Paolo Gentiloni: “Spain is in better shape than the rest of the EU”

Germany notwithstanding, no handful of rules written in bronze can anticipate the creativity of history.

15 years ago Europe believed the opposite and only rescued half a dozen countries on the horn, against the European treaties, and then applied a good austerity cure to them, as prescribed by the fiscal rules.

Things went wrong, but Brussels learned a lesson: when the pandemic arrived, the rules and Easter were suspended.

European Commissioner Paolo Gentiloni arrives in Spain when just a few hours ago an extension in the budget was announced that would have made his predecessor, a Finn whose name no one wants to remember, angry.

Gentiloni makes it clear in this interview that Brussels has a certain apocalypse fatigue.

He applauds the robust Spanish growth, especially the Augustinian growth “depending on who you compare it to.”

He does not believe that neither the succession of upcoming elections nor the lack of budgets nor the unstable balance on which Pedro Sánchez's parliamentary majority is based will have any effects.

He calls for intelligent rules that look to the long term and are capable of creating a suit for each country.

He asks – with a small mouth – the ECB to act now.

He leaves a good message for a Germany in low times.

And he asks for more: defense spending, investments for the green and digital transitions and a European fiscal capacity against crises that is a kind of I want and I can't.

Everyone knows that Europe desperately needs it.

And no one knows how the hell to convince the north that without that there is no union worthy of the name.

Ask.

The euro zone faces a period of stagnation.

And the economic policy manuals say that in this situation stimuli are needed.

This European Union is different from 15 years ago, but the European Commission is advocating contractionary budgets.

Do you think that, at another level, the mistakes of the Great Recession can be repeated?

Answer.

No. In 2020 we suffered a deep crisis, and then a strong rebound, even faster than China's.

That was the trend until autumn 2022, when the economy slowed down due to the Russian war and the energy and inflation crisis.

Growth was weak in 2023, with 11 countries negative, and we are now in a weak growth environment.

But I am not a pessimist: two years ago we were talking about blackouts and recession in the face of a war that has a global impact.

We were able to decouple from Russian gas in a matter of months and we expect economic activity to accelerate this year, by 0.8%.

We have gone through the hardest part, we are not heading towards recession, and inflation will be below 2% in 2026, according to the ECB's estimate.

The markets expect rate cuts, which together with the strong labor market justify the optimism I was talking about: the economy will accelerate in the second half of the year and from then on we will have decent growth, of 1.6%.

Q.

And a fiscal squeeze cannot be counterproductive?

A.

Between March 2020 and the end of 2023 there was no fiscal discipline: we suspended the Stability Pact.

And the new fiscal rules are less demanding in terms of the adjustment path, with plans for the coming years in terms of fiscal consolidation, investment and reforms.

The stimulus is there: the Commission has borrowed between 100,000 and 120,000 million a year on the markets.

That money expires in 2026, so the question is: what then?

After the financial crisis we had a drop in public investment for many years;

Now there is a slight increase, but there is a lack of private investment for the climate and digital transitions.

But I go back to the beginning: we need fiscal rules for our union.

If anyone believes that we can have a union without fiscal rules, they are wrong.

Of course: we need them to be realistic, differentiated by country and oriented to the medium term.

I believe that this has been achieved with a very good contribution from the Spanish presidency of the EU.

Gentiloni during the interview.Jaime Villanueva

Q.

You have spoken about the markets' expectations regarding the ECB.

Are the rates too high?

Frankfurt has been very forceful about its fiscal policy: what is Brussels asking of the ECB?

A.

We saw a love story between fiscal and monetary policies during the pandemic: the ECB's debt purchase program coincided with the suspension of fiscal and state aid rules.

After the invasion of Ukraine we entered a different phase.

I am aware that there is now a debate about the speed of rate cuts.

Inflation has moderated and we will have less strict monetary conditions for the second part of the year;

the economy will accelerate.

Now, the Next Generation EU funds and the war in Ukraine have changed the map of growth in Europe: the countries in difficulty are now the Nordic, Baltic and Central European countries, that is, Germany and Austria.

The countries with the strongest expansion are part of those in the east and south, especially Spain, Portugal, and Greece, with Italy and France, holding up well.

That's not the traditional growth map.

Q.

In the previous crisis, 15 years ago, Germany frequently gave

economic policy

advice to other countries.

Now the German model is in crisis: delegating defense to the United States, energy to Russia and export strength to the Chinese market may not have been such a good idea.

