Brussels to give Spain some leeway in meeting deficit targets

The European Commission will show some flexibility about the deficit-reduction targets agreed with a number of euro-zone countries, including Spain, EC sources said Wednesday.

While continuing to pledge its “absolute commitment” to fiscal discipline, Spain wants Brussels to grant it a reprieve on meeting this year’s budget deficit target, which it believes can only be achieved by further austerity measures that would constitute a form of economic suicide at a time when the country is already heading back into recession.

The deficit target agreed with Brussels for this year is 4.4 percent of GDP, but Spain is seeking the European Commission’s consent to have a shortfall of somewhere over 5 percent.

In its official capacity, the EC on Wednesday declined to comment on whether it would be amenable to cutting Spain some slack in its program to get its financial house back in order. “I have nothing to comment,” the spokesman for the EC’s economic and monetary affairs commission, Amadeu Altafaj, said.

The Commission is due to release its growth and inflation forecast for European Union member countries on Thursday. The Popular Party government of Prime Minister Mariano Rajoy has said it would use those forecasts in drawing up the state budget for this year, which is due to be presented next month, and also in drafting an update of its Stability and Growth Program, which has to be submitted to Brussels in April.

Just days after taking office at the end of last year, the PP administration announced the outgoing Socialist government had overshot the budget deficit target for 2011 of 6 percent of GDP by two percentage points. It subsequently unveiled a package of tax hikes and spending cuts to trim 15 billion euros off the budget. A reduction of one percentage point in the deficit requires budget savings of some 10 billion euros.

With the public already up in arms against an unpopular reform of the country’s labor laws that make it cheaper and easier to sack workers, the further budgetary measures that would be required to meet the 4.4 percent deficit target would most likely exacerbate the recession, throw yet more people out of work when almost a quarter of the population is already jobless, and create further social unrest.

The deficit goal for this year was drawn up on the assumption that the Spanish economy would grow 0.7 percent. However, Economy Minister Luis de Guindos said Tuesday that the figure Brussels will come out with for Spain will be “more pessimistic.” The Bank of Spain expects the economy to shrink 1.5 percent this year, while the IMF expects a contraction of 1.7 percent. De Guindos said the government would study the new EC forecasts and ready itself to debate their “implications.”

Spain, along with 11 other EU countries, sent a letter to Brussels asking for the EC to promote measures to reactive the European economy. The European Commissioner for economic affairs, Olli Rehn, last week chided Spain for dragging its feet over drawing up the 2002 budget, and reminded the Rajoy government of its budget deficit commitments for this year.