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Thursday, March 01, 2012

Spain's deficit: "Brussels, We Have A Problem"

That was the headline of an editorial in Tuesday's edition of Spanish business daily Cinco Días. The problem - slightly overlooked due to news coming out of Athens, Berlin and Dublin - is that Spain's public deficit at the end of 2011 was 8.51% of GDP. This is 2.5% higher than the target agreed with the European Commission.

In effect, this means that in order to meet the agreed deficit target (4.4% of GDP) by the end of the year, Spain needs to find total savings of €44 billion. The new centre-right government slashed some €15 billion of spending last December, meaning that an additional €29 billion now needs to be found somewhere, through public spending cuts and/or tax hikes. That won't be easy.

As in other parts of Southern Europe, the question is how much austerity the population is willing to take. With austerity measures starting to bite, widespread protests are continuing across Spain in the wake of last year's indignados movement. Thousands of students have been taking to the streets in all the main Spanish cities over recent weeks to protest against education cuts, with the demonstrations sometimes turning violent. Civil servants in the debt-laden Castilla-La Mancha region yesterday went on strike over the local government's plans to cut salaries by 3% and extend the working week by two-and-a-half hours.

In a sign of how much power unelected officials now have in the eurozone, the Spanish government is hostage to decisions made by the European Commission on whether to soften Spain's targets, and give the country a bit of breathing space. Economic and Monetary Affairs Commissioner Olli Rehn and his Spanish colleague Joaquín Almunia, in charge of competition, have said that a decision on whether to revise the targets can't be taken until Spain submits its draft budget and fiscal consolidation plans for 2012, which is unlikely to happen before the Andalucía and Asturias regional elections on March 25.

The Commission has two options. It can play hardball and tell the Spanish government that deficit reduction targets are not negotiable, risking more rage from the masses. Or it can loosen the targets, risking requests from other eurozone countries for the same treatment and hostile market reactions.

For the moment, Rajoy insists that "we will lower the deficit as much as we can." However, Spanish government sources quoted by El País have suggested that the budgetary plans to be submitted to the Commission are already based on a deficit for 2012 higher than the previously agreed 4.4% of GDP. If you ask us, there's no way that Spain can reach the original target.

As the Spaniards say: un hecho cumplido.


Rik said...

The problem with basically all PIIGS (except Ireland) and effectively with Belgium and France as well is that their wagescosts are far too high to compete on the international markets.
In order to get competitive again wagescosts and subsequently wages and subsequently standard of living have to drop and have to drop considerably.

So what eg Spain is doing is simply take longer to get to the point the economy might be sustainable again. It basically does this at the cost of the Northern part of Europe and it creates a situation of a long period of negative growth that might have other negative consequences as well.

The fact that the population isnot ready for it only makes things worse than it already is:
-cuts take too long;
-cuts at the wrong places (inefficient government sector and welfare are often treated with the utmost care;
-taxes are increased to fill the gap iso making cuts; etc..
If the population isnot ready for it is imho simply bad luck, the money is simply finished. If their politicians forgot to tell them that their present economic model was not sustainable, they should do it asap.

Tracy said...

Another problem is that by lowering Spain's debt costs via actions like the ECB's 3 year liquidity operation Spain is in effect being encouraged to borrow more!

The UK economist Shaun Richards has shown the impect of this in his blog.

"Back on the 16th and 2nd of December I explained how such monetary easing was likely to see banks take the relatively cheap money and buy peripheral government bonds which yield much more. I gave this example of what happened in Spain after the announcement of the LTROs.

Also existing bonds look attractive and if we look at the yield on existing 3 year maturity Spanish bonds they have fallen from 5.1% on the day of the ECB announcement to 3.57% as I type this.

Let me bring this up to date as the Spanish three-year bond yield has fallen since to 2.73%"

So as ever the policies of the Euro zone are contradictory.

David Barneby said...

There is no way forward for Spain , Greece , Italy , Potugal , Ireland , while ever they remain in the Euro . I was in Italy at the time of the Euro inception and knew then that it would be a disaster for Italy . These countries should never have joined the Euro , their economies have been distroyed by the Euro , raising their cost of living , wages , salaries , that has made them uncompetitive . Now we begin to see that a shared EU wealth will greatly deplete that enjoyed by northern states and has diminished the market and growth to effectively Zero . The EU shouls abolish the Euro !!!