Spain wriggles from fiscal throttling

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Spain wriggles from fiscal throttling

Spain wriggles from fiscal throttling

Tuesday, March 13, 2012
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Juncker pretends to throttle de Guindos at a eurozone meeting in Brussels.

MADRID: Spain has won breathing space in the grapple with its public deficit but it must now tighten the austerity screws despite a wave of street protests, analysts warned Tuesday.

 

The Spanish morning papers bore a photograph from a meeting in Brussels: the eurozone finance ministers' leader, Jean-Claude Juncker, pretending to throttle Spain's Economy Minister Luis de Guindos in a telling jest.

 

At the meeting the ministers allowed Spain to relax its 2012 public deficit goal to 5.3 per cent of gross domestic product (GDP) -- higher than the original target but lower than the 5.8 per cent Madrid was asking for.

 

"That's still a very ambitious target for a country in the middle of a recession," said Jesus Castillo, an analyst at French bank Natixis, on Tuesday.

 

The eurozone ministers, known as the eurogroup, set 2013 as the key target year: by then Spain must bring its deficit -- the amount by which public spending exceeds income -- down to the regular EU limit of 3.0 per cent.

 

The agreement was hailed as progress amid concern that the debt crisis which has ruined Greece could spread to Spain.

 

But the deficit compromise still obliges Spain to make an extra 5.0 billion euros ($6.5 billion) of savings this year, on top of those announced already, bringing total cuts this year to 35 billion euros.

 

"The eurogroup is giving Spain some extra room to run a deficit this year," said analysts at financial group Citi.

 

"This means that in order to meet the fiscal target in 2013, Spain has to implement sizable fiscal tightening next year, which is likely to weaken economic performance."

 

The spending cuts and labour reforms have brought hundreds of thousands of protesters into the streets in recent weeks and unions have called a general strike for March 29.

 

Much of the burden of the cuts is falling on the governments of Spain's 17 regions and their public service budgets including health and education.

 

"Austerity is a necessary and highly effective medicine. But an overdose can kill a patient, as it has done in the case of Greece," wrote analyst Holger Schmieding of Berenburg bank.

 

"Delivering the extra austerity and reining in the deficits of the Spanish autonomous regions will not be easy for the Spanish central government. But it should be doable," he added in a report.

 

The eurogroup's agreement on the 2012 target fell between the 4.4 per cent demanded by the EU and 5.8 per cent that Spain's Prime Minister Mariano Rajoy had targeted, based on worse-than-expected 2011 economic results.

 

The new targets oblige Spain to make a total of 35 billion euros in cuts this year and a further 23 billion euros in 2013, according to analysts' and AFP's calculations.

 

EU economy commissioner Olli Rehn said Madrid had to deliver a credible and convincing path of fiscal consolidation over the coming two years.

 

This must run in parallel with economic reforms that can bring sustainable growth and better jobs in Spain, he added.

 

Public spending cuts, on top of a labour market reform that makes it easier and cheaper to hire and fire, have brought tens of thousands of protesters into the streets in recent weeks.

 

Spain's economy is expected to shrink this year -- by as much as 1.7 per cent according to the IMF -- and its unemployment rate, already the highest in the industrialised world, is set to surge past 24 per cent.