Growth is now the European Commission's main concern. In its spring forecast it looks closely at price increases, how a stronger euro will affect exports and what peripheral countries will do to wrap up their reform agendas.
Brussels said yesterday that it will watch Spain extra close. Even though our economy has grown more the the European average for the first time since the crisis began in 2008, unemployment will remain around 24% through 2015. Plus, we have done all we can do to balance the budget. Now that the national debt is 100% of our GDP, the European Commission fears that the deficit will shoot up to 6.1% of GDP once the government lowers the income tax. This is a clear warning to Rajoy and his government that they cannot afford to let down their guard until their work is done. The Commission doesn't want its member states to compromise their agendas in order to win elections and placate the troika comprised of the EU, ECB and IMF. In Brussels, they know that Spain met its 2013 deficit objective by pushing back some bills to 2014?s budget. This is a legal accounting trick, but tricky nontheless. For this reason, how can we be lowering taxes without reducing spending, too? The government is not talking about this because it would make them look silly leading up to elections.
If you are going to lower taxes and social security contributions -- which is what we need to spur economic growth -- then spending cuts must follow. Luis de Guindos talking about meeting deficit goals is not good enough. He needs to articulate specific steps the government will take to do that, because the road ahead is rife with dangers and the recovery will fail if the budget goes unbalanced.
