MNI INTERVIEW:Spain Unsure On Fiscal Escape Clause For Defence

Spain has still to decide whether it will activate the national escape clause from the European Union’s fiscal framework to allow for an increase in defence spending from 1.28% of GDP to 2% by 2025, and may not need to do so, Finance Minister Carlos Cuerpo told MNI.

The end-April deadline to request the clause from the European Commission is viewed as more indicative than binding, Cuerpo said in an interview in Washington where he was attending the spring meetings of the World Bank and the International Monetary Fund.

“It’s good that we have this degree of flexibility in the rules, but it’s early to decide if we use it or not,” he said, adding that some countries might request activation of the clause but ultimately not need to rely on it in order to comply with the fiscal rules.

“It should be seen as an element of flexibility and not as one as moral hazard or negative stigma,” he added, arguing for a pragmatic use of the clause amid evolving conditions. (See MNI: France, Other EU States, To Forego Defence Escape Clause)

Spain remains undecided partly due to the broader uncertainty created by ongoing international tensions, including the risk of a trade conflict. The April deadline is intended to help the European Commission organise its planning.

Spain will fund the boost to meet the NATO defence spending target, which it had initially intended to reach by 2029, through a combination of economic growth, lower-than-expected expenditure in 2024, and reallocation of resources from the EU’s post-Covid recovery programme, Cuerpo said.

“Basically from three sources: money from the recovery plan, in areas such as digitalisation that would finance cybersecurity, savings in some programmes compared to planned expenditure and then higher growth, which generates a bigger pie of higher revenues.” 

STRONGER EURO WELCOME

Cuerpo said the recent appreciation of the euro should be interpreted positively, as it reflects growing investor confidence in the single currency and in Europe’s broader economic and political stability. (See MNI INTERVIEW: Risk Fed Will Have To Buy Bonds - Bini Smaghi)

“I would say it’s positive also that these flows could be arriving and giving the message that in this instability context Europe is a safe haven,” he said, adding that this should reinforce Europe’s commitment to fiscal responsibility and longer-term sustainability.

Cuerpo said the EU is not aiming for the euro to displace the dollar as the world’s reserve currency, but that Europe should not shy away from assuming a greater role in the international monetary system.

“It is about reinforcing the euro as an essential currency in the international monetary system and this is possible by increasing the eurozone’s relevance,” he said, stressing the importance of internal reforms and deeper integration to bolster the euro’s standing.

A European safe asset would play a natural part in enhancing the euro’s international status, said Cuerpo, without specifying any timelines for its development. 

“I believe that part of the solution must come in a natural way by increasing debt issuance in euros, both by bigger issuers like Germany and by more joint debt,” he added.