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Spain EMU

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Country Analysis


The probability of Spain joining EMU by the start date is questionable at this time. Nevertheless, Spain has made the most impressive progress over the past several months of steering its economy towards meeting EMU criteria. It is unlikely that Spain would enter EMU without Portugal. Therefore, to some extent these two nations are tied together.GDP growth in Spain has been less than impressive averaging at the 2.2% level. The Spanish government hasindeed tightened its fiscal policy with a 1996 budget deficit of 4.4%. It is widely hoped that the budget deficit will decline further to meet the 3% Maastricht target for 1997.

Spain’s national debt is another story. The debt has climbed steadily since 1992 while its debt/GDP ratio still is better than most EMU applicants. At best, the debt ratio in Spain will come in around 70% for 1997. On the inflation front, Maastricht inflation targets are still well below the current levels.

Spain has indeed made great progress on its economic and fiscal criteria. Still the extremely high levels of Spanish unemployment (22.3%), one must question the political stability of this nation in the near future. There is no doubt that the political powers in Spain are very much in favor of early EMU membership, the final decision to admit Spain in 1999 would require more flexibility in Maastricht Treaty interpretation. Still the survival of EMU itself will depend upon the number of states admitted from day-one. Too few will spell disaster while too many could lead to an unstable economic condition for Europe as a whole.

The current political stability within Spain is based largely upon the centre-right government’s minority position within parliament. It has been supported loosely by the regional nationalist parties and it is this support, which is in danger should unemployment fail to improve sharply. Should this political agreement between the government and the regionalists fail to hold, then the next general election could change the direction of Spain. Otherwise, as long as this agreement holds, then the next elections will be held as late as March 2000.

Depending upon the economic conditions in both France and Germany, we could see Spain, Portugal and Italy membership being postponed until 2001. If economic conditions in Germany continue to worsen, these three nations may find themselves in a membership sooner rather than later.

1995 1996e 1997f
ERM Member Y Y Y
Inflation 4.7 3.6 2.8
Budget Deficit / GDP 6.6 4.4 3.0
Debt / GDP 65.7 67.8 68.9
10Y Bond Yields 11.3 8.7 6.9
f=forecast e=estimate

© Princeton Economic Institute