Spain is in for a difficult time. Already mired in debt and unemployment, the country has been told that the target deficit rate of 5.8% of GDP that new Prime Minister Mariano Rajoy declared only 10 days ago is inadequate, and Madrid must seek a faster reduction in its deficit.
Bloomberg reported Tuesday that while Spanish Economy Minister Luis de Guindos said the country would accept the eurozone’s “recommendation” that it cut an additional 0.5% from its budget, he added that Spain was “absolutely committed” to lowering its deficit to meet the eurozone requirement of 3% by 2013.
Nonetheless, the news was a surprise, since the eurozone had not planned on having to deal with Spain until after its 2012 budget is released in April and until final European Union data is available on the 2011 shortfall. Rajoy had, after a March 2 summit meeting, initiated the new target deficit rate without consulting the eurozone, which had set a rate of 4.4% for Spain to meet.
However, Spain had substantially overshot the 6% deficit rate that had been promised by Rajoy’s predecessor Jose Luis Rodriguez Zapatero for 2011, instead coming in at 8.5%. This, coupled with an unemployment rate topping 24% and a prediction that the country’s economy would contract 1.7% in 2012 on top of austerity measures already in place, led Rajoy to declare the goal for 2012 a “sovereign decision” to be made by Spain alone. He discarded the 4.4% target in favor of the new 5.8% goal.
But Luxembourg Prime Minister Jean-Claude Juncker was having none of that after a meeting of eurozone finance ministers in Brussels on Monday. He declared the new 5.8% goal “dead” and added that Spain's pledge to cut its deficit to 3% by 2013 was “far more important ... That is the main figure that should be kept in mind.”
De Guindos said in accepting the addition of 0.5% to the target, “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.”
Juncker commented, “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 eurozone and as such it cannot take total leave from the promises it has made. Today’s result is a healthy mix between consolidation and common sense.”