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EU says Spain too optimistic on growth, warns on deficit

Source: Reuters - Wed 14th Oct 2015
EU says Spain too optimistic on growth, warns on deficit

Spain's budget risks breaking EU fiscal rules in 2016 as it is based on growth forecasts that do not take into account the country's exposure to emerging markets where growth is slowing, a European Commission report said on Monday.

The Commission's rebuke comes months ahead of a Spanish general election on Dec. 20, when the centre-right government is expected to emphasize its handling of the economy as it seeks to win back voters after imposing big spending cuts.

Spain has left behind recession and is now growing at one of the fastest rates in the euro zone, but the Commission said the macroeconomic scenario forming the basis for Spain's 2016 budget appeared "somewhat optimistic".

"According to the ad-hoc Commission forecast, risks to growth projections appear skewed to the downside and are mainly related to the external sector, should the deceleration in emerging markets intensify," the European Union's executive said in a report on Spain published on Monday.

The Commission said its opinion was that Spain's draft budget plan risked non-compliance with the Stability and Growth Pact, which sets out rules on the size of deficits and debt for EU member countries.

The Commission said it believed the Spanish economy would grow by 3.1% in 2015 and by 2.7% next year - less than the 3.3% and 3.0% forecast by the Spanish government but higher than the Commission's last forecasts in May. Then, Brussels expected Spanish GDP would grow by 2.8% in 2015 and 2.6% next year.

The Commission believes Spain's budget deficit will be 4.5% of GDP in 2015 instead of the required 4.2%. The discrepancy will widen in 2016, it has forecast, with an estimated deficit then of 3.5% of GDP, against a 2.8% agreed target. EU rules require that national deficits should not go beyond 3.0% of GDP.

Spanish Economy Minister Luis de Guindos on Monday rejected the need for major changes to the country's 2016 budget plans, which were put together early to get them signed off before the election.

He stressed that Spain was on track to meet its 2015 deficit target, which would leave the country well placed to whittle it down further to below 3.0% in 2016.

"The trend in budget revenues is very positive," De Guindos told reporters in Madrid.

In a separate report on Monday, the ECB said that Spain's economic recovery has picked up pace but unemployment remained high and financial imbalances, dating to the pre-crisis years, were still substantial.

Spain's parliament is expected to be dissolved by the end of October ahead of the December vote.

The Commission wants any new government to revise the budget, taking account of Brussels' remarks and adding financial data from Spain's regions that are missing in the current draft.

"We call on the Spanish authorities to submit an updated draft budgetary plan as soon as the new government is in place," European Commission Vice President Valdis Dombrovskis told a news conference.

New fiscal rules, adopted after the euro zone debt crisis, give the European Commission the power to seek amendments to national budgets.

According to these rules, governments must send Brussels their draft budgets for 2016 by Oct. 15. Spain sent its budget well in advance, to give time for the Spanish parliament to vote on the plan before it is dissolved.

Recommended Reading :

* Spain's economy making progress, but imbalances still substantial : ECB Commission

* Spain managingto hold off impact of global slowdown : IMF report

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