Commissioner Ursula VON DER LEYEN
President
EUROPEAN COMMISSION
Rue de la Loi 200/Wetstraat 200
B-1049 Bruxelles/Brussel
(BELGIUM)
Dear Madam,
We, the undersigned, a group of Spanish independent professors and economists, have been submitting since June 2016 to the previously-responsible EC Commissioners detailed calculations both proving the historical manipulation of the Spain’s National Accounts (Spain’s ‘official’ GDP is overrated by 16% with respect to the ‘real’ GDP) and in addition highlighting with anticipation that the deficit reductions promised by the Spanish government to the EU were never going to be met.
To our regret, our calculations have not been proven wrong so far by either your services or by those of other national and international institutions. Such discrepancies have far-reaching consequences on the magnitude of Spain’s public deficits and on the long-term sustainability of its debt. As you are perfectly aware of, Spain depends entirely on the stimulus programme of the ECB not to declare itself in bankruptcy. However, the dynamics of non-compliance of Spain’s promised deficit reductions seems to have no end; moreover, it has accentuated in recent time.
Two weeks ago the Spanish government submitted a Stability Plan for 2020-2021 to the European Union; in it, a drop of 9.2% in GDP during 2020 and a recovery of 6,8% in 2021, plus a deficit of 10.3% in 2020 were introduced, figures that are pure scientific fiction to say the least.
Starting with Spain’s GDP, our estimate is a drop of 19,9%, based on i) the official figures for the first quarter (-5.2% or -20.8% raised at the annual rate), ii) the PMIs for the second quarter, with falls to 7 and 8 in the services sector (the worst in history), and iii) the forecasts for the whole year from the employer’s associations active in the most affected sectors (see Annex 1). Industries in the service sector represent by far the largest component of the economy (about 68% of GDP and 75% of employment). These industries are on average, the hardest hit by the pandemic, and revenues lost are gone forever, not deferred (fewer consumer that tend to spend less). For this reason, a recovery of 6.8% in 2021 is not possible; a zero growth is our estimate.
We anticipate a 19.6% increase in Spain’s deficit following the financial needs derived from the pandemic and a brutal increase in current expenses proposed by the Spanish government, which includes a gigantic increase in spending on public wages (6%). In short, an unprecedented increase in the size of the Spanish public sector, which goes from 41.9% to 51.5% of Spain’s GDP. In addition, the Spanish government considers that the interest on the debt will barely rise from 25,000 to 29,000 million Euros, in a context in which at least 380,000 million Euros would be needed in reality for both refinancing and new financing (see Annex 2).
Regarding employment, close to one million employments have been lost between 12 March and 30 April, and in addition 3 million workers are under a Temporary Unemployment Scheme (“ERTE” in Spanish language). Taking into consideration these temporary unemployed workers, Spain has now reached a 34% unemployment. As it is estimated that one out of every three temporary unemployed workers will lose their job permanently, we can anticipate unemployment will stabilise at 24%. The Spanish Social Security figures show as well that in a month and a half 142,000 companies have been dismantled in Spain, and the self-employed have suffered the biggest drop since there are recorded statistical series.
Finally, the Debt/GDP ratio, two estimates are made, one with the EDP debt, and the other with the Total debt, including liabilities not included in the EDP debt that amount to 350,000 million Euros according to the Bank of Spain. In short, EDP Debt/GDP = 141% and Total Debt/GDP = 175% (see Annex 3). This debt is impossible to repay, so Spain is bound to suspend payments in 2021, and given the size of our economy, 6.5 times that of Greece, Spain cannot be rescued. In our opinion, the only realistic option to address this challenge is putting an end to the autonomous regions model, which represents an annual waste of about 100,000 million Euros.
For this reason, we believe the extra financing required by Spain must have as a “sine qua non” condition: the drastic cut in our regional administrative model which represents an annual waste of about 10% GDP, only duplications between Public Administrations represent 36,000 million Euros waste. In words of the former Ministry of Finance: “two million public employees have joined the public service through personal connections and not through merit”, there are more than 3,000 public companies in the autonomous regions administrations that are ineffective. Allocating additional resources to Spain without conditions would entail the country’s eventual exit from the Euro, and probably the end of the Euro system. Spain’s future and that of the Eurozone is at stake. Only the European Union can foster the drastic measures required to avoid an economic disaster for our nation.
