While Europe is still groaning under high inflation, in Spain it has fallen well below the ECB’s “magic” target of 2%. In June, inflation in Spain fell to 1.6%, making it the first major economy in Europe to meet the target set by Frankfurt.
What makes Spain different? And even in the midst of the election campaign for the July 23 elections? Low inflation confirms the “effectiveness of major tax cuts and benefits”, the finance ministry said in Madrid. The result is that in Spain inflation reached in June the lowest point since April 2021. Compared to May, the drop is 1.3 points. This decrease was affected by the decline in the prices of fuel, electricity and of food.
Madrid’s timely response to energy inflation was a combination of measures introduced from June 2021 and mainly from June 2022. Various measures in favor of the most vulnerable categories, such as poor families, the unemployed and students, played an important role. The reduction of public transport tickets, the limitation of rent increases, the increase of the minimum wage and the agreements with civil servants. Just two years ago the Sanchez government approved a cut in bill fees and introduced a kind of tax on the profits of companies that generate electricity from sources with little or no pollution. Towards the end of 2021 and in the following months, VAT on energy and gas bills has been reduced from 21% to 5% and various discounts on tariffs have been approved.
The Iberian exception
However, the measure that prevented the biggest problems was the decoupling of the price of natural gas from that of electricity, which was established with the “Iberian exception” from last summer. The “Iberian exception” that Madrid extracted from the EU has also worked effectively: Thanks to the gas price freeze and other measures, prices are falling in Spain. “Our choices paid off,” Sanchez said.
Spain is supplied with natural gas via pipelines from Morocco and Algeria. It has also built six LNG import and regasification terminals. In addition, electricity from the gas-fired combined cycle accounts for just over 15% of the total energy generated.
Producer prices fell nearly 7% from a year ago, at a faster pace than they rose during the gas crisis. Growth in the first quarter was revised upwards to 0.6% in the first quarter, beating the preliminary estimate of 0.5%.
According to the Spanish Central Bank, “the measures taken to limit the effect of natural gas on inflation, reduced the price index by two points”. In this way, government aid to vulnerable households, although costing about 1.3% of GDP, did not cause any deterioration in public finances.
Spanish Presidency of the EU
As of Monday July 3, Prime Minister Sanchez has taken over the reins of the EU presidency for six months, although no one can predict with certainty what the outcome of the election will be in 20 days’ time. Sanchez’s Socialists are trailing in the polls by two percentage points the centre-right People’s Party, which is likely to form a new government in partnership with the far-right Vox, which is in third place.
“Spain is the first of the major European economies to see inflation fall below 2%,” says the Spanish prime minister. “In such a complex context” with the war in Ukraine, the Spanish economy is the fastest growing European economy, we are creating jobs like never before and we are reducing and controlling prices like no one else in Europe,” Sanchez underlined.
A lesson for many, starting with the ECB, because it shows how fiscal policy can play a fundamental role in tackling inflation, rather than the constant tightening of monetary policy by raising interest rates.