Any advice for Germany?

A.

It is obvious that some pillars of German success have been questioned, such as cheap gas or explosive trade with Asia.

And it is also true that the reinforcement of European defense is independent of the results of the American elections, but if Donald Trump ends up winning that message will be even more urgent.

But even in that context there are positive things.

First, globalization is not dead: exporting countries like Germany or Italy are not doomed.

And second, when you have to change the energy

mix

you go through difficulties, but in the medium term there is the opportunity to have stronger renewables.

That said, it is clear that Germany needs more investment.

And here the contradiction between that need and German rules comes into play.

It's fine to build fiscal buffers for tough times, but when you have those buffers and you hit hard times and investing turns out to be too difficult, we have a serious problem.

Q.

Rules written in bronze are usually not a good idea.

With the rules in hand, the Commission asks Spain for a credible medium-term fiscal consolidation plan, but the Government has just given up presenting a Budget.

Are you worried that Spain could fail to fulfill its commitments?

A.

No. We take note of the decision on the budget project.

But the difficulties in having Budgets are frequent and do not represent a serious impediment.

It will be a challenge for Spain to put together a medium-term plan on fiscal consolidation, investment and reforms, which incorporates Next Generation funds into fiscal planning.

Q.

Can political instability affect economic growth?

A.

I don't think so.

Since I have been commissioner, despite the weakness of the majorities or the electoral processes, the course of your country has been effective.

Spain is in better shape than the rest of the EU.

Stability is a fundamental characteristic of a country.

But look, I come from a country that changes governments frequently, and has always been considered stable.

In the end, international alliances, a pro-European orientation and the management of the economy have as much to do with stability as a more or less large majority in Parliament.

Look at the Netherlands, France or Germany.

The European elections will be a stress test, because in some countries anti-European forces could rise, which are a real risk of instability in that sense that I point out.

But in recent years Spain has shown that it can do a very good job with complicated parliamentary arithmetic.

Q.

The Government is having difficulties approving the unemployment benefit reform, essential for the plans agreed with the EU.

Spain had until now led the execution of the plan.

Do you see a slowdown that could translate into punishment, into less funds?

R.

I hope that Spain continues to be a leader in this process.

Overall, last year we saw some slowdown because several countries had to revise their plans.

Of the 225 billion euros disbursed so far within the framework of Next Generation EU, Spain has received 38 billion.

So the country is on the right track.

We are now examining your fourth request for payment.

The Cortes did not approve the subsidy reform, but there may be alternative measures.

Q.

You talk about the recovery plan as a factor in the change that the EU and economies like Spain have experienced.

Is it a consequence of the investments, the new money, or the transformation that has been caused through reforms?

A.

It's a mix.

First, it is the result of the funds' impact on financial markets.

These resources have stabilized markets, while avoiding a prolonged contraction in public investments.

In some countries like Spain, the impact comes from investment, but also from important reforms.

For example, the labor market, which, according to our estimates, has good results after two years.

In other countries it is still too early to evaluate beyond investments.

Q.

Without Budgets, do you see difficulties in absorbing funds in Spain?

A.

The next two years are going to be demanding in the absorption of all these resources.

Spain, after requesting the loans, will receive 163,000 million, the equivalent of 12% of GDP.

I don't see problems with the Budgets, but it is a challenge to absorb them.

So far very good news has come from Spain.

And the performance of Spain and Italy will be crucial for the future of the method.

Q.

An extension of these funds is complicated.

A.

It is legally impossible.

Q.

So were the rescues, and there were some.

A.

In order to continue borrowing in the markets to finance this program beyond 2026, a unanimous decision of the 27 leaders and the approval of almost all national parliaments would be needed.

Frankly, I see it as impossible.

Q.

But do you see room for a debate on a common fiscal capacity?

A.

I see the need.

I know it is not the time, but the Commission has launched messages about a European sovereign fund or an instrument for defense.

The ECB, the IMF and the OECD insist that Europe lacks central fiscal capacity.

Politically it is difficult, but one of the main objectives of the next Commission must be what happens after 2026.

Q.

Maybe in the next crisis.

That curse: “Europe will be forged in crises.”

A.

Well, until 2026 we have a large amount of funds.

Then we will have to consider what the next step is.

But the pressure is there, with defense spending and the green and digital transitions.

Q.

What are your plans?

A.

Return to Italy.

I will not leave politics, but I am not a candidate for the European Parliament.

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