Spanish Elections A Blow To EU Fiscal Reform-Officials

The decision by Spanish Prime Minister Pedro Sanchez to call snap elections for July 23 deals a blow to remaining hopes of a deal on reforming European Union fiscal rules by the end of this year, with officials in Brussels and Madrid telling MNI that Spain’s capacity to concentrate on the bloc’s objectives will inevitably be reduced.

While Sanchez has insisted his government will fulfil its duties once it takes over the EU’s six-month rotating presidency from July 1, a Spanish official conceded to MNI that the political drive to push through reform of fiscal rules contained in the Stability and Growth Pact “could be a bit affected.”

Still, the official insisted that Spain would still have the capacity to broker policy deals and that technical-level work at least can go on. But any new government, and even if Sanchez’s Socialists are re-elected, would be unlikely to be fully functional before September.

“It’s easy to see that the focus won’t be on Stability and Growth Pact reform, especially if negotiations get thorny,” the Spanish official said.

DISTRACTED PRESIDENCIES

The prospect of a distracted Spanish presidency is bad news for Brussels, with officials already assuming that the next rotating presidency, under Belgium, will be sapped by elections to the European parliament. Then, from mid-2024, the following 12 months will be presided over by first Hungary and then by Poland, both countries locked in disputes with the rest of the bloc over rule of law issues.

European Union member states face a race for agreement over a new legislative draft for reforming the bloc’s fiscal rules before old debt limits come back into force next year, after the Commission went some way to toughen up its original proposals after objections from countries like Germany, national officials told MNI. The reform would make the enforcement of strictures against excessive borrowing more flexible, and give the Commission more leeway to negotiate bespoke debt reduction deals. (See MNI:EU In Fiscal Reform Race Before Old Rules Return-Officials)

Now, for the remainder of this year, at least, Brussels will be pessimistic over chances of not only a deal on fiscal reform, but also over the next step in EU banking union, the Crisis Management and Deposit Insurance directive, though the latter was already looking unlikely due to Italy’s continuing reluctance to ratify reforms to the European Stability Mechanism. (See MNI: EU Loses Patience As Italy Blocks Bank Backstop-Officials)

Countries such as Germany and the so-called “frugals” – grouping the Netherlands, Austria, Denmark, Sweden and sometimes Finland – may not be sorry if fiscal reform remains adrift, noted one national official.

Spain’s well-known position in the fiscal debate, including its support for more flexibility and more room for investment in green tech and the digital transition, had already led some officials to suggest that it might struggle to present its presidency as impartial.

MORE POLARISATION

Talks about fiscal reform are currently at the level of diplomats, with actual negotiations between countries hardly having begun.

But in recent weeks the discussion has become more polarised, with Italian Finance Minister Giancarlo Giorgetti calling for investments in Green and Digital transformation to be excluded from debt calculations as a quid pro quo for ratifying the ESM Treaty. At the other end of the spectrum, German Finance Minister Christian Lindner wants high-debt countries forced to make bigger budget adjustments to meet Stability and Growth deficit and debt limits.

EU finance ministers will return to the topic of fiscal reform at their June 16 meeting.