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ECONOMY

Rajoy sets out to persuade Europe to cut Spain some slack on its deficit target

Government engages in brinksmanship on announcement of budget ceiling Mission could meet with political opposition from struggling euro-zone partners

As Spanish Prime Minister Mariano Rajoy and his economy minister, Luis de Guindos, on Thursday headed for Brussels to attend a European summit, Foreign Minister José Manuel García-Margallo said the most Spain could hope for in its quest to have its deficit target for this year reduced would a “few tenths of a point” off the figure.

Spain wants some leeway on the 4.4-percent target for 2012 in order not to exacerbate the recession Spain is slipping back into. The deficit last year came in at 8.5 percent, 2.5 points above the target agreed with the European Commission.

In order to achieve the 4.4-percent goal this year would require the administration to find savings in this year’s budget of 44 billion euros, a task that would involve dismantling part of the welfare state at a time when protests are mounting against cutbacks already in place, and with the country’s unions threatening a general strike in opposition to labor reforms introduced last month that make it cheaper and easier to sack workers.

Madrid has been hoping for concessions from Brussels on the target this week in order to incorporate them into its calculation for the spending limit that it is aiming to unveil on Friday. The EC, however, has insisted that it first needs to study the reasons for the huge slippage in last year’s target and has urged the government to present its state budget for this year as the basis for discussing whether it would be appropriate to afford Spain some leeway in its fiscal consolidation program.

PP sources on Thursday were talking on Thursday of a far greater planned overshoot of between 5.3 and 5.9 percent of GDP, however, with the final figure to be revealed in Friday’s Cabinet meeting.

The Financial Times on Thursday quoted senior European diplomats as saying some of the smaller members of the bloc would resent Spain being given special treatment on the new fiscal rules recently agreed. “It would question the entire economic governance tool kit,” the daily quoted one senior diplomat from a smaller country that has had a tough fight with the Commission on its deficit targets. “We hope there is equal treatment.”

Once in Brussels, De Guindos said it seemed reasonable to want to renegotiate a deficit target that was premised on expected growth in the economy that is now forecast to shrink 1.5 percent this year. “These circumstances seemed perfectly understandable,” the minister said.

De Guindos insisted that Spain would comply with its fiscal consolidation program, but added a rider: “Spain will comply, but bear in mind that circumstances have changed.” Government sources insist that key is to this is not so much the target for this year, but bringing the shortfall back with the three-percent ceiling imposed by the European Union next year.

De Guindos declined to be drawn on how much slack Spain is hoping to persuade Brussels to cut. “I’m not going to go into figures, but the European Commission already perfectly knows our stance and tomorrow [Friday], we will unveil the spending limit,” the minister said.

De Guindos’ European colleagues were also reticent to speak out about Spain’s demands. “Today, we are here to speak about Greece,” German Finance Minister Wolfgang Schäuble said in Brussels.

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