Spain flexes muscles in tug-of-war with Brussels over deficit target

Spain on Tuesday put pressure on the European Commission to agree to a softer deficit target for this year before the end of this week when it plans to unveil the basis for the 2012 state budget.

However, Brussels’ response indicated that under its protocol, the process of renegotiating a new target could take weeks.

Finance Minister Cristóbal Montoro on Monday revealed that the budget deficit for last year came in at 8.5 percent of GDP, 2.5 percentage points above target. The government wants some leeway on the 2012 deficit goal of 4.4 percent of GDP in order not to exacerbate the coming recession. A spokesman at the office of Prime Minister Mariano Rajoy on Tuesday confirmed officially for the first time that Madrid was in talks with Brussels on softening the target.

The secretary of state for public administrations, Antonio Beteta, said Tuesday the government wants to announce its spending limit for this year on Friday, and needed to agree the deficit target with the Commission in order to do so. The spending limit is the first step in drawing up the budget.

“It is expected that once Brussels has knowledge of the data, it will give the corresponding [indication on the budget figure] in the coming days, and that the government will include it in the spending limit on Friday,” Beteta told state radio RNE.

Rajoy is due to attend a dinner with other European Union leaders on Thursday prior to an EU summit, and the prime minister’s office expects the issue of the deficit figure to be resolved by then. That might require some political input to persuade the Commission to break with protocol.

The president of the Eurogroup, Luxembourg Prime Minister Jean Claude Juncker, on Tuesday indicated that it might be possible to find a “solution” to Spain’s request at this week’s summit.

However, Brussels said it had yet to receive the deficit figures and suggested a different timetable for dealing with the deficit. “We have not received any formal notification of these figures yet,” Commission spokesman Olivier Bailly said. “We still want to see from the Spanish authorities, or discuss with them, how they are going to build the 2012 budget.”

“We need to understand the causes of this significant slippage,” he said. “Is it a problem on the revenue side? Is it a problem of expenditure? Is it a problem at the national level? Is it a problem of the regions? Is it a problem with the health insurance system deficit?”

Bailly said the figures would have to be verified by the European Union’s statistics office, a process that would normally only take place in April when Spain is due to file an update of its Stability and Growth program.

Bailly said Spain also needed to deliver its 2012 budget estimates in the coming weeks.

“The magnitude of the challenge is so high that we need to have something credible in the process, so taking another few days, another few weeks to have something credible, will be, might be key for the success of this operation,” he said.

“We expect now the Spanish authorities within the coming weeks, in the course of March, to come up with a draft budget for 2012.

“We are not talking about giving any flexibility to the current rule. [...] We are not talking about giving more flexibility to any member state when it comes to fulfilling commitments." Olivier insisted.

Popular Party (PP) regional leaders told Rajoy on Tuesday that they cannot find any more areas for public spending cuts and said they hope the Spanish leader can obtain some leeway from Brussels to revise the country’s deficit target goal.

Rajoy’s meeting was designed to tell the premiers to revise their budgets after the latest government figures show that Spain finished the 2011 with a deficit of 8.51 percent — two points above what the predecessor Socialist government had predicted. The biggest chunk in the overshoot was caused by runaway spending in the regions. In Valencia alone, incoming revenue is down to levels reached in 2004, said the region’s Popular Party premier Alberto Fabra.

Earlier in day, Deputy Prime Minister Soraya Sáenz de Santamaría lamented the fact that the government was spending too much money — about 100 million euros a year — on office rentals when there are many government buildings sitting empty.