The “Frugal” Countries Are Right

There is no solidarity without responsibility. The European Union Recovery Fund cannot be used as an excuse to perpetuate bloated political spending and create a transfer union where governments use taxpayers’ money to increase bureaucracy, because it would be the end of the European project. A union based on excess spending, debt and extractive policies would be destroyed in a few years. The strength of a unified group of countries comes from diversity and responsibility.

No one denies the challenges created by the Covid-19 crisis, but there are countries that have used the excuse of the pandemic to inflate political spending and now demand free money. The Spanish government has doubled the cost of government, maintained all the spending it increased during the growth period and increased the number of ministerial seats and advisors despite the crisis. Additionally, the government has approved a basic income plan that had no budget or fiscal space. There has been no management of costs whatsoever to allow budget room for automatic stabilizers, health, and unemployment costs. A government that increased the deficit in 2019 by 24% in a year of 2% GDP growth and record tax revenues has doubled the cost of government in the crisis and now demands no conditions or scrutiny from other member states.

Why would a serious government oppose a detailed scrutiny of the funds received? It should welcome it. Why would a government that calls itself reformist and states its commitment to budget stability reject any structural reform proposed by other member states? They should be implementing them now. Furthermore, why would a government that talks about an unprecedented emergency prefer to receive less funds than to accept the member states’ monitoring of grants? One could suspect that they are not aiming to use the funds in the most effective way.

These are important questions that need to be addressed in the European summit because this crisis cannot be solved if governments use the money of a recovery fund to perpetuate imbalances and squander resources for political purposes. If we want the EU to survive, it can only be based on competitiveness, trust and, most of all, credit responsibility.

If we want a united Europe we must listen more to the most dynamic countries and stop using the bureaucratic steamroller to turn all the member states into interventionist satellites.

The European Union faces a deep crisis. It cannot become a depression by using important funds that should boost competitiveness and strengthen the recovery to finance massive political transfer plans that serve as a political tool to keep bloated administration and political budgets.

The Spanish government has made serious mistakes in its objective of getting massive grants without conditionality.

The first one was not giving serious estimates of spending ceiling, deficit and debt for 2020 and not providing any for 2021 when Spain had already tested the patience of the European Commission in 2019 by missing an already revised deficit target in a period of record tax revenues.

The second mistake was assuming that Spain’s European partners were going to accept things that the Spanish government itself would not have accepted in different circumstances. Everyone knows that the government of Spain would have refused an unconditional fund if it had been only for another country, since it would mean a greater contribution to the EU budget, and a greater deficit for Spain. We know this because it was exactly the Spanish government’s position in the Greek crisis, when Prime Minister Zapatero stated that the Greek opposition parties should agree to the agenda of reforms in order to receive bailout funds (24th June 2011, La Vanguardia). It is easy to demand solidarity when you are the recipient of it.

Third mistake: It is not convenient to demand from the most responsible countries free money when the government goes to the negotiation table having missed the 2019 deficit target in a year of record tax revenues, with the largest deficit in the eurozone in 2020, being the only country that has not reduced non-essential expenses to accommodate the increase in health spending and with the most expensive government, with more ministers and higher officials in four decades.

The fourth error: It is also not easy to convince others to provide tens of billions of euros, unconditionally and with greater weight of subsidies when Spain has in the government coalition a party that has voted in Europe in favour of breaking the euro and whose leaders, including a vice president and two ministers, defended a massive default on the debt.

Podemos and Izquierda Unida voted on December 14, 2015 an amendment proposing “facilitating withdrawal mechanisms” from the monetary union and “an alternative plan for an orderly break-up of the euro area” and have never withdrawn or modified it.

The final and fifth mistake: The Spanish Government constantly repeats that the economy is recovering in a V-shape and that they will not cut any spending under any circumstance, just implement massive tax hikes that will erode competitiveness, growth, job creation, tax revenues and increase future deficit and debt. At the same time, they demand donations with no conditions.

Many Spanish and European citizens like me are more than happy to commit to a strong set of reforms to improve competitiveness and boost economic growth and jobs. We do not want funds to be squandered in political spending.

The failure to approve a no-condition all-grant recovery fund is not a European failure. It is the confirmation that the European project will only be strengthened if it becomes a union where solidarity is given with responsibility and where strength comes from the prudent management of so-called “frugal” – or rather, responsible – leaders.

There will be a Recovery Fund, it will have conditions and it will be good for all if it does. However, the Recovery Fund is not the solution for many European states’ structural problems. Structural reforms must be adopted to solve the long-term imbalances of European economies and conditionality should be viewed as a positive, not a negative. If countries want to show to the world that they are reliable partners committed to budgetary stability, reforms must be embraced, not rejected.

About Daniel Lacalle

Daniel Lacalle (Madrid, 1967). PhD Economist and Fund Manager. Author of bestsellers "Life In The Financial Markets" and "The Energy World Is Flat" as well as "Escape From the Central Bank Trap". Daniel Lacalle (Madrid, 1967). PhD Economist and Fund Manager. Frequent collaborator with CNBC, Bloomberg, CNN, Hedgeye, Epoch Times, Mises Institute, BBN Times, Wall Street Journal, El Español, A3 Media and 13TV. Holds the CIIA (Certified International Investment Analyst) and masters in Economic Investigation and IESE.

2 thoughts on “The “Frugal” Countries Are Right

  1. The U.N. report by Philip Allston paints a damning picture of the inefficiency at all levels of Spanish Government in dealing with poverty. Having begun my working life in the U.K. Civil Service and then moved to government positions in Australia, I see first hand the ineptitude, document demanding officers in government who have a job for life and that is all their interest. There are always exceptions of course, the “angels” who actually “help” those in need, but a job for life is an incredible disincentive to efficiency.
    The majority of western administrations were revolutionised in the 90’s to generate efficiency, that should be a condition of ANY further money given to Spain.

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