Rehn Says Spain Must Convince EU on Deficit to Win Delay

Economic and Monetary Commissioner Olli Rehn said Spanish Prime Minister Mariano Rajoy must convince European Union officials he can stabilize public finances before gaining extra time to cut the budget deficit.

Spain’s budget gap widened to 10.2 percent of gross domestic product in 2012, the most in three years, and will still be 7.2 percent in 2014 -- more than twice its 2.8 percent target -- as temporary austerity measures expire, the EU forecast today. Rajoy’s bank rescue program added 3.2 percentage points to the shortfall last year.

When there is a “convincing and credible” plan to ensure financial stability, “then it is possible to have a longer time to do all of the correction, to have less impact, less short-term impact on economic growth,” Rehn said in an interview in Brussels today. He urged Rajoy to deepen structural reforms.

The commission is wary of revisions after Spain last year revised its growth numbers downward and its deficit figures upward. While Rajoy this week said he’d cut the 2012 deficit to less than 7 percent of GDP, excluding the bank rescue, the government’s first estimate for 2011 last year was later revised to 9.4 percent from 8.5 percent.

“It seems the structural fiscal effort has been undertaken and that there has also been an unexpected shortfall of growth,” Rehn said at a press conference today in Brussels. “We’ll have to verify this.”

Missed Targets

Spain has missed all its deficit targets since overspending surged to 11.2 percent of GDP in 2009 after the end of a decade-long property-fueled boom. It escaped a full bailout last year after the European Central Bank pledged to backstop the single currency, causing the yield on its 10-year benchmark bond to drop about 250 basis points from a euro-era high of 7.75 percent in July. It rose three basis points after the EU forecasts were released before dropping to 5.15 percent at 5 p.m. in Madrid.

The commission raised its budget-deficit forecasts from November, when it saw shortfalls of 6 percent and 6.4 percent for 2013 and 2014. It also increased its debt-to-GDP ratio predictions to 88.4 percent from 86.1 percent for 2012, to 95.8 percent from 92.7 percent for this year, and to 101 percent from 97.1 percent for next year.

Debt Load

Spain’s debt load will surge above the euro-region average this year for the first time since the single currency’s creation, the updated data show, after more than doubling in 2012 from its 2008 pre-economic slump level. The commission previously forecast it would breach the average next year.

Asked today whether the government will reduce the pensions’ bills or increase value-added tax to pare the deficit, Deputy Prime Minister Soraya Saenz de Santamaria told reporters in Madrid that the country needs growth policies.

“What we have on the table is a law to boost growth, job creation and help entrepreneurs,” she said. “If the economy improves as the European Commission itself forecasts, that’ll enable us to obtain income through other means.”

The government is now able to apply measures it previously couldn’t afford, such as exempting small companies from paying value-added tax until they themselves have been paid, Saenz said.

‘Great Strain’

Still, Rehn said the commission may give a favorable response to Spain’s lobbying for more time to reorder its finances. Euro finance chiefs already gave it an extra year in July to bring the shortfall back within the European limit of 3 percent of GDP. The plan was to achieve 6.3 percent in 2012 and 4.5 percent this year before complying with the rules in 2014.

The country’s economic situation is still “putting the budget under great strain,” Rehn said, with unemployment at an “unacceptable” level. The commission sees it rising to 27 percent this year from 25 percent in 2012 and remaining at that level in 2014.

“Given the size and urgency of the adjustment challenge, this also means firmly embedding it in structural reforms that lead to growth and bring back durable employment,” Rehn said, calling on Spain to “stay the course of reform.”

(Updates with bond yields in sixth paragraph, comments from Spain’s deputy prime minister in eighth. See TOP CRIS for more on Europe’s debt crisis.)
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