Eurozone eases Spain's debt targets

Eurozone finance ministers gave unemployment-ridden Spain more wiggle room in cutting its big deficit, signalling that new, tighter rules against overspending in the currency union retain some flexibility for hard-hit countries.

The ministers from the 16 other states that use the euro said Spain had to make further cuts worth 0.5% of gross domestic product, which indicates that the country is now expected to slash its government deficit to around 5.3% of GDP this year from about 8.5% last year.

That is still below the 5.8 % deficit target Spanish prime minister Mariano Rajoy announced earlier this month, but significantly softer than the 4.4% deficit the country had originally promised to its partners in the euro.

Jean-Claude Juncker, the prime minister of Luxembourg who also chairs the meetings of eurozone finance ministers, said it was "of the utmost importance" that Spain brought its deficit down to below 3% of GDP - and back in line with European Union rules - by 2013.

Many economists have warned that cutting spending too quickly could do more harm than good in a country like Spain.

Spain's debt level is below the eurozone average, but unemployment is running at a record high and a shaky housing market risks piling huge losses on an already weak banking system.

However, before the meeting, several ministers had worried that easing the pressure on Madrid risked undermining almost two years of work by the currency union's leaders to tighten rules against overspending.

The currency union has chosen tough austerity as its main tool in fighting off a worsening debt crisis, hoping that it will convince investors to lend to struggling countries like Italy and Spain.

But Olli Rehn, the EU's economic affairs commissioner who is in charge of policing the bloc's debt and deficit limits, said giving Spain a bit more leeway this year did not break the new rules.

"The Stability and Growth Pact is not stupid," he said.

He said that this year's target had to be eased because Spain's 2011 deficit had come in so much higher than expected - at 8.5% of GDP instead of 6% - and because the country is falling deeper into recession.

The important thing, he said, was that the 2013 goal would be met and that Spain gets its public finances back on a sustainable path.

But Sony Kapoor, the managing director of the economic think-tank Re-Define, said that even the softer target could damage Spain's weak economy and push up unemployment even beyond the current 23%.

"It's too hard an adjustment in too short a time, when the Spanish real-estate market is too weak and unemployment is too high and rising," Mr Kapoor said. He added that a boost from exports was also unlikely amid low growth or recession in most other euro countries.

The stricter budget rules are also causing some problems in countries that have always presented themselves as fiscal hard-liners. The Netherlands, which has spent much time lecturing Greece and other struggling states about the importance of deficit cutting, also risks overrunning its budget targets this year.

Dutch finance minister Jan Kees de Jager stressed yesterday that while his country would take the "appropriate measures", