Spain says it will ignore this year's EU bet targets

Sat, Mar 3, 2012, 00:00

EU SUMMIT:SPAIN HAS declared that it will ignore the budget targets Europe has set for it this year as its economic difficulties intensify, setting up a confrontation that will test new EU laws designed to enforce fiscal discipline.

Spanish prime minister Mariano Rajoy told reporters in Brussels that he had eased his deficit-cutting drive this year because it was too onerous, but he still planned to achieve next year’s target.

The move has perplexed the EU authorities. A high-level European official said Spain ran the serious risk that any savings not made would be lost through higher borrowing costs in debt markets.

With a 20 per cent unemployment rate and bank sector struggling to cope with a property collapse, Spain has been under pressure for almost two years to avoid an EU-IMF bailout.

Assuming Mr Rajoy follows through with the plan, it will be open to other governments to penalise his administration if the European Commission finds it is not taking “effective action” to tackle the deficit.

Mr Rajoy’s unilateral intervention came on the day he and 24 other EU leaders – Taoiseach Enda Kenny among them – signed Europe’s new fiscal treaty.

The move by the centre-right Spanish leader is set to stoke tension with the commission, which is responsible for budget surveillance, and with Germany, the dominant power in the battle against the debt crisis.

EU leaders did not formally discuss the Spanish budget at the summit but German chancellor Angela Merkel said before Mr Rajoy’s announcement that governments had a duty to observe agreed procedures.

“It makes no sense to declare first thing that the deficit-reduction targets are no longer valid,” she said. “Every country – and the Spanish prime minister just confirmed this to me – will be very ambitious to anchor these targets in their budgets.”

The development overshadowed what was a calm EU summit at which heads of state and government sought to shift the focus from the crisis to policies to stimulate growth in Europe’s moribund economy.

Obliged under an EU-approved plan to cut the budget deficit to 4.4 per cent this year and to 3 per cent in 2013, Mr Rajoy now wants more headroom in a budget due next month.

“I’m backing austerity and aim to reduce the deficit from 8.5 per cent to 5.8 per cent; that’s significant austerity,” he said.

“I’m not going to tell the other presidents or heads of state about the deficit figure that will be included in our budget. I don’t have to. It’s a sovereign decision. I’ll tell the commission in April.”

In question in the coming weeks is whether Mr Rajoy can convince his European counterparts that the 2013 target can still be met if he does not stick to the 2012 target. There is considerable doubt about that.

The response from Brussels was immediate, with a spokesman for EU economics commissioner Olli Rehn saying the achievement of fiscal consolidation targets is a cornerstone of Europe’s response to the crisis.

While EU officials made no secret of their displeasure at Mr Rajoy’s declaration, the commission cannot formally make a judgment until it receives the budget document. However, Mr Rehn has been insisting for months that he will use new budgetary oversight powers to the maximum extent.

Last month he forced Belgium’s newly installed government to introduce budget cuts. He has also threatened to fine Hungary for its failure to take effective action to cut its deficit.