Spain wins big deficit concession from eurozone
Spain wrung a major concession from the eurozone Monday, winning leeway in its struggle to tame a runaway public deficit amid rampant unemployment.
After relentless austerity going back two years, but faced with renewed recession snagging the entire eurozone, the government in Madrid secured a substantial Brussels U-turn days after officials warned there would be no negotiation.
“The figure announced previously by the Spanish government… is dead,” said the head of the Eurogroup of finance ministers, Luxembourg Prime Minister Jean-Claude Juncker.
The sums involved are big — “slippage” in Spain’s 2011 deficit, from a targeted 6.0 percent of gross domestic product (GDP) to the most recent estimate of 8.5 percent equated to some 90 billion euros ($120 billion).
That’s roughly the same as the entire bailouts given to Portugal or Ireland.
Diplomats have said Madrid blames its autonomous regional governments for overspending.
Spain was originally meant to bring its deficit down to 4.4 percent of GDP this year, but Spanish Prime Minister Mariano Rajoy said at a European Union summit last month that Madrid would instead aim for 5.8 percent of GDP.
However, finance ministers agreed to allow Spain to target 5.3 percent of GDP.
Stung by the Greek debt debacle, the EU had heavily flagged over the past year its efforts to tighten laws covering national borrowings.
Hungary, for instance, is set to be docked substantial monies on Tuesday under new oversight powers for Brussels, despite Budapest figures showing it fell officially within the EU limits last year, its target date.
But Spanish Finance Minister Luis De Guindos insisted: “There is no doubt about Spain’s commitment despite a complex, recessionary climate, not only in Spain but also in Europe.”
Austria’s hardline Finance Minister Maria Fekter had urged currency partners to adopt a “severe” attitude towards Spain, the eurozone’s fourth-biggest economy, in order to at least appear “serious.”
But Juncker insisted that the 2013 target-date for Madrid to get back within longstanding EU spending limits of 3.0 percent of GDP was “far more important.”
Asked about the signal the eurozone was sending out, at a time when Belgium has agreed to squeeze another 2.0 billion euros out of its spending this year but the Netherlands is still trying to find 10-17 billion euros to keep its numbers on track, Juncker maintained that “we are not easing” up on the new EU budgetary rules.
EU economy commissioner Olli Rehn said Madrid had to deliver “a credible and convincing path of fiscal consolidation over the coming two years,” which would “run in parallel with economic reforms that can bring sustainable growth and better jobs in Spain.”
A Eurogroup statement said only that the Spanish government “expressed its readiness to consider” the eurozone’s call for an additional 0.5 percentage points in the ratio of deficit-to-output to be implemented this year as it finalises new budget proposals due by next month.
The decision however amounted to “a big compromise” for the eurozone, said Sony Kapoor, who heads the Re-Define economic consultancy.
“Warning that Spain has become “a test case” for EU oversight of national budgets, he added: “Expect the battle about permissible levels of Spanish deficits to be replayed across a growing number of euro area member states.”
London-based analyst Gilles Moec of Deutsche Bank though said in a note to investors that giving Spain time to reach 24-month goals was “reasonable.”
The decision came as Greece moved towards wrapping up its second bailout in as many years, with the Eurogroup saying its latest analysis of the sustainability of Athens government debt would now see it fall to within an acceptable level.
The eurozone will therefore later this week sign off on the remainder of a 130-billion-euro second bailout after Athens completed a historic bond swap to erase more than 100 billion euros in privately-held debt.
Some of the bailout was already needed as “sweeteners” for big debt-holders, to recapitalise Greek banks left on their knees by the write-down and also to guarantee the debt-swap in case it went badly wrong.
Greece previously had a total public debt of over 350 billion euros and faced a big bill on March 20 presented as a default deadline.
Discussions on boosting the eurozone’s firewall made little headway, as did talks on replacing Juncker as Eurogroup chair.