Rehn says EU will toughen debt crisis defences


THE EUROPEAN Union’s top economic official said the recent sharp rise in Spanish borrowing costs was the result of perceptions Madrid was seeking to wriggle out of tough deficit-shrinking targets.

Olli Rehn has called on the Spanish government to push through more austerity measures.

Mr Rehn, the EU commissioner for economic and monetary affairs, also said the EU would toughen debt-crisis defences to guard against future risks.

“The key thing now is to conclude the comprehensive crisis response,” he told reporters at an informal gathering of European leaders in a small Finnish hamlet within the Arctic Circle.

The commissioner said he trusted that euro zone finance ministers “will take a convincing decision on the reinforcement of the firewalls” next week.

Europe has so far set aside €500 billion for crisis-busting measures in two war chests.

The temporary rescue fund, the European Financial Stability Facility (EFSF), has disbursed €192 billion in three bailouts. Under the current rules, the unused funds would be passed on to the permanent fund, the European Stability Mechanism (ESM).

Policy-makers are discussing how to add to the funds.

Under the least-ambitious option, the ESM would be allowed to start afresh with its entire half-trillion euro capacity available for future use, a euro zone official said last week.

The EFSF would continue to administer the programmes in progress, while its unused capacity would no longer be available. That would bring the total crisis backstop to €692 billion.

On Spain, Mr Rehn acknowledged trying to balance the need for budget discipline and growth-enhancing policies was proving difficult for Spain, which has suffered one of the sharpest economic downturns in the euro zone.

Yet despite signs that Spain was headed to one of Europe’s deeper recessions, Mr Rehn said Madrid would only regain market confidence by sticking to EU-mandated deficit targets, which require the Spanish government to cut its deficit to 3 per cent of economic output by next year.

Last year’s deficit was 8.5 per cent, meaning Madrid must make some of the deepest cuts of any euro zone country outside Greece.

Jitters over the Spanish economy sent borrowing rates on benchmark 10-year bonds above 5.5 per cent last week for the first time in more than two months, and they have been trading above Italian rates for the first time since last summer.

“Because there was a perception Spain was relaxing its fiscal targets for this year, there has been already a market reaction of several dozen basis points on yields of Spanish bonds,” Mr Rehn told reporters on the sidelines of the gathering in Saariselkae, Finland.

The gathering is hosted by Finnish prime minister Jyrki Katainen to brainstorm on Europe’s role in the global economy and how to get the EU’s economy back on track after the debt crisis.

“That shows how fragile the situation still is. To return to sustainable growth, it is a necessary condition to ensure sustainability of public finances.”

Spain’s minister for European affairs said his country would reach the 3 per cent deficit target next year.

“We’re going to do it,” Inigo Mendez de Vigo said. “We’re on the way and we’re serious. We’re going to give our word.”

Mr Rehn said he was “fully confident” Spain will meet the fiscal target in 2013. “It is indeed very challenging to find the right balance in the case of Spain.”

However, he dismissed suggestions Madrid should be given more leeway on deficit targets because of its weakening economy.

“You cannot have the cake and eat it,” said Mr Rehn.

“This is still relatively fragile, and therefore Spain needs to stick to its targets in order to avoid any setbacks in terms of its borrowing costs.”

The new Spanish government recently announced it would not meet its agreed budget deficit target. Spain was supposed to lower its budget deficit target this year. – Copyright The Financial times Limited 2012/Bloomberg