Needless to say, we remain at your full disposal to introduce to you the complete findings of our analysis.
Yours faithfully,
| Prof. Dr. Roberto CentenoProfessor Emeritus of Economy
Technical University of Madrid |
| Jose Papí
Economist and Technology Entrepreneur Juan Carlos Bermejo Entrepreneur, Engineer & MBA |
ANNEX 1
The tourism sector represents 15% of Spain’s GDP. The employers of the sector (plus Iberia, the national airline, and Renfe, the national railways company) estimate a decrease in business of 124,000 million Euros compared to 2019, which would mean a loss of 10% of GDP. Construction is a cyclical sector closely linked to economic growth; it represent 14% of GDP and the accumulated of the first quarter of the synthetic indicator of construction activity (ISAC) showed a drop of 28,1%, which if maintained the rest of the year represents 3,9 points of GDP. The automotive industry represents 10% of the GDP and 9% of the employment, and ANFAC (the employers’ association) estimates a fall of the production of 30% or 3% of the GDP
Commerce (shopping) accounts for 10% of GDP, and the Spanish Confederation of Commerce calculates that it will be necessary to close 20% of 80,000 businesses that employ 240,000 people, equivalent to 2 points of GDP. And finally, there are other activities, a part included in tourism and a part not, such as restaurants, bars, nightclubs: as a whole, and including the expected fall in exports, we estimate a reduction of one point of GDP. In summary and based on the data provided by the sector employers and the Quarterly Accounting raised at the annual rate for the first quarter, and the PMIs for the second quarter, we foresee a drop in GDP of 19,9%.
ANNEX 2
Regarding the deficit, the government failed in 2019 to meet the different objectives that were scaled, finally the financing needs of the Public Administrations were 35,195 million Euros, above the 30,495 million Euros of the previous year. And for this year i) the size of the public sector rises ten points, ii) public employment increases its cost by 6%, to 142,500 million Euros, due to the legions of new employments offered and the maintenance of salary increases of 2.3%, and iii) the interest on the debt requires a refinancing between now and the end of the year of 88,000 million Euros in Treasury bonds and 47,000 million Euros from the rest of the Public Administrations.
With a 9% drop in GDP, they estimate that tax revenue will only drop 6%, with a 17.6% GDP drop, while tax revenue will drop 15% (that is, the government is inflating revenues by 20,000 million Euros). And all this without including the financing for the exit of the crisis, that we estimate in 185,000 million Euros or 15% of the GDP. In total Spain will have to obtain 135,000 million Euros for the refinancing of the debt, 40,000 million Euros for the financing of the increased size of the Public Sector, 20,000 million less of fiscal income, plus the 240,000 million that President Sánchez wants the ECB to assume, although he would settle for 185,000. In short, total needs amount up to 380,000 million Euros, of which 245,000 million would be the 2020 deficit or 19.6% of GDP.
ANNEX 3
Finally, before entering into the calculation of the Debt/GDP ratio, we want to draw your attention to the fact that the debt according to EDP has been systematically in Spain about 350,000 million Euros lower than the total debt according to the Bank of Spain. For this reason, we always undertake the two calculations: with debt according to EDP and with total debt. The debt according to PDE at the end of 2019 was 1.19 trillion Euros, with a total debt of 1.54 trillion, which divided by a GDP of 1.24 trillion gives us an EDP Debt/GDP debt ratio = 96%, and Total Debt/GDP = 124%.
For 2020 the debt according to EDP with our deficit estimate would be 1,435 trillion Euros, and the total debt 1,785 trillion. GDP would be 17.5% lower than in 2019, that is 1.02 trillion Euros. Consequently, at the end of 2020 we would have EDP Debt/GDP = 141% and Total Debt/GDP = 175%. This means that Spain will be bankrupt and will need to be rescued, unless we change the current autonomous regions model for a simpler decentralised model. Spain’s administrative model counts on 17 autonomous regions with the full administrative structure and institutions of a sovereign state, plus 7,286 local entities, something unique in Europe (the United Kingdom has 340 local authorities for a population 50% higher). Several independent studies from the whole ideological spectrum have shown this means an annual waste of 100,000 million euros or 10% of the new GDP.