European Union pressure on Spain to make additional budget cuts may not be enough to compel the government in Madrid to bring its deficit in line with the 27-nation bloc’s rules next year.
European finance ministers told Spain late yesterday to make cuts equivalent to 0.5 percent of gross domestic product from the 2012 budget. A request accepted by Economy Minister Luis de Guindos as part of the euro region’s fourth-biggest economy’s effort to get the shortfall within the EU’s 3 percent limit in 2013.
“Even this hurdle looks too high,” Christoph Weil, an economist at Commerzbank AG, said in a report. “Spain would have to reduce the cyclically adjusted public deficit by a total of about 7 percent of GDP this year and next,” which would be an “enormous tour de force.”
European finance chiefs in Brussels pushed back against Spanish Prime Minister Mariano Rajoy’s plan to aim for a deficit of 5.8 percent of GDP this year instead of the 4.4 percent previously agreed, as they seek to show that tougher fiscal rules in effect since December have teeth, unlike the “stability pact” that let repeat violators go unpunished in the run-up to the debt crisis.
Spain faces an “enormous problem” to narrow the deficit to the 3 percent euro limit next year, said Luxembourg Finance Minister Luc Frieden. “Spain has always been a country we kept an eye on,” Frieden said today in an interview on RTL Radio.
Meeting the new 5.3 percent deficit target means cutting about 45 billion euros ($59 billion) from this year’s budget, which will be “very difficult” as the economy contracts, Julian Callow, head of European economics at Barclays Capital in London, said in a note. The European Commission forecast Feb. 23 that Spanish GDP will shrink 1 percent this year.
The EU’s request of additional deficit cuts won’t have “any significant impact” on growth, jobs or the government’s economic forecasts, De Guindos told reporters in Brussels today. The extra cuts will come from the central government’s budget, leaving regional administrations that control health and education unaffected, Budget Minister Cristobal Montoro told Parliament in Madrid today.
Rajoy’s government, in power since December, said the 2011 deficit was 8.5 percent of GDP, more than the 6 percent target the previous government had agreed with the EU. Most of the overshoot came from the regions, while the social security system also missed its goal.
Deficit concerns have led Spanish bonds to underperform those of Italy in recent weeks. The yield on Spain’s benchmark 10-year bond rose 5 basis points today to 5.11 percent. That left it yielding 23 basis points more than the comparable Italian bond. A month ago the Italian 10-year yielded 30 basis points more than Spain.
Rajoy rattled Europe’s establishment after a March 2 leaders’ summit by shredding the original 2012 deficit target in what he called a “sovereign decision.”
Last night’s deficit deal was unexpected. European officials had planned to put off a reckoning with Spain until April, after the release of its 2012 budget and final EU data on the 2011 shortfall. Rajoy is set to present his spending plan and additional austerity measures on March 30, days after regional elections in Andalusia, a Socialist stronghold that his People’s Party is attempting to seize for the first time in three decades.
Foreign Minister Jose Manuel Garcia Margallo said the EU decision was “absolutely” a victory for Spain. “They have given us 5.3, which was the maximum they could give us,” Garcia Margallo, a former member of the European of parliament, said in an interview with Cadena Ser radio today.
“I don’t agree that Spain should go through excessive and stupid consolidation that puts it in a more difficult situation than it already is, but on the other hand Spain is the fourth-largest economy of the euro zone and as such it cannot take total leave from the promises it has made,” eurogroup president Jean-Claude Juncker said. The result “is a healthy mix between consolidation and common sense.”