Spain rejects EU deficit reprisals, insisting economy will grow above 3% this year

The government of acting Prime Minister Mariano Rajoy has rejected Brussels’ demands that it implement further budget cuts to the tune of €10 billion, freeze a further €1.1 billion in EU funds and impose a proposed fine on Spain for not meeting its 2015 deficit reduction targets.

Negotiations with the EU are taking place at the same time as Rajoy attempts to form a government in the wake of the June 26 election, at which his Popular Party (PP) won the most votes but failed to secure an absolute majority.

Rajoy is currently talking to the Socialist Party and Ciudadanos, hoping to convince their leaders to support his investiture in Congress on August 2

Rajoy’s economic team says the country is on track to register growth of more 3% this year, and that it is confident it can meet the EU’s objectives without further adjustments.

Economy Minister Luis de Guindos believes that improved GDP growth and job generation over the last year will negate the need for sanctions. He will have told the EU that despite not meeting the 2015 deficit target, there is no point in punishing Spain at a time when its macroeconomic data is improving.

“Spain has been growing for more than a year now at 3%, putting it among the EU’s leading economies, and when GDP growth increases above 3%, and we even see a slight increase in inflation, then we don’t need to do much more to automatically produce a fall in the public deficit ratio by almost a point, which is equivalent to those €10 billion,” said a spokesman for the Economy Ministry.

He added that last year saw Spain’s deficit fall by seven-tenths of a percentage point, equivalent to €7 billion, driven by the economy’s own momentum. De Guindos believes the economy will now pick up speed and continue growing by around 3%, creating some half-a-million jobs per year.

The Spanish team negotiating with Brussels insists that this year will see the country’s economy shed another point from the deficit without having to apply the €10 billion cut the EU has been demanding. The deficit objective for the end of 2016 is around 4%, falling to 2.9% for 2017. Brussels has demanded 3.9% for this year, and 2.5% for next year.

Diplomatic sources in Brussels have told EL PAÍS the EU intends to impose a symbolic fine on Spain, while freezing some €1 billion in community funds for failing to meet its deficit objectives in 2015.

At the same time, it will demand a structural adjustment of €10 billion until 2017, along with quarterly progress assessments. The interim government rejects this flatly.

“The cut would only have to be applied if Spain doesn’t grow this year and we don’t create any jobs, which is to say that the country’s economy flatlined, and that isn’t going to happen,” say Rajoy’s advisors.

Spain will present its arguments against a possible sanction between July 27 and August 2, a decisive week for Rajoy, during which he will attempt to unblock a political stalemate that has left the country without a government since December’s first inconclusive elections. Rajoy is talking to the Socialist Party and Ciudadanos, hoping to convince their leaders to support his investiture in Congress on August 2. Brussels will be aware of the challenges Rajoy faces.

De Guindos insists that Brussels will not fine Spain, using the example of Portugal to show that consistently missing deficit objectives (as Spain’s neighbor has done) is not the same as being on path to miss them, but with clear signs of economic growth, as is the case with Spain.

The government is also confident that Brussels will not carry out its threat of directly supervising Spain’s accounts every three months. “Such a quarterly exam would be a strange thing to do and the issue has not been raised,” insist Economy Ministry sources.

English version by Nick Lyne.