REPORT FROM THE COMMISSION Spain Report prepared in accordance with Article 126(3) of the Treaty on the Functioning of the European Union
Date: 2020-05-20
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: Spain, budget deficit, budget policy, budgetary control, epidemic, gross domestic product, infectious disease, macroeconomics, public debt, stability pact

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 20.5.2020  COM(2020) 536 final  REPORT FROM THE COMMISSION Spain  Report prepared in accordance with Article 126(3) of the Treaty on the Functioning of the European Union  
 
 
REPORT FROM THE COMMISSION 

Spain 

Report prepared in accordance with Article 126(3) of the Treaty on the Functioning of 
the European Union 

1. 

INTRODUCTION  

On  20  March  2020,  the  Commission  adopted  a  Communication  on  the  activation  of  the 
general  escape  clause  of  the  Stability  and  Growth  Pact.    The  clause,  as  set  out  in  Articles 
5(1),  6(3),  9(1)  and  10(3)  of  Regulation  (EC)  1466/97  and  Articles  3(5)  and  5(2)  of 
Regulation (EC) 1467/97, facilitates the coordination of budgetary policies in times of severe 
economic downturn. In its Communication, the Commission shared with the Council its view 
that, given the expected severe economic downturn resulting from the COVID-19 outbreak, 
the  current  conditions  permit  activation  of  the  clause.  On  23  March  2020,  the  Ministers  of 
Finance of the Member States agreed with the assessment of the Commission. The activation 
of  the  general  escape  clause  allows  for  a  temporary  departure  from  the  adjustment  path 
towards  the  medium-term  budgetary  objective,  provided  that  this  does  not  endanger  fiscal 
sustainability in the medium term. For the corrective arm, the Council may also decide, on a 
recommendation  from  the  Commission,  to  adopt  a  revised  fiscal  trajectory.  The  general 
escape  clause  does  not  suspend  the  procedures  of  the  Stability  and  Growth  Pact.  It  allows 
Member States to depart from the budgetary requirements that would normally apply while 
enabling  the  Commission  and  the  Council  to  undertake  the  necessary  policy  coordination 
measures within the framework of the Pact. 

Data notified by the Spanish authorities on 31 March 2020 as validated by Eurostat show that 
the  general  government  deficit  in  Spain  reached  2.8%  of  GDP  in  2019,  while  general 
government gross debt stood at 95.5% of GDP. According to the 2020 Stability Programme, 
Spain plans a deficit of 10.3% of GDP in 2020, while debt is planned at 115.5% of GDP. 

The planned deficit for 2020 provides prima facie evidence of the existence of an excessive 
deficit as defined by the Stability and Growth Pact. 

Moreover,  the  data  for  2019  imply  insufficient  progress  towards  the  debt  reduction 
benchmark, which also provides prima facie evidence of the existence of an excessive deficit 
as defined by the Stability and Growth Pact. 

Against this background, the Commission has therefore prepared this report, which analyses 
Spain’s compliance with  the deficit and debt  criteria of the Treaty.  It  takes into account  all 
relevant  factors  and  gives  due  consideration  to  the  major  economic  shock  linked  to  the 
COVID-19 pandemic.  

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Table 1. General government deficit and debt (% of GDP)   

2016 

2017 

2018 

2019 

2020 
COM 

2021 
COM 

Deficit 
criterion 

Debt 
criterion 

General 
government 
balance 
General 
government 
gross debt 
Change in 
structural 
balance 
Required 
MLSA 

-4.3 

-3.0 

-2.5 

-2.8 

-10.1 

-6.7 

99.2 

98.6 

97.6 

95.5 

115.6 

113.7 

-0.9 

0.3 

0.1 

-0.5 

0.6 

-1.6 

1.3 

0.4 

4.2 

Note: MLSA refers to the Minimum Linear Structural Adjustment  
Source: Eurostat,  Commission 2020 spring forecast 

2. 

