Spain | The return of austerity

Summary

Spain has committed to undertake a huge fiscal adjustment over the next few years. While the impact on the economy will depend on its composition, evidence suggests that it may be significant. Even if this is not the case, it will create social tension.

Key points

• Key points:
• This can lead to two solutions, a virtuous one (structural reforms), but one that will involve even more tension. Another ruinous one, although politically it will be more attractive. Europe and Spain could find middle ground if they agree to promote a deeper union.
• The European Council adopted legislation this week that will reform the EU's public finances framework. These new fiscal rules will require significant and sustained adjustments over time in several economies, including Spain, from 2025.
• The impact of the cumulative and ongoing adjustment over time in much of the eurozone on economic activity will be significant and undermine growth going forward.
• Discussions must be held on how much of the adjustment should target taxes, how much should target expenditure and how to spread the costs between the two items so as to have the smallest impact possible on economic activity and protect the most disadvantaged.
• In Spain, a policy agenda is needed to help bring down the country's structurally high unemployment, drive growth in productivity and reverse the downward trend in investment.

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