Spain Is Suddenly Shy About Stimulus With Virus Out of Control
Spain Is Suddenly Shy About Stimulus With Virus Out of Control
(Bloomberg) --
The European Union just gave Spain the OK to spend its way through the coronavirus crisis.
But the left-wing government in Madrid is unsure whether to take full advantage. Such is the topsy-turvy world of the Covid-19 pandemic.
The socialist economy minister is trying to stop the deficit blowing out, while a former spending watchdog is urging her to open the taps to stop the economy collapsing. The cabinet meets Tuesday to thrash it out.
With more than 9,000 cases, Spain has quickly become a focus of the epidemic, and the scramble to pull together an effective response has exposed unexpected fault lines in the cabinet.
Prime Minister Pedro Sanchez and his ministers, like a generation of European politicians, cut their teeth during almost a decade of financial crisis in which economic policy often came down to budget fights between indebted nations like Spain and Greece and the creditors who funded their bailouts.
Spain’s borrowing costs have jumped in recent days, with 10-year yields at the highest since May. However, for now they remain far below the levels seen during Europe’s debt crisis. The budget deficit stood at 2.5% of economic output in 2018, compared with almost 11% during the height of the crisis in 2012.
Fast Moving
The idea that a health scare could prove as much of a threat to their economy as the bond market caught Spain’s leaders unawares. And like their counterparts across the continent, Sanchez and his team have struggled to come to terms with the scale and speed of the response required.
Nine days ago government ministers were among 120,000 demonstrators who filled the streets of the Spanish capital to mark international women’s day, brushing off the risks of contagion even as Italy imposed a lockdown on the region around Milan.
In the following days, Social Security Minister Jose Luis Escriva, who previously ran Spain’s independent budget overseer, was talking to Sanchez about targeted measures to support sectors affected by the virus, according to people familiar with their conversation.
Now he’s calling for massive fiscal stimulus to buoy the economy -- and he’s winning support from cabinet colleagues.
Escalation
In the intervening days, ministers realized that the reassurances they’d been offered by the government’s main medical adviser were unfounded as the number of cases and deaths spiraled, the people said. Sanchez’s wife and two ministers all tested positive for coronavirus after attending the march.
In response, the prime minister imposed a series of increasingly drastic restrictions on the movement of Spaniards. That culminated in him imposing a state of emergency on Saturday night, as police drones buzzed around the capital ordering citizens to get indoors.
European Central Bank President Christine Lagarde told EU leaders last week that unless they deliver decisive fiscal stimulus, the virus could trigger an economic meltdown on a par with the one that followed the collapse of Lehman Brothers in 2008. The European Commission effectively suspended the restrictions on what euro-area members can spend.
Yet Escriva is running into resistance in the cabinet from Economy Minister Nadia Calvino.
She is arguing that Madrid needs to conserve its fiscal firepower in case the epidemic lasts longer than anticipated, and is wary of the sudden volte-face from the EU budget enforcers.
People close to Calvino say she is worried that unrestrained spending might eventually be punished by bond investors with higher borrowing costs that set the country on track for its last crisis.
While they agree that Spain needs a major stimulus package, Calvino’s team also points out the country will have to reckon with a public debt of almost 100% of GDP down the road. Italy’s debt of 135% has been a flashing red warning light for the EU for years.
‘Secrets’
So Calvino, a former top budget official in Brussels, is demanding a careful analysis of the cost of any aid policies to be implemented, the people said.
Escriva says they need to find strategies that will be effective in this unprecedented situation and they should worry about the price tag later.
“I’m not going to reveal any kind of secrets from the deliberations in the cabinet meeting,” Calvino told journalists on Monday. “It’s an issue of such magnitude that it justifies an in-depth debate.”
The Bank of Spain has also argued for a major and immediate response to prevent what it sees as a temporary crisis from turning into a longer-lasting downturn.
When the cabinet gathered on Saturday to decide the terms of the state of emergency, the discussion ran on more than seven hours longer than planned.
The battle over fiscal policy begins at 9:30 a.m. when they meet again.
To contact the reporters on this story: Rodrigo Orihuela in Madrid at rorihuela@bloomberg.net;Jeannette Neumann in Madrid at jneumann25@bloomberg.net
To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, ;Chad Thomas at cthomas16@bloomberg.net, Ben Sills
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