Cutting deficit and fighting recession

The Spanish government has insisted that Spain still plans to comply with the deficit objectives set out in the pact made with its EU partners. Economy Minister Elena Salgado issued a public reminder of the government's commitment to budgetary stability, which calls for reducing the deficit to six percent this year, to 4.4 percent in 2012 and to three percent in 2013, in response to the proposal of the Socialist prime-ministerial candidate, Alfredo Pérez Rubalcaba, that the three-percent objective be postponed by two years. A sensible government cannot and must not stand for any public reneging on the Stability Pact, because Spain might then suffer new pressures in the debt market; and some time ago the Spanish government decided that the solvency of the Kingdom of Spain is the priority objective.

But the economy minister's official response does not flatly exclude the possibility of change in the conditions of the Spanish adjustment. "If, in one of these years, the EU's requisites come to be different, we will then adapt to the new requisites," she said. That is, it is up to the EU institutions to propose greater flexibility in deficit commitments, should circumstances change; for only if the initiative comes from the EU can further financial turbulence be avoided for euro-zone member states such as Spain and Italy.

But the fact is that the European Commission, Germany and the ECB cannot prevent the spread of discussion on the desirability and efficacy of the adjustment policies that have been imposed on the bailed-out countries (Greece, Ireland and Portugal), and on others such as Spain that have accepted a stiff stability timetable in order to be spared.

At first sight, it might be said that the fiscal curtailment programs have obtained a lackluster result. They have not even managed to get all the bailed-out countries to reduce deficit under the agreed terms, and have procured only a precarious sense of stability for the Irish and Portuguese debts.

But the greatest harm occurs when extreme austerity policies are incompatible with policies designed to stimulate demand, combat recession and facilitate growth. Strict fiscal contractions, especially when applied in all or most of the countries of an economic area, ultimately increase unemployment and plunge these economies into a spiral of demand depression, more unemployment and uninterrupted recession.

The case of Spain is a good example of the snares that adjustment may contain. The coming recession calls for stimulus policies, which cannot be implemented if public resources are totally neutralized by demands to reduce deficit with all haste and at all cost. It is not a question of non-compliance with stability commitments, but of the EU proposing, at the right time and when it will not affect the markets, a more reasonable timetable for compliance. A new pact that would make it possible to control the deficit and, at the same time, to have at hand investment resources sufficient to incentivize growth.