Economy Minister Luis de Guindos said Spanish budget cuts are hurting the economy more than he expected.
“The impact of fiscal tightening is deeper than we projected in the past,” de Guindos told European lawmakers in Brussels today. “This is something we have to take into consideration.”
De Guindos was defending Spain’s budget consolidation efforts in front of a panel of European lawmakers after the European Commission last week said his government will miss its fiscal target every year through 2014. He told the committee Spain’s economy is hamstrung by flaws in the design of the monetary union that have added about 200 basis points to borrowing costs.
A Spanish recovery “is practically impossible unless doubts over future of euro are dissipated,” he said.
Spanish Prime Minister Mariano Rajoy has pushed his European partners to meet their self-imposed deadline for establishing a banking union in the face of German opposition. He wants greater European integration to persuade investors that they don’t run the risk of the currency union breaking up when buying bonds from nations on the region’s periphery.
The European Commission cast doubt on Spain’s deficit and growth forecasts on Nov. 7, predicting shortfalls of 8 percent this year and 6 percent in 2013. The deficit was 9.4 percent of gross domestic product in 2011, including the impact of measures to support banks, and the government aims to cut that to 7.4 percent this year, or 6.3 percent excluding bank aid.
“The government maintains its budget deficit projections,” de Guindos told reporters when asked to clarify his position after the parliamentary session. “Budget revenue is in line with forecast. We are making an effort on spending. That will bring us to the objective we have committed to.”
The yield on Spain’s 10-year benchmark bond rose six basis points to 5.89 percent at 5:10 p.m. in Madrid. That compares with a euro-era high of 7.75 percent on July 25, a day after Spain signed the conditions for bank aid. It has dropped 150 basis points since the ECB on Aug. 2 pledged to buy sovereign debt of countries requesting aid and committing to austerity measures.
The commission said the economy will shrink 1.4 percent next year, compared with the government’s estimate of a 0.5 percent contraction. It said the economy will grow 0.8 percent in 2014, in line with Rajoy’s forecast of a recovery after 2013.
“Everyone is agreed that Spain is doing everything it has to do,” de Guindos said. “No one questions the effort.”