SPAIN’S MAIN political parties have agreed ambitious plans to limit public debt and budget deficits by changing the constitution and requiring governments by law to keep debt and deficits below specified levels.
Hoping that the deal will dispel bond market doubts about Spain’s creditworthiness, leaders of the ruling Socialists and the centre-right Popular Party negotiated into the early hours of yesterday to reach agreement.
The changes will commit Spain to abide by EU limits – currently 60 per cent of gross domestic product for accumulated debt and 3 per cent of GDP for annual deficits – from 2020. Given that Spanish debt is expected to reach 70 per cent of GDP next year, this will oblige Spain in normal circumstances to have budget surpluses or economic growth, or both, in the next decade.
Under the plan the maximum deficit allowed from 2020 over the course of an economic cycle will be 0.4 per cent of GDP.
Spain’s annual budget deficit peaked at 11.1 per cent in 2009, and is due to fall to 6 per cent this year and to 3 per cent in 2013.
“We think that sooner or later there will be some common discipline for budget deficits in the EU,” said Alvaro Nadal, PP secretary for economy and employment. “The idea is to prepare the Spanish economy to be located inside the new European governance system as a member of high discipline.”
Exceptions to the EU debt and deficit limits can be made for “natural disasters, economic recession or situations of extraordinary urgency” that threaten the “financial situation or the economic or social sustainability of the state”.
Some sovereign bond market investors have claimed Spain will need to follow Ireland, Greece and Portugal in seeking a bailout from the IMF and the EU even though Spain’s public debt as a share of GDP is lower than Germany’s and the EU average.
A collapse in bond prices at the start of this month prompted the European Central Bank to start buying billions of euro of Spanish and Italian bonds to bring down prohibitively high yields.
This week José Luis Rodríguez Zapatero, Spain’s Socialist prime minister, proposed constitutional reform to “guarantee budgetary stability in the medium and long term”. This would be only the second amendment since the document was enacted in 1978.
The government also announced reforms yesterday which are designed to reduce youth unemployment of more than 40 per cent but are opposed by the Socialist Party’s trade union allies. – (Copyright The Financial Times Limited 2011)
