Bloomberg News

EU Commission May Agree for Spain to Cut Deficit More Slowly

May 30, 2012

The European Commission may give Spain more time to meet budget-deficit rules as the country battles a deepening recession.

Commission officials “are ready to consider proposing an extension of the deadline to correct the excessive deficit by one year to 2014,” said Economic and Monetary Affairs Commissioner Olli Rehn during a news conference in Brussels.

Spain has the third-largest budget gap in the euro zone, comparable to Greece’s. Prime Minister Mariano Rajoy today repeated a call on European authorities to support his government’s efforts as the yield on Spain’s 10-year benchmark bond jumped 22 basis points to 6.67 percent.

Economy Minister Luis de Guindos today said that the yield premium investors demand to hold Spanish 10-year debt over similar maturity German bonds, which reached a euro-era record 540 basis points today, isn’t sustainable.

Rajoy, in power since December, pledged in March to reduce overspending by the equivalent of 3.6 percent of gross domestic product this year to cut the budget deficit to 5.3 percent of GDP and reach 3 percent, the limit set by the EU for all euro zone members, by 2013. The shortfall was 8.9 percent last year.

His People’s Party government is stepping up austerity efforts even with the economy set to contract 1.7 percent this year.

Conditions

The Commission may agree to more flexibility on the condition that Spain can effectively “control the excessive spending at the subnational level, especially by the autonomous regions” and present a “solid” 2013-2014 budget plan, Rehn said.

In a staff report, the European Commission said the policy plans submitted by Spain “lack sufficient ambition” as the nation hasn’t gone far enough in overhauling labor rules and its tax system. The report recommended raising consumption and environmental levies, while reducing tax advantages, such as the favorable fiscal treatment of residential housing.

Bank of Spain Governor Miguel Angel Fernandez Ordonez today said meeting deficit targets will be “tremendously arduous” as tax receipts may come in lower than forecast and spending be higher than planned.

To contact the reporters on this story: Jones Hayden in Brussels at jhayden1@bloomberg.net; Angeline Benoit in Madrid at abenoit4@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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