The European Commission has agreed to give Spain another year to meet its deficit target. For Madrid, this is a small reprieve ahead of general elections, which will almost certainly need to be held early. Spanish media reported that the decision was made during April 15-17 International Monetary Fund meetings in the United States and will be officially announced in the coming days. The commission's leniency will give Spain some breathing room to sort out its current political stalemate, but it will not resolve the nation's fractious politics or boost its disappointing economic growth.
The latest deal reflects a mix of compromise and realism on both sides. In early April, Madrid announced its intention to adopt budget measures that will save an additional 2 billion euros ($2.26 billion) this year, a move the European Commission welcomed. But today the Spanish government also lowered its expectations for economic growth, from 3 percent in 2016 and 2.7 percent in 2017 to 2.7 percent and 2.4 percent, respectively. Moreover, Madrid estimated that unemployment will likely reach around 19.9 percent this year and 17.9 percent next year, higher than its original forecasts. The IMF similarly lowered its predictions for Spanish economic growth in the coming years.
In light of these developments, the European Commission acknowledged that it would be unrealistic to ask Madrid to lower its public deficit, which was 5 percent of gross domestic product in 2015, to below the EU requirement of 3 percent this year. (The Spanish government expects its 2016 deficit to be around 3.6 percent of GDP.) Madrid, which is having a particularly hard time getting Spain's autonomous communities to reduce their deficits, has had to ask for extra time to meet its deficit targets on three occasions since the start of the economic crisis. This time, though, its negotiations with the European Commission went far more smoothly.
This can probably be explained at least in part by Spain's current political climate. The country's last round of general elections, held in December 2015, resulted in a hung parliament and complex talks to form a government. The ruling center-right Popular Party lacks the seats in parliament to govern alone, and Spain's main opposition forces refuse to form a coalition with it. But the opposition parties — the center-left Socialist Party, the centrist Ciudadanos and the left-wing Podemos — have likewise failed to reach a coalition agreement. If no government is formed by May 3, Spain will have to hold new elections by late June.
But opinion polls show that early elections would not significantly change the composition of the Spanish parliament, meaning a coalition government would still be needed. The European Commission probably believes there is little point in asking the country's current government for reforms since it could be replaced in a few months. More important, Brussels likely realizes that requesting painful spending cuts during an electoral campaign would hurt the ruling Popular Party, which is friendly to businesses, and benefit anti-establishment forces such as Podemos. Though all of Spain's political parties are promising to increase public spending, a coalition of center-left forces would be especially troubling for Brussels.
When Jean-Claude Juncker became the European Commission's president in 2014, he pledged to play a greater political role in Europe. Since then, Brussels has shown more flexibility with EU member states that fail to meet their deficit targets, granting many of them extra time and opting not to impose sanctions. EU member states are still expected to clean up their economies, and Brussels watches to ensure they do, though it keeps a closer eye on some, depending on the size of their deficits. Similarly, countries are still required to present reports on their progress and show some willingness to reform. In recent years, however, the European Commission has generally avoided direct confrontation with EU members.
Political conviction is partially responsible for the commission's caution, since it is well aware that extreme austerity requirements fuel anti-EU sentiments and boost Euroskeptic parties. But it is also an admission of the commission's own weakness. Its ability to influence members that are increasingly willing to ignore or flout EU requirements is limited, and Brussels knows it. Considering that the bloc is already dealing with the migration crisis, the Greek bailout and the impending British referendum on EU membership, it is probably trying to steer clear of further conflict.
Meanwhile, countries in the European periphery are slowly starting to recover, thanks in large part to low oil prices and expansionary monetary policies by the European Central Bank. When that period ends, the currency union could be in trouble once again, especially with countries such as Italy, Spain and Portugal easing the pace of reform and planning to increase spending.
