What will the European Central Bank’s bailout of Spain cost? Over the past decade, the European Union has been very tolerant in demanding that Spain meet its commitments. But the debt burden is becoming increasingly unsustainable, so cuts and reforms seem inevitable in the near future.

The European Central Bank (ECB) announced in mid-June its intervention to prevent the risk premiums of Greece, Italy, Spain and Portugal from soaring. Basically, these are new bailouts in the face of the markets’ distrust of economies with soaring debt and a clear imbalance in their accounts.

The aid is not a blank cheque, as none of the previous bailouts was. All indications are that the latitude Spain has been given over the past decade to meet its reform commitments could come to an end in 2024. For the time being, fiscal rules limiting the public deficit to 3 per cent per year and debt to 60 per cent of GDP will remain frozen in 2023.

A European Commission report published in May stressed that Spain’s indebtedness exceeds “prudent levels” and could destabilise the EU as a whole because of “macroeconomic imbalances”. EU experts have already called for the introduction of measures to mitigate the long-term risk to fiscal sustainability, which should be adopted this year.

Pensions and the labour market

In this situation, pensioners could be the main victims. Pensions account for almost a third of the Spanish state budget, making them the item with the greatest scope for cuts. In fact, the government is already considering extending the reference period for calculating pensions.

The European Commission’s other great hobbyhorse is to make the labour market more flexible in order to reduce the percentage of unemployed, which is twice as high in Spain as in the EU as a whole. Obviously, this reduction in unemployment in order to improve the state’s accounts will entail a certain amount of precariousness.

Brussels’ objective is for Spanish debt to be below 114 per cent of GDP next year. And the demands it will make of the Spanish government in terms of the scope of cuts and reforms have yet to be specified. In any case, what is clear is that the level of demands in terms of fulfilling commitments will increase. The huge growth in debt over the last decade leaves no other option.

Third in a row

This is Spain’s third “bailout”, after the one granted in 2012 to Mariano Rajoy’s government to save the banks and the one granted two years ago to Pedro Sánchez’s government to tackle the ravages of the pandemic.

The first involved the injection of 100 billion euros in exchange for the signing of a “memorandum of understanding”. Although this document focused mainly on financial sector reform, it also addressed macroeconomic aspects. The agreement called for a reduction in the annual deficit from 6.3 % in 2012 to 2.8 % in 2014, with the consequent cuts and tax hikes that this implied. In addition, the document stated that progress in deficit reduction and the implementation of structural reforms to “correct macroeconomic imbalances” would be monitored “closely and regularly”.

Also the 140 billion euros the EU promised Spain two years ago in grants and loans involved conditions very similar to those of a full bailout. The aid is being delivered in tranches and disbursement is conditional on the implementation of the reforms promised by the Spanish government. Again, these will eventually affect the pension system and the labour market in particular.

Every year, the Spanish government must submit a stability plan to the European Commission, which is closely scrutinised in Brussels. And although there are no “men in black” in Madrid, any European government can stop payments from the Next Generation funds if it considers that Spain is not delivering what it has promised. 

The Greek and Italian experiences

How far could the EU’s adjustment plan for Spain go? The cases of Greece and Italy show that European technocrats do not hesitate to take measures to balance the books. 

Between 2010 and 2018, Greece experienced a “corralito”, implemented multiple cuts, sold public companies and reduced pensions by more than a third, in addition to going through multiple political crises. It is estimated that more than 400,000 Greeks had to leave the country during this period. And, in the case of Italy, in 2011 it even forced a change of prime minister and the appointment of a technical government almost designed by Brussels.

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