Spain economy minister urges Europe to focus on trade and banking

Posted on November 20, 2016

Spain’s economy minister has urged European governments to look beyond a rising clamour for fiscal stimulus and focus instead on boosting trade and fixing ailing banks to spur more growth.

“If you limit free trade and if there are doubts about the health of the banks then it is going to be extremely difficult to have a real recovery in Europe,” Luis de Guindos said in an interview. “That kind of slow-motion economy is the ideal landscape for populism.”

Mr de Guindos’s comments clash with recent calls from Brussels for more spending by some EU governments to boost demand. Pierre Moscovici, the EU’s budget commissioner, last week called on governments that “have budgetary room for manoeuvre to spend and invest more, both in their own interest and in the interest of everyone”.

Donald Trump, the US president-elect, has also raised expectations of looser fiscal policy, promising to push through tax cuts and boost investment in infrastructure.

While Mr de Guindos said “loosening might be the correct policy in countries that have the fiscal space”, he insisted that other policies were more important.

“Fiscal stimulus by itself is not going to fix our problem. We need to talk about free trade, about structural reforms and about addressing the situation of the banks in Europe,” he told the Financial Times.

Mr de Guindos, a 56-year-old economist who played a crucial role in formulating Spain’s response to the banking collapse and debt crisis of 2012, spoke at the start of a second term as economy minister under Mariano Rajoy, who last month won backing from parliament to lead another government.

The veteran conservative prime minister lacks a majority in parliament, giving rise to concern that the new legislature will be short and unproductive.

The immediate concern for Madrid is the wayward budget deficit. Spain is on track to post a deficit of 3.6 per cent of gross domestic product next year, or 0.5 points more than agreed with Brussels.

Mr de Guindos said Madrid was committed to reach its target, equivalent to about €5.5bn, with a focus on corporate tax revenues. “We are not going to touch VAT and we are not going to touch personal income tax. The bulk of the adjustment in terms of revenues has to come from corporate taxes,” he said.

“In 2007, Spain collected about €40bn in corporate taxes. This year, it is going to be about €20bn. That is partly due to the crisis but now we are in a recovery and corporate profits are starting to come back to the level we had in 2007. What is the difference? Many companies have accumulated a negative tax base and you can deduct that.”

The government would now close some of the “loopholes and deductions” used by companies, he said.

While the government has ruled out raising the headline rates on VAT, income tax and corporate tax, the plan to raise the tax burden on companies runs counter to a pre-election promise made by Mr Rajoy. The prime minister told the Financial Times in May that he was eyeing a cut in income tax and corporate tax, depending on the evolution of tax revenues. That prospect appears to have been ruled out.

Another challenge awaiting Mr de Guindos is the privatisation of Bankia, the sprawling financial group that was bailed out and nationalised in 2012. The government has promised to fully privatise Bankia by the end of next year.

Mr de Guindos signalled that the deadline could slip, arguing that it was more important for Madrid to recover as much of its bailout money as possible. “We are going to try to do it before the end of next year but these kinds of deadlines don’t make much sense. It will depend on the evolution of the market. To set a restriction that forces you to sell at the wrong time is a little bit insane,” he said.

Any delay would anger Spain’s private retail banks, which have long argued that Bankia should be made to compete with them without state ownership as quickly as possible.

Additional reporting by Jim Brunsden

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