.