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Europe: Spain and Portugal offer good examples of balance between public finances and economic growth

Europe: the Mediterranean offers good examples. Spain registered a growth of 2.6% in 2018 (three times higher than Italy’s sluggish 0.9%), and 2.2% growth is forecast for 2019 (compared to zero or lower for Italy). Portugal’s GDP grew 2% in 2018 (after a solid 2.7% in 2017), and the country estimates a further 1.5% growth for 2019. Both are fragile economies, naturally. They are emerging from a season of heavy recession when they had to made serious adjustments to the public finances that entailed significant social costs. They have experienced lagging production and partial absence from strategic sectors of the digital economy. Yet they are changing, growing, innovating and attracting investments at the same time. They are endeavouring to develop new forms of economic and social balance. In hard times of crisis and protests against the EU, these countries have chosen to remain clearly tied to the regulations and strategies of Brussels, the focal point of commitments towards economic reform and recovery, instead of indulging in anti-Euro populism and dead-end sovereignism.

Until a few years ago, they were considered a problem for Europe, two of the four PIGS ‒ a crude acronym indicating Portugal, Italy, Greece and Spain ‒ the Mediterranean adrift, hotbeds of crisis that jeopardised the stability of the EU, bad apples on the Southern rim. These initials are now outdated in Europe’s public discourse. Public finances are not at risk in Spain and Portugal. These countries do not fuel harsh controversies against the single currency, nor do arguments against the “bureaucrats” of Brussels monopolize their political debate. More importantly, their economies are in clear recovery even amidst the recent difficult months of slowdown in the global economy. Greece is struggling to find its way back on the road to reform, closing the improbable and extremist chapter of Tsipras-Varoufakis. The former Minister of Economy is no longer a player in political games and instead travels around giving speeches. Premier Tsipras, after leading his country to the verge of a Grexit and bankruptcy, is now the spokesman for responsible politics.

The case is still open for Italy: zero growth, alarmingly increasing public deficit on the verge of post-Maastricht tolerance and public debt well over 130% of the GDP with no credible signs of abatement. The spread is much higher than that of Spain and Portugal, still over 250 points, with repercussions on much higher costs to finance the debt. Indeed, in a time of global crisis with a government that wields controversy with the EU as a tool for heated electoral campaigns, Italy is the weak link of Europe. It is a problem for us and for the whole eurozone.

It is worthwhile to consider additional data (the financial daily Il Sole24Ore has published a detailed news report on Mediterranean Europe in recent weeks). We can look at international investments, for example. Spain (data from the Banco Santander Research Unit) has a stock of foreign investments amounting to $650 billion, equivalent to 50% of its GDP. Compare this to Germany’s 30% or France and Italy’s 20%. The Spanish deficit dropped to 2.6% of its GDP, still one of the highest in the EU, but it is characterised by a virtuous reduction pathway that should lead to concluding the EU Excessive Deficit procedure in a matter of months. The debt is falling steadily, it was at 97.2% of the GDP in late 2018, almost one point below that of 2017. The spread is low, one third of Italy’s.

Consolidation of public finances and renewed investments are the keys to a successful economic policy. Exportation, attracting international capital and stimulating internal demand are also essential. All of this has to happen within the solid boundaries of Europe and the Euro. The basic political choices have been shared over time from one government to the next, from the People’s Party to the Socialists, even in the case of fragile political alliances and severe tension (extremist Catalan autonomists clashing with Barcelona and Madrid). Despite the limits and contradictions, these measures are bringing benefits in terms of equilibrium, recovery and a returned sense of well-being.

Portugal also provides data worth considering. The deficit is barely 0.5% of the GDP, the sign of healthy public finances able to free resources for investments (in 2017 the deficit was at 3%, after climbing to 11% at the height of the Great Crisis). Although the debt remains above 120% of the GDP, the primary surplus generated fosters confidence in a clear debt reduction pathway. ‘Portugal has managed to attain a level of credibility it had never enjoyed before,’ affirms Mario Centeno, Minister of Finance in the government headed by the Socialist Antonio Costa and, since 2018, president of the Brussels Eurogroup (the coordinating body for the Finance Ministers of the 19 eurozone countries). Centeno explains: ‘We have launched a positive mechanism based on growth, public finances and the resulting credibility that has had a multiplier effect on market confidence, which has translated into reducing interest rates to a historic minimum.’

In Lisbon as well, the successive governments led by conservatives then by the Socialists as of 2016, have concurred on the pathway of recovery and relaunch, developing a long-term perspective that places priority on the interests of Portugal rather than electoral propaganda. There is no sign of populism nor sovereignism. These countries maintain intelligent ties with Brussels, including a wise use of the European Funds available (a skill Italy, especially the Southern regions, appears to be particularly incapable of doing).

Carlo Cottarelli, as executive director of the International Monetary Fund, monitored Portugal’s situation for several years. He recently commented (Il Sole24Ore, 29 March): ‘The Costa government has always confirmed its firm intent to formulate and implement economic and fiscal policies that promote sustained and fair growth in a context of fiscal consolidation’, promoting ‘a fiscal adjustment completely in line with international commitments’, especially by ‘controlling costs and eliminating waste, which is necessary in a country with a high public debt’.

The results: two countries on a path of growth in the context of Europe, which considers them positive examples.

Italy could learn quite a lot from their Mediterranean lesson.