Spain’s Two Finance Ministers Clash on Deficit Target as Economy Shrinks

Economy Minister Luis de Guindos said Spain is sticking to its deficit goal even as the economy shrinks, underlining a rift in the month-old Cabinet over whether the nation can halve its shortfall during a recession.

De Guindos said the government’s commitment to budget cuts is “total” and there’s “no change” to this year’s target. His comments in Brussels today came after reporters asked him about Budget Minister Cristobal Montoro’s call on Jan. 22 for the European Union to ease Spain’s 2012 deficit goal to take its shrinking economy into account.

Spanish Prime Minister Mariano Rajoy divided the Finance Ministry in two after coming to power in December, putting People’s Party veteran Montoro in charge of the budget and giving de Guindos, a former Lehman Brothers Holdings Inc. banker, responsibility for the economy. Rajoy didn’t make either of them deputy prime minister, as the last two finance chiefs were, saying he would oversee economic issues himself.

“It’s a trial of strength to see who’s really in charge of economic issues, and Rajoy will just let it happen,” said Ismael Crespo, a political scientist at the Fundacion Ortega- Maranon research institute in Madrid, who was head of the state polling unit when the PP was last in power.

“Montoro is speaking more to the public and Guindos is speaking more to the foreigners,” he said in a telephone interview.

Economy Contracting

Spain’s government needs to rein in its borrowing costs and convince investors it can cut the euro region’s third-largest budget deficit even as the economy enters its second recession in two years. The Bank of Spain said yesterday the economy contracted in the fourth quarter and may shrink 1.5 percent in 2012, adding to pressure on Rajoy, who won the Nov. 20 election on a pledge of creating jobs.

Budget Minister Montoro, a 61-year-old public-finance professor and lawmaker for Seville, said on Jan. 22 the EU should ease Spain’s budget target of 4.4 percent of gross domestic product this year as the goal was set by the previous government, which expected the economy to grow 2.3 percent. The deficit amounted to 8 percent of GDP last year, overshooting the 6 percent target.

“If Brussels doesn’t adapt the stability program to the new scenario of a recession, it won’t be realistic and not only will Spain sink but the whole of Europe,” Montoro said in an interview with La Vanguardia newspaper in comments confirmed by a Budget Ministry spokeswoman.

Austerity Commitment

EU Economic and Monetary Affairs Commissioner Olli Rehn rejected Montoro’s comments today after a meeting of finance ministers in Brussels, saying it’s “essential” that Spain meets the target, and must take more measures to do so.

De Guindos, 52, who described Montoro in December as his “mentor” and “friend,” said Spain would keep its promises. The task of attending the European meetings falls to de Guindos, who speaks fluent English, while Montoro stays in Spain.

“The government’s deficit target is 4.4 percent and there is no change in this respect,” de Guindos said after the meeting today.

It isn’t the first time the pair has given differing messages in the past week. De Guindos, who is not a member of parliament, wrote in the Wall Street Journal on Jan. 19 that budget cuts were “not a choice.”

The same day Montoro was quoted as telling the Financial Times Deutschland newspaper that the nation may miss its budget goal. The two gave conflicting reports of the 2011 deficit on Jan. 2, as de Guindos said the overshoot may have been even greater than the government’s first estimate.

De Guindos’ position on this year’s shortfall is backed up by Deputy Prime Minister Soraya Saenz de Santamaria, who said on Jan. 20 that the government was “determined” to meet the existing target. Rajoy holds a news conference later today after meeting Portuguese Prime Minister Pedro Passos Coelho at 5 p.m. in Lisbon.

To contact the reporter on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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