22nd Oct 2020

Europe awaits fine print of Spanish austerity plan

  • The Spanish PM (l) chatting with his Greek counterpart in Brussels (Photo: Council)

European Union institutions are awaiting the fine print of Spain's plans for additional austerity measures first announced on Sunday (9 May), amid concern that Madrid's package may not be sufficient to calm markets and avoid a Greek-type scenario.

Both Spain and Portugal were specifically mentioned in the language of a new EU measure on Sunday establishing a "shock-and-awe" bail-out package for eurozone economies whose ability to raise funds on the money markets is dwindling.

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European Commission officials said on Monday that the reason the two countries were named and shamed was a form of "peer pressure" to try to force Spain - which currently holds the six-month rotating presidency of the EU - in particular to take a tougher approach.

"Only two member states were mentioned. The ones that are the most subject to market turbulence. But the funds are theoretically open to all member states and as we have learnt from the past months, things can change very quickly," the official said.

"No one was looking at Spain or Portugal just a short while ago."

"Just look at the deteriorating situation of Portugal. It is in the same situation as Greece was a few weeks ago."

The official underscored however: "Spain is not at the moment a beneficiary of this mechanism, so at no point [during the Sunday finance ministers' meeting] was there a discussion on policy conditions for Spain or Portugal or anyone, but a number of minister pointed to the need for Spanish and Portuguese authorities to take further consolidation measures."

In what some EU sources have described as a "frank" and others a "stormy" meeting at the weekend, it is understood that Germany and the Netherlands in particular put pressure on Spain to come up with additional savings, a position also reportedly favoured by Sweden, Finland, France and the European Central Bank.

According to one contact in the European capital: "Coming in, [Spanish economy minister Elena] Salgado didn't have the intention of making further commitments, but it became clear over the course of the meeting it would have to be done."

Portugal had announced fresh measures on Thursday and therefore avoided the same opprobrium. In what was the second round of austerity announcements made in the last fortnight, centre-left Prime Minister Jose Socrates outlined cuts to the public sector that he hopes will slash the budget deficit to 7.3 percent of GDP this year, down from an earlier announced goal of 8.3 percent.

In the end, the consensus among EU finance ministers was that Spain's objective of a two percent reduction over a two-year period is appropriate, but they need to see details of the measures.

"We expect further measures from the Spanish authorities too," said a commission official.

Spain on Sunday announced additional cuts of 0.5 percent in 2010 and one percent in 2011. This comes atop the 0.5 percent cuts announced in March.

Spanish Prime Minister Jose Luis Rodrigues Zapatero is to outline details of the measures on Wednesday. EU economy and finance ministers will then analyse the plan on 18 May and the commission will give its recommendations in June.

Yet an early draft version of the EU bail-out mechanism agreed on Sunday contained specific additional budget demands of fiscal consolidation from Spain and Portugal worth 1.5 percent of national income this year and two percent the next.

At a summit of eurozone premiers and presidents on Friday night, EU leaders were shown a graph of predicted bond spreads that showed that Portugal, Spain and Ireland could be in the same situation as Greece within weeks, according to a report in the UK's Observer newspaper.

However, on Monday, a commission official said: "Ireland is doing what it needs to do."

Economic and finance commissioner Ollie Rehn last week encouraged Ireland to "accelerate" its austerity plan, but said that the worst was over for the Irish economy. It is thought that Dublin, which has already implemented swingeing cuts, is being held up as a "role model" for Spain and Portugal.

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