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13 Mar 2012 By Fiona Maharg-Bravo

Mariano Rajoy’s defiant stance has worked – at least in part. After the Spanish prime minister unilaterally changed the country’s 2012 budget deficit target, euro zone finance ministers allowed him some leeway – as long as Spain maintains its goal of shrinking it to 3 pct of GDP next year. The compromise allows both sides to save face for now.

Rajoy ruffled European feathers by declaring the country would have a 5.8 percent deficit in 2012, up from the original target of 4.4 percent. His stance was reasonable: the new conservative government was landed with a 2011 deficit of 8.5 percent – 2.5 percentage points above target. Furthermore the economic environment has taken a turn for the worse. Meanwhile Spain is still cutting its structural deficit by the agreed annual 1.5 percentage points, including the miss in 2011. The problem was the delivery, which Rajoy rather undiplomatically said was a “sovereign decision”.

The new 5.3 percent target does not look very scientific. It means Spain will have to find another 5 billion euros of saving or tax increases, on top of the 35 billion euros or so the government had already penciled in, and including the 15 billion euros announced at the end of December.

But the horse-trading for 2012 misses the point. This year’s budget – which will only be crafted by the end of the March – is only a stepping stone to 2013. Spain has maintained its commitment to stick to a 3 percent target next year – which looks difficult. Economists are barely forecasting any growth for 2013 after a 1.7 percent GDP decline this year. What’s more, interest and pension payments are growing annually by around 5 billion euros.

To make the numbers work, Spain will have to face tough political battles on measures such as layoffs at public companies, or cuts in basic social services such as education and health. These are the regions’ responsibility. A hike in VAT looks inevitable. At least the new government has an absolute majority in parliament, and so the mandate to take difficult decisions. A victory in the imminent elections in Andalusia, which has been under socialist control for decades, would give Rajoy fresh impetus. He will need it.


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