DEFICIT CRITERION 

Based  on  the  2020  Stability  Programme,  Spain’s  general  government  deficit  in  2020  is 
expected to reach 10.3% of GDP, above and not close to the Treaty reference value of 3% of 
GDP. 

The planned excess over the Treaty reference value in 2020 is exceptional, as it results from a 
severe economic downturn. Taking into account the impact of the COVID-19 pandemic, the 
Commission 2020 spring forecast projects a contraction of real GDP growth in 2020 by 9.4%. 

The  planned  excess  over  the  Treaty  reference  value  is  not  temporary  based  on  the 
Commission 2020 spring forecast, which projects the deficit to remain above 3% of GDP in 
2021. 

In  sum,  the  planned  deficit  for  2020  is  above  and  not  close  to  the  3%  of  GDP  Treaty 
reference  value.  The  planned  excess  is  considered  to  be  exceptional  but  not  temporary  as 
defined  by  the  Treaty  and  the  Stability  and  Growth  Pact.  Hence,  the  analysis  suggests  that 
prima facie the deficit criterion as defined by the Treaty and Regulation (EC) No 1467/97 is 
not fulfilled. 

3. 

DEBT CRITERION  

The  government  debt-to-GDP  ratio  decreased  from  97.6%  in  2018  to  95.5%  in  2019.  The 
debt-increasing  effect  stemming  from  the  headline  primary  deficit  and  interest  expenditure 
was more than offset by real GDP growth and the increase in the GDP deflator, and by the 
debt-reducing impact of stock-flow adjustments.  

Following the abrogation of the excessive deficit procedure in June 2019, Spain is subject to 
a three-year transition period to ensure sufficient progress towards compliance with the debt 
reduction benchmark. The transition period started in 2019 and will end in 2021. In order to 
ensure  continuous  and  effective  progress  towards  compliance  during  the  transition  period, 
Spain should respect simultaneously the following two conditions:  

a.  First, the annual structural adjustment should not deviate by more than ¼% of 
GDP from the Minimum Linear Structural Adjustment (MLSA) ensuring that 
the debt reduction benchmark is met by the end of the transition period;  

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b.  Second,  at  any  time  during  the  transition  period,  the  remaining  annual 
structural adjustment should not exceed ¾% of GDP (unless the first condition 
implies an annual effort above ¾% of GDP); 

The notified data show that Spain did not make sufficient progress towards meeting the debt 
reduction  benchmark  in  2019  (see  Table  1),  as  the  gap  to  the  MLSA  amounted  to  1.1%  of 
GDP. 

The  analysis  thus  suggests  that  prima  facie  the  debt  criterion  is  not  fulfilled  based  on  the 
2019 outturn data. 

4. 

RELEVANT FACTORS  

Article 126(3) of the Treaty provides that, if a Member State does not fulfil the requirements 
under one or both of those criteria, the Commission has to prepare a report. That report must 
also  “take  into  account  whether  the  government  deficit  exceeds  government  investment 
expenditure  and  take  into  account  all  other  relevant  factors,  including  the  medium-term 
economic and budgetary position of the Member State”.  

Those factors are further clarified in Article 2(3) of Regulation (EC) No 1467/97, which also 
provides  that  “any  other  factors  which,  in  the  opinion  of  the  Member  State  concerned,  are 
relevant in order to comprehensively assess compliance with the deficit and debt criteria and 
which the Member State has put forward to the Council and to the Commission” need to be 
given due consideration.  

For the apparent breach of the debt criterion, the analysis of the relevant factors is particularly 
warranted  given  that  debt  dynamics  are  to  a  larger  extent  influenced  by  factors  outside  the 
control of the government than is the case for the deficit. This is recognised in Article 2() of 
Regulation  (EC)  No  1467/97,  which  provides  that  the  relevant  factors  shall  be  taken  into 
account when assessing compliance on the basis of the debt criterion, irrespective of the size 
of the breach. In that respect, at least the following three main aspects need to be considered 
when assessing compliance with the debt criterion, given their impact on the debt dynamics 
and  sustainability:  (i)  adherence  to  the  MTO  or  the  adjustment  path  towards  it,  (ii)  the 
implementation of structural reforms, and (iii) the prevailing economic conditions. 

