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EU Budget Deal May Leave Spain Struggling to Meet Deficit-Reduction Goal

March 13, 2012

Mariano Rajoy, Spain's prime minister, speaks as he addresses the Spanish parliament in Madrid, Spain. Photographer: Denis Doyle/Bloomberg

Mariano Rajoy, Spain's prime minister, speaks as he addresses the Spanish parliament in Madrid, Spain. Photographer: Denis Doyle/Bloomberg

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. Economy Minister Luis de Guindos said Spain, the euro region’s fourth-biggest economy, remained “absolutely committed” to getting the shortfall under 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.

A shrinking economy is complicating Rajoy’s efforts to meet the deficit goals after austerity measures failed to prevent Spain from overshooting last year’s target.

‘Enormous Problem’

Spain faces an “enormous problem” to narrow the deficit to the 3 percent euro limit next year, said Luxembourg Finance Minister Luc Frieden.

“The 16 other finance ministers of the euro zone believe that what they have planned for this year is not yet enough,” Frieden said today in an interview on RTL Radio. “Spain has always been a country we kept an eye on.”

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.

Rajoy’s government, in power since December, estimates 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 regional administrations, while the social security system also missed its goal.

Situation ‘Different’

“A lot of Spain’s considerations were taken into account, that last year’s deficit situation was much more complicated than what had been thought and that the situation is different from an economic point of view,” De Guindos said today.

Spain accepted the recommendation for the 2012 budget, Guindos said in reiterating his pledge to meet the EU limit next year. Juncker said that goal “is the main figure that should be kept in mind.”

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.

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.” Spain’s pleas didn’t go entirely unheeded. The euro ministers agreed that the initial 2012 goal is no longer reachable.

‘Stupid Consolidation’

“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,” Juncker said. The result “is a healthy mix between consolidation and common sense.”

The new government has already implemented 15 billion euros of austerity measures, including higher income-tax rates. The government forecasts the economy will contract 1.7 percent this year with unemployment holding above 24 percent, complicating efforts to raise revenue.

Deficit concerns have led Spanish bonds to underperform those of Italy in recent weeks. Spain’s benchmark 10-year bond now yields 22 basis points more than the comparable Italian bond. A month ago the Italian 10-year yielded 30 basis points more than Spain.

To contact the reporters on this story: James G. Neuger in Brussels at; Emma Ross-Thomas in Madrid at

To contact the editor responsible for this story: James Hertling at

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