Spain Rebels Against Budget Reforms

Spain is trying to soften its deficit target for 2012 in a move that would undermine the credibility of a just-signed fiscal treaty meant to hold euro-zone members to tighter budget discipline.

Prime Minister Mariano Rajoy insists the move is within the guidelines of the so-called “fiscal compact,” which was signed Friday by 25 of the European Union’s 27 member states, including Spain, because it would still hit the European Union public deficit goal of 3 percent of gross domestic product in 2013.

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Spain would aim to reduce its deficit to 5.8 percent of GDP in 2012, a goal Rajoy considers more realistic than the original goal of 4.4 percent, though still rather demanding, given that Spain’s deficit was 8.5 percent of GDP last year. Though Rajoy insisted his new goal is still “significant austerity” and that he fully backs the fiscal compact, his announcement cast a pall over the agreement at an EU summit in Brussels on Friday.

Spain has already cut spending sharply and adopted economic reforms to avoid being dragged further into the euro-zone debt crisis since Rajoy was elected in November, but German Chancellor Angela Merkel and European Council President Herman Van Rompuy said that for euro zone credibility to endure, there should not be any flexibility on fiscal targets for countries facing economic difficulties.

Rajoy doesn’t believe his move will spook markets, but the country’s long-term borrowing costs rose after the news to the same level as Italy for the first time since August. His announcement brings into question whether Europe is willing to ease fiscal rules for states grappling with stunted growth and high unemployment, in part caused by heavy austerity measures.

Spain’s government said Friday the economy will shrink 1.7 percent this year, matching the outlook from the International Monetary Fund. Rajoy’s decision no doubt makes economic sense for Spain, but the premier didn’t even bother lobbying other European leaders to support his cause at Friday’s summit. “I’m not going to tell the other presidents or heads of state about the deficit figure that will be included in our budget. I don’t have to. It’s a sovereign decision. I’ll tell the Commission in April,” Rajoy said.

Now the EU must decide whether or not to punish Spain under the new austerity rules, as Rajoy’s obstinacy risks undermining the hours-old treaty and the legitimacy of the whole fiscal stability process. Rajoy has already cut spending and health, which spurred tens of thousands of students all around the country to take to the streets in protest.

On Friday, Madrid said it would make around 15 billion euros more in fiscal adjustments in 2012, adding to around 15 billion euros of spending cuts and tax hikes announced in December. It cut its spending ceiling by nearly 5 percent from 2011 to 118.6 billion euros. Getting the deficit down to the 4.4 percent target would have entailed a total of 44 billion euros in cuts

Of course, if Spain hadn’t overshot its deficit target last year by such a wide margin, this year’s target would have been more easily attainable. The target had been 6 percent. Some at the European Commission reportedly suspect Madrid has inflated its deficit forecasts for 2011 to help it gain flexibility for its target this year.

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To contact the reporter on this story: Emily Knapp at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com