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Francesc Pujol, Professor of Economics , University of Navarra

Is Spain more solvent than Italy?

Fri, 11 Nov 2011 10:36:55 +0000 Published in

-What does it mean for the Spanish Economics that our country does not meet the goal?

-The failure to meet the budget targets announced by the Government and accepted by the European Commission does not have a direct economic impact in itself. Degree However, in the current context of turbulence due to the crisis of confidence in the sovereign debt of the most indebted countries (Greece, Italy, Belgium) or those with the largest deficits (Spain, Ireland), this advertisement revives even more distrust in the long-term solvency deadline of our Government. The increase in distrust does penalize the Spanish Economics . We now pay a much higher interest subject than a year ago to borrow money. This increase in the cost of financing necessarily detracts from other public spending, not only now, but also in the coming years. If the public sector continues to monopolize the demand for savings available to finance its bulging deficit, it competes with companies and families who also knock on the banks' doors to ask for credit, in a process that stifles the productive and consumption dynamism of the private sector, thus slowing down the recovery.

-What does the next government have to do to comply with goal?

-There is a lively debate among economists discussion about the correct fiscal policy recommendation. Many fear that adopting fiscal consolidation now (the dreaded public expense cuts and/or additional tax hikes) would only worsen the economic status , to scupper any hope of growth. The European Commission itself in its recently published report foresees that the gloomy growth forecasts and employment will worsen if Spain undertakes the additional cuts that the same Commission demands.

I think, on the contrary, that a resolute budgetary adjustment policy is the only real path to growth recovery for Spain. Spain has the great advantage that its level of public debt is low in comparison with other countries. If it manages to reduce its public deficit aggressively, it will relieve the current pressures that translate into a higher risk premium.

- Is Spain at risk of following in Italy's footsteps by moving away, like Italy, from the deficit limits set by the European Union?

- Italy, like Belgium (and of course, the insurmountable Greece), suffers from solvency problems due to its huge public debt, which becomes unsustainable when the required interest rates soar. Spain is solvent because its debt is much more manageable. But if the bulky deficit does not abate soon, the need to turn to the markets for massive financing will place us in the same club as Italy and Greece. In normal times no one would doubt Spain's ability to refund the requested loans. In the current status of skill global for savings this risk is real. The new government should significantly reduce the expected deficit. Not because Europe or the markets dictate it, but because it is the only way to recover growth and the creation of employment.