As specified in Article 2(4) of Regulation (EC) No 1467/97, as regards compliance with the 
deficit criterion in 2020, ,since the government debt-to-GDP ratio exceeds the 60% reference 
value and the double condition is not met - i.e. that the deficit remains close to the reference 
value and that its excess over the reference value is temporary - the relevant factors cannot be 
taken into account in the steps leading to the decision on the existence of an excessive deficit 
on the basis of the deficit criterion for Spain. 

In the current  situation,  a key  additional factor to  take into consideration regarding 2020 is 
the economic impact of the COVID-19 pandemic, which has a very substantial impact on the 
budgetary situation and  results in  a highly  uncertain outlook. The pandemic has also  led to 
the activation of the general escape clause. 

4.1. 

 COVID-19 pandemic  

The  COVID-19  pandemic  has  led  to  a  major  economic  shock  that  is  having  a  significant 
negative  impact  throughout  the  European  Union.  The  consequences  for  GDP  growth  will 

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depend  on  the  duration  of  both  the  pandemic  and  of  the  measures  taken  by  national 
authorities and at European and global level to slow its spread, protect production capacities 
and  support  aggregate  demand.  Member  States  have  already  adopted  or  are  adopting 
budgetary  measures  to  increase  the  capacity  of  health  systems  and  provide  relief  to  those 
individuals  and  sectors  that  are  particularly  affected.  Significant  liquidity  support  measures 
and  other  guarantees  have  also  been  adopted.  Subject  to  more  detailed  information,  the 
competent statistical authorities are to examine whether those measures entail an immediate 
impact on the general government balance or not. Together with the fall in economic activity, 
those measures will contribute to substantially higher government deficit and debt positions. 

4.2  Medium-term economic position including structural reforms 

While  the  Spanish  economy  was  on  a  moderating  growth  path  before  the  outbreak  of  the 
COVID-19 pandemic, it still enjoyed above-potential and above euro area average growth of 
2.0% in 2019. The Commission 2020 winter forecast projected it to remain robust at 1.6% in 
2020.  Hence,  it  cannot  be  argued  that  macroeconomic  conditions  are  a  mitigating  factor  in 
explaining Spain’s lack of sufficient progress towards meeting the debt reduction benchmark 
in 2019. 

However,  the  outbreak  of  the  pandemic  in  early  March  led  to  the  adoption  of  strict  virus 
containment measures that are expected to result in a sharp contraction of output in the first 
half  of  the  year.  While  output  should  rebound  strongly  once  restrictions  are  lifted,  the 
recovery  is  expected  to  be  uneven  across  sectors,  and  the  lost  output  is  not  expected  to  be 
fully recovered within the forecast  horizon. The European Commision 2020 spring forecast 
projects GDP to contract by 9.4% on average in 2020. There is an exceptionally high level of 
uncertainty about the evolution of the pandemic and the pace of relaxation of the restrictions 
to economic activity and the short-term response of private agents to it. The projected sharp 
drop in GDP is a mitigating factor in the assessment of Spain’s compliance with the deficit 
criterion in 2020. 

In its 2020 Country Report1, the Commission assessed that Spain has made limited progress 
in  addressing  the  2019  Country  Specific  Recommendations.  Concretely,  Spain  made  some 
progress  in  modernising  and  increasing  the  capacity  of  employment  and  social  services, 
whereas  limited  progress  was  achieved  in  improving  the  fiscal  and  public  procurement 
frameworks, in reducing the use of temporary contracts, and in improving family support and 
coverage gaps in unemployment and social benefits. There was also only limited progress in 
reducing early school leaving and improving educational outcomes, in increasing cooperation 
between  education  and  businesses,  in  fostering  innovation,  and  in  upgrading  rail  freight 
infrastructure  and  energy  interconnections,  as  well  as  in  implementing  the  Law  of  Market 
Unity.  

