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24th Sep 2022

Spain to test beefed-up EU budget rules

  • Spanish youngsters burn the EU flag amid anti-austerity feelings centered on Brussels (Photo: tom.tziros)

Spain, the eurozone's fourth largest economy, is becoming the first major test of the EU's fresh new rules on budget discipline as it seeks flexibility from Brussels on its deficit targets.

Madrid on Monday (27 February) announced that last year's budget deficit was 8.51 percent of GDP, up from an initial estimate of 8.2 percent and well above the 6 percent target agreed with the European Commission last year.

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Spain, which is supposed to bring its deficit down to 4.4 percent this year and a rules-abiding 3 percent in 2013, has said it will try and negotiate a softer deal.

But the commission is indicating it will play hardball, with tougher fiscal discipline laws only in place since December after previous rules underpinning the euro were breached some 60 times.

"We need full information on the slippages of 2011 and the reasons for them. We also need full information on the draft budget and planned concrete measures for fiscal consolidation for 2012," EU economic affairs commissioner Olli Rehn said on Tuesday when asked by a Spanish deputy about the possibility of renegotiating the target.

He added that EU finance ministers last week "reaffirmed their commitment to stick to the rules of the stability and growth pact while ensuring long-term sustainability of public finances."

On the same issue, a European Commission spokesperson said: "We are not talking about giving any flexibility to the current rule ... We are not talking about giving more flexibility to any member state when it comes to fulfilling commitments."

The commission indicated that the eurozone's credibility in the eyes of the markets is at stake.

"We might think about the need to maintain the credibility of our response to the crisis," said the spokesperson, with any change to Spain's deficit targets having to be agreed by both the commission and the 16 other members of the single currency.

Aside from being the first serious test of the commission's enhanced budgetary surveillance powers - fellow euro country Belgium fell into line earlier this year when it was told to curb its spending - the Spanish situation highlights a wider debate about whether too harsh austerity measures risk worsening an already troubled economy.

Even within the commission, some voice concerns that the deficit-focused austerity measures are not helping bring down the record unemployment figures, particularly among young people.

Social policy commissioner Laszlo Andor, speaking alongside Olli Rehn in the European Parliament on Tuesday said "Spain has the worst statistics and is the greatest challenge for my portfolio."

He insisted that there was not "just one reason and solution" to the unemployment figures and that while labour market reforms "have to be part of the agenda," other measures such as improved learning opportunities and investments in the "social economy" also need to be put in place.

Spanish officials also warn that one-sided policies will not help.

"The fiscal consolidation effort, that is going to be large, has to simultaneously avoid additional and further damage to growth ... his discussion is going to happen not only for Spain, but for the rest of eurozone countries," economy minister Luis de Guindos told the The Wall Street Journal.

The commission, for its part says that "new solutions" are needed to "relaunch growth" pointing to opening up the internal market still further.

Growth will not come through "massive budget [spending]," said the spokesperson, nor from using solutions of the past where growth was based on public debt.

EU leaders meet on economy, Schengen and Serbia

EU leaders at a two-day EU summit on Thursday will look where each country stands in terms of public deficit, taxes and retirement ages. Schengen enlargement and Serbia are also on the agenda.

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