Fiscal Discipline And Green Energy Transition

The government that comes out of the polls, whatever it may be, will face an external environment that, in addition to conditioning its action, is characterized by strong contradictions. One of the most obvious concerns the area of fiscal policy. On the one hand, Brussels urges member countries to return to budgetary discipline. Even incorporating the proposal to make the targets more flexible, adapting them to the situation of each country, a containment effort seems unavoidable for the most indebted economies like ours. Simultaneously, Brussels shows its concern about the effects of climate change and advocates a colossal investment effort that is around 2% of European GDP until 2030.

These objectives may coincide in the long term: decarbonization would help to ease the pressure on energy prices and some foodstuffs that are becoming scarce as a result of the drought, and, therefore, would generate activity and the public resources necessary to reduce the deficit. But, in practice, the transition towards that long term poses complex dilemmas in the current framework of European governance. According to a highly commented report by Pisani-Ferry on the green transition, it is possible to reduce the fiscal imbalance and increase green investment at the same time, but this would require draconian measures to cut other expenses or raise taxes on the middle class, which are difficult to assume in our democracies.

The objective of reducing the deficit could also be postponed, at the expense of the markets wanting to buy the debt issued by each country, in addition to that which the ECB is amortizing as part of its liquidity drain policy. In any case, this is a highly improbable eventuality politically. Another option would be to dilute decarbonization targets, exacerbating climate stress and leaving the bulk of the effort to future generations.

Coherence, however, could come from an extension of the Next Generation program geared towards green investment and financed with pooled resources. This option, which appears to be the path preferred by Commissioner Paolo Gentiloni, would alleviate the fiscal-ecological dilemma, although without fully resolving it, since the pooled debt falls indirectly on the Member States. But, above all, the Pisani-Ferry report reveals the minimum conditions for the effectiveness of such a European program: public investment must go hand in hand with greater legal predictability, as well as an alignment of incentives for private investment in technology that serves environmental objectives. It is also convenient that this policy be formulated at the level of the Union as a whole, instead of consisting of a mere accumulation of national projects —a defect suffered by the Next Generation—. Therefore, in addition to agreeing on the good design of the strategy, the member countries should accept the transfer to Brussels of part of their economic and fiscal sovereignty.

Such a step towards greater integration faces well-known reluctance within Europe, but the differences between the “frugal” core and the “expendious” periphery have faded. Southern Europe is no longer necessarily perceived as a drag, neither from the point of view of economic growth nor of budgetary discipline: according to data relating to the first quarter released this week by Eurostat, Portugal shows a surplus and the Spanish deficit falls to below the European average or even that of Germany itself. In our case, there is still a long way to go to consolidate the result, with a debt that still weighs 112% of GDP, one of the highest in the EU. But the tables could be turning. This, together with the urgency of the energy transition, makes it possible to approach the reform of European tax rules in a different way. This is, therefore, an opportunity, as well as a responsibility that will condition our economic strategy.

Deficit

According to the latest data published by Eurostat, the government accounts showed a deficit equivalent to 1.9% of GDP in the first quarter (with seasonally adjusted data), compared to 3.2% for the euro area as a whole. This result could come partly from the surge in Spanish growth at the beginning of the year, and therefore it is worth waiting to determine if it is a structural improvement. Public spending represented 45.2% of GDP (4.2 percentage points below the European average). Revenues, for their part, reached 43.2% of GDP (three points less).