4.3 

 Medium-term budgetary position, including government investment 

The  headline  deficit  increased  from  2.5%  of  GDP  in  2018  to  2.8%  in  2019,  due  to 
expenditure growing faster than nominal GDP while tax revenue increased in line with it. In 
particular, compensation of employees and social transfers, including pensions, contributed to 

1  See  Commission  Staff  Working  Document  SWD  (2020)  508  final,  26.2.2020,  "Country  Report  Spain  2020. 
Including an In-Depth Review on the prevention and correction of macroeconomic imbalances".   

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the rapid expansion of expenditure. Government investment is estimated to have fallen from 
2.1% of GDP in 2018 to 2.0% in 2019, still below the general government deficit in 2019. 

On 13 July 2018, Spain was recommended to ensure that the nominal growth rate of primary 
government expenditure, net of discretionary revenue measures and one-offs, did not exceed 
0.6%  in  2019  (‘the  expenditure  benchmark’),  corresponding  to  a  structural  adjustment  of 
0.65%  of  GDP2.  Based  on  outturn  data  and  the  Commission  forecast,  expenditure  growth 
exceeded  the  benchmark,  with  a  deviation  from  the  recommended  adjustment  path  towards 
the medium-term budgetary objecitve of 1.6% of GDP in 2019, thus pointing to a significant 
devation. The structural balance deteriorated by 0.5% of GDP in 2019, thus also pointing to a 
significant deviation of 1.2% of GDP in 2019. The overall assessment points to a significant 
deviation  from  the  recommended  adjustment  path  towards  the  MTO  in  2019.  The  lack  of 
compliance with the preventive arm requirements is an aggravating factor for the assessment 
of Spain’s prima facie non-compliance with the debt criterion in 2019. 

The Stability Programme provides information on substantial measures taken to contain the 
pandemic  and  support  the  economy  and  reports  a  total  of  around  3%  of  GDP  in  support 
measures in response to the crisis. The Commission estimate of the budgetary imapct of these 
measures  is  smaller  (at  0.8%  of  GDP),  as  it  considers  a  large  share  of  the  expenditure  on 
short-term work schemes as part of the normal operation of the automatic stabilisers, whereas 
the  programme  appears  to  report  the  gross  impact  of  these  schemes  under  the  budgetary 
measures  taken  in  response  to  the  crisis.  On  substance,  however,  this  does  not  point  to 
fundamental differences in the overall assessment of the impact of the crisis on government 
expenditure. The medium-term fiscal outlook remains subject to high uncertainty.  

4.4.  Medium-term government debt position  

Government debt declined steadily between 2016 and 2018, from 99.2% to 97.6% of GDP, 
due to relatively strong nominal GDP growth more than offsetting both the cumulated general 
government deficits and the debt-increasing impact of stock-flow adjustments recorded over 
the same period.  In 2019, the  government  debt-to-GDP ratio decreased further to  95.5% of 
GDP, mainly reflecting debt-decreasing stock-flow adjustment, but also the fact that the debt-
reducing impact of nominal GDP growth was still greater than the increase in debt stemming 
from the general government deficit. 

According to the Commission 2020 spring forecast, general government debt is expected to 
rise from 95.5% of GDP in 2019 to 115.6% of GDP in 2020. 

Overall,  the  debt  sustainability  assessment  indicates  that  notwithstanding  risks,  the  debt 
position  remains  sustainable  over  the  medium-term,  which  takes  account  of  important 
mitigating  factors  (including  the  debt  profile).  In  particular,  while  the  government  debt 
position has deteriorated as a result of the COVID-19 crisis, the debt- ratio in the baseline is 
expected to be on a sustainable (slightly declining) trajectory over the medium term.3  

