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The socialist-inspired traveling circus more commonly known as the EU debt crisis is moving from Greece to Spain. Last Friday, Spanish Prime Minister Mariano Rajoy announced that a deepening recession in that country would make it impossible to meet the EU-mandated deficit reduction target of 4.4 percent of GDP for FY2012. He proposed a target of 5.8 percent instead. The latest “readjustment” is similar to the one that occurred in 2011, when Spain’s target of 6 percent gave way to the reality of 8.5 percent. Ironically, Rajoy made his announcement on the same day 25 European leaders signed a fiscal pact–aimed at strengthening budgetary discipline among its member nations.
Yet it is the choice between budgetary discipline that would require previously prepared sanctions against Spain, or once again making them an exception to those rules that reveals the EU’s Catch 22 dilemma: new sanctions would undoubtedly induce further unrest in a nation already beset by a 22.85% unemployment rate and an economy that has contracted economy by 0.3% on a year over year basis. On the other hand, another exemption to supposedly rigid budget rules would likely undermine confidence in the EU’s overall recovery plans, as yet another incarnation of ”too big to fail” would be playing itself out on the world stage.
The actual numbers are daunting. In 2011, Spain’s national and state governments spent $120.72 billion more than they took in during 2011. This is only a modest reduction compared to the $129.75 billion budget deficits the country ran in 2010, underscoring the reality that austerity measures imposed on that nation have yielded precious little in the way of genuine savings. Adding to the uncertainty is the fact that two-thirds of the current shortfall was accrued by the nation’s regional–and autonomous–governments. Absent the ability to compel regional governments to fall in line, the idea that Spain’s national government can meet fiscal targets imposed by the EU appears dubious at best.
Yet if the EU insists that Spain adhere to the promises it made on December 30th, an additional $33 billion of deficit reduction must be found on top of the $19.8 billion in savings already accrued from a combination of $11.9 billion in spending cuts, and $7.9 billion in tax increases. That number represents a staggering increase of 167 percent of additional austerity measures imposed only two months after the original pledge. In addition, Spanish economic output will fall 1.7 percent this year, making a mockery of the 1 percent drop recently forecast by the EU, along with the 1.5 percent predicted by the Bank of Spain only two weeks ago. And unemployment is now expected to hit a mind-boggling 24.3 percent in 2012.
Rajoy insists that Spain remains within the proposed EU guidelines because it intends to meet the public deficit goal of 3 percent of GDP by 2013. Yet it reportedly rankled many EU leaders when the Prime Minister publicly announced his intentions without first holding private negotiations with the European Commission. Last November, the European Commission demanded the power to override budgets enacted by individual EU nations, and its members are no doubt irked by Rajoy’s characterization of his failure to meet the 2012 guidelines as a “sovereign decision by Spain.”
An official not authorized to discuss the issue described the move as reflective of Rajoy’s political inexperience. “He thinks that most of the people around the table are political allies who will support him,” the official said. “But here you put your political considerations away because the dynamic that counts is that of national interests.”
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