EUROPEAN DIARY:THE CONCESSION Spain prised from its EU partners on its budget deficit target gives centre-right Spanish prime minister Mariano Rajoy a measure of breathing room this year.
For all the controversy this news created in Ireland, the fact remains that Rajoy faces a daunting task to bring his public finances under control.
Rajoy angered his European counterparts a fortnight ago when he unilaterally declared that he would not be meeting the deficit target set out in the EU-backed economic plan for Spain.
The premier’s self-described “sovereign decision”, seen as a blatant play to his domestic audience, was held to be in defiance of the new sense of common purpose EU leaders are trying to instil in their diverse economic policies.
He had signed Europe’s new fiscal treaty only hours before the demarche, committing himself alongside 24 other leaders to work in unison to ensure a common probity in their public finances.
Accusations swiftly followed that the German-inspired treaty was doomed to go the sorry way of previous efforts to enforce fiscal discipline.
The tut-tutting in Brussels was considerable.
With Italian technocrat prime minister Mario Monti winning plaudits every time he opens his mouth, doubts were raised as to whether Rajoy was fully on board the campaign to revolutionise Europe’s economic governance.
This is crucial, for Spain relied on heavy European Central Bank bond-buying to stay out of the bailout zone last year.
With Madrid under enormous pressure from the outset of the debt debacle, Rajoy’s socialist predecessor, José Luis Zapatero, is perceived to have done a pretty good job keeping the country afloat.
The lesson learned, of course, is that the austerity blitz cost him dearly. Zapatero’s party lost power in an early election and he didn’t even seek re-election as prime minister.
Rajoy is still something of an unknown force – and questions remain as to how far his wily strain will take him.
For one thing, he is perceived to have delayed this year’s budget until next month to avoid doling out bad news before a key regional election in Andalusia on Sunday week.
For another, doubters wonder whether Madrid has massaged last year’s fiscal figures to make this year’s challenge look all the greater.
Thus there was more than a touch of inevitability when Spanish economy minister Luis de Guindos was summoned on Monday to meet German finance minister Wolfgang Schäuble in the hours before euro zone ministers met.
More surprising was that the ministers agreed so quickly to ease the deficit target that very night, a move which was at odds with the prediction of euro group president Jean-Claude Juncker that no decision would be made.
Rajoy took office in December. The EU-mandated plan he inherited from Zapatero obliged him to achieve a 4.4 per cent budget deficit this year and a 3 per cent deficit next year. Given that an overshoot in the latter part of last year had brought the deficit to 8.5 per cent instead of the 6 per cent target, Rajoy insisted it was no longer practicable to pursue the 4.4 per cent target.
He chose instead to aim for a 5.8 per cent deficit, but insisted he would still achieve the magic 3 per cent in 2013.
By the time the euro zone ministers had finished interrogating de Guindos on Monday, they too admitted that the 4.4 per cent target was not on. However, they directed the government to go further and settled on a 5.3 per cent target for this year.
This was not insignificant in its own right. In a recession-struck country with an unemployment rate in excess of 20 per cent, the change to the 5.3 per cent target from 5.8 per cent will require an extra €5 billion in tax or spending measures.
That will come on top of an additional €15 billion dose of austerity expected in next month’s budget and €15 billion in measures already in train.
Rajoy can claim a victory of sorts, but he’s not exactly on easy street and won’t be for some time yet. Indeed, the retention of the 3 per cent target next year brings with it obvious potential for trouble down the line.
The episode shows, however, that there are limits to economic policy governed by preordained targets. The very fact that euro zone ministers granted the concession in the first place means they were convinced by the argument that the presumptions underpinning the original target were no longer valid.
That is a common-sense approach. Given the abundant uncertainties which prevail in the crisis, setting unwavering fiscal targets years in advance is a dubious game.
While the fiscal treaty compels participating governments to introduce an “automatic corrective mechanism” to reverse any deviation from an EU-approved recovery plan, the key point here is that Spain has won approval for its new deficit target.