2 Council Recommendation of 13 July 2018 on the 2018 National Reform Programme of Spain and delivering a 
Council opinion on the 2018 Stability Programme of Spain, OJ C 320, 10.9.2018 p 33 
3 The baseline is based on the Commission spring 2020 forecast. Beyond 2021, a gradual adjustment of fiscal 
policy is assumed, consistent with the EU economic and fiscal coordination and surveillance frameworks. Real 
GDP growth is projected according to the so-called EPC/OGWG T+10 methodology. In particular, (real) actual 
GDP  growth  is  driven  by  its  potential  growth  and  affected  by  any  additional  fiscal  adjustment  considered 

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Graph 1 : General government debt (% of GDP) 

4.5 

Other factors put forward by the Member State 

On  11  May  2020,  the  Spanish  authorities  transmitted  a  letter  with  relevant  factors  in 
accordance with Article 2(3) of Regulation  (EC) No 1467/97. The analysis presented in the 
previous  sections  already  broadly  covers  the  key  factors  put  forward  by  the  authorities. 
Additional  factors  not  mentioned  above  are  the  difficulties  in  2019  to  form  a  government 
with full powers, which resulted in two general elections being held, and the failure to have 
the  2019  budget  bill  adopted  by  parliament.  The  latter  prevented  the  adoption  of  some 
planned revenue-increasing measures. Moreover, the letter mentions some unforeseen events 
having an impact in 2019, which the authorities claim to be of a one-off nature; the need to 
balance  the  need  to  reduce  government  debt  against  the  need  to  reduce  unemployment  and 
other  social  imbalances;  and  the  progress  Spain  has  continued  to  make  in  the  correction  of 
macroeconomic imbalances.  It  also  makes  reference to  methodological  issues related to  the 
measurement  of  fiscal  targets  and  fiscal  effort.  The  letter  also  refers  to  recent  debt 
developments  and  argues  that  the  gap  to  the  debt-reduction  benchmark  would  be  small  as 
compared to deviations recorded in the past by other Member States, thereby raising the issue 
of fairness and equal treatment. Finally, it also puts forward the argument that exceptionally 
low inflation has slowed down the pace of debt reduction.   

 5. 

CONCLUSIONS 

According to the Stability Programme, Spain’s general government deficit in 2020 is planned 
to increase to 10.3% of GDP, above and not close to the 3% of GDP Treaty reference value. 
The  planned  excess  over  the  reference  value  is  considered  to  be  exceptional  but  not 
temporary.  

(through the fiscal multiplier). Inflation is assumed to converge gradually to 2%. Interest rates assumptions are 
set in line with financial market expectations. Under the adverse scenario, higher interest rates (by 500 bps.) and 
lower GDP growth (by -0.5 pp.), with respect to the baseline, are assumed (throughout the projection horizon). 

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The general government gross debt stood at 95.5% of GDP at the end of 2019, above the 60% 
of GDP Treaty reference value. Spain did not make sufficient progress towards meeting the 
debt reduction benchmark in 2019. 

In line with the Treaty and the Stability and Growth Pact, this report also examined relevant 
factors. As specified in Article 2(4) of Regulation (EC) No 1467/97, as regards compliance 
with the deficit criterion in 2020, since the government debt-to-GDP ratio exceeds the 60% 
reference value and the double condition is not met - i.e. that the deficit remains close to the 
reference  value  and  that  its  excess  over  the  reference  value  is  temporary  -  those  relevant 
factors cannot be taken into account in the steps leading to the decision on the existence of an 
excessive deficit on the basis of the deficit criterion for Spain. 

As regards compliance with  the debt  criterion  in 2019, the relevant  factors, in  particular (i) 
the  observed  macroeconomic  conditions;  (ii)  the  implementation  of  growth  enhancing 
structural  reforms  in  past  years,  and  (iii)  the  significant  deviation  from  the  recommended 
adjustment path  towards the medium  term  budgetary objective, leads to  the conclusion that 
the  debt  criterion  as  defined  by  in  the  Treaty  and  in  Regulation  (EC)  No  1467/1997  is  not 
complied with.  

Overall, the analysis suggests that the deficit and debt criteria as defined in the Treaty and in 
Regulation (EC) No 1467/1997 are not fulfilled. 

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