Greek debt crisis effects Spain indirectly

Elcano Royal Institute

Ignacio Molina
 
After the implementation of the institutional innovations included in the Treaty, the second big priority of the Spanish EU Presidency was coordinating economic policies so as to encourage recovery.[1] However, the unprecedented Greek debt crisis dominated the semester and it ended up affecting Spain indirectly. It is true that crises usually provide an opportunity for rotating presidencies to enhance their leadership roles, but that was not the case this time. Spain’s troubled economic situation prevented this from happening, or at least blocked it. Spain’s fiscal situation was never nearly as serious as Greece’s. Still, that did not stop people from comparing the two countries, thus raising doubts about Spain’s neutrality and its authority for leading the debate on how to address the Greek problem or on how to reform European economic governance.[2]
 
Nevertheless, the single biggest result of the Spanish Presidency was the decision to articulate a joint response aimed at defending the stability of the Euro and enhancing economic coordination among EU countries. Although it would not be accurate to say that the Spanish Presidency played the main role in producing this important outcome – as said, the Spanish government had to act in a reactive, defensive way, yielding the leading role to France, Germany and the Eurogroup Presidency – the truth is that the final outcome of the Presidency with regard to economic decisions has undoubtedly been outstanding.
 
Spain began its Presidency by raising the possibility of strengthening the EU’s say over how member states run their economies, and, although the initial reaction from Germany and the UK was negative, the Spanish term ultimately made important strides in this direction. It is true that in January the Spanish government was not thinking so much about a more forceful role for European institutions in short-term fiscal consolidation as in medium- and long-term mechanisms for financial supervision and coordination of structural reforms. But the dramatic developments in the public debt markets during this six-month period led things toward the former of the two options. Despite the wavering and lack of leadership seen in February and April, the EU finally decided to bail out Greece. And what is more important, Ecofin, holding an extraordinary meeting on 9-10 May 2010, adopted the key decision to create a 750 billion Euro financial stability fund for troubled governments, moving to give a firm response to speculators. It is an impressive system geared towards protecting the Euro, to the point where a European monetary union can finally be considered complete and, what is even more novel, a true economic union is now beginning to take shape. Many member states, in particular Spain, have clearly seen the new, direct link that has been established during this Presidency between the creation of the new fund, rigorous application of the deficit limits of the Stability and Growth Pact and the adoption of economic reforms encouraged by Brussels in areas that, in principle, fall outside EU jurisdiction: the labour market, savings banks, pay for civil servants and retirement ages and pensions.
 
But on the economy there was even more during the semester. While the financial oversight mechanisms agreed in late 2009 – the European Systemic Risk Board and three additional measures – are close to being approved by the European Parliament, the Council added complementary measures on hedge funds and credit-ratings agencies during this Presidency.
 
As for approval of the Europe 2020 Strategy, which replaces the semi-failed Lisbon Agenda of 2000, the climate of economic urgency has caused it to go relatively unnoticed, even though it was the main declared priority of the Spanish Presidency and the other Trio Presidency members, Belgium and Hungary. In any case, on the basis of the Commission’s proposal in early March 2010, the European Councils of March and June 2010 approved the broad outlines of a new and more sustainable productive model for the entire EU for ensuring economic growth and job creation in the future .[3] It identifies five basic goals and national plans to achieve them in the areas of employment, innovation, education, sustainability and the fight against poverty. But it remains to be seen how seriously member states and EU institutions will take these goals and what the consequences will be if they fail to do so.


[1] It has been discussed to what extent this should be the first and not the second priority of the semester.  Financial Times published an editorial titled ‘A stumbling Spain must guide Europe’, with the subtitle ‘Message for Zapatero: forget London, it’s the economy!’ The editorial called the programme proposed by the Spanish Presidency ‘remarkably anodyne’ and said it was a big mistake to focus on the fine-tuning of institutional reforms rather than address the problems of the ‘real world’, such as the economic crisis.

[2] Because of the Greek crisis and the poor state of the Spanish economy – deep recession, soaring unemployment, a bloated budget deficit and a swift increase in public debt – the Spanish officials tasked with leading the Ecofin had to spend a lot of time reassuring international investors or denying that Spain could be compared with Greece

[3] According to the president Van Rompuy, who chaired the European Council meeting on 25-26 March, the strategy sums up the European model of social market economy with a strong environmental dimension. "To protect this model, economic performance should be very strong." It remains to be seen if the new strategy have sharper and more realistic goals than the Lisbon Agenda.

AttachmentSize
EU-27 Watch No 9 - Spain_Q3.pdf754.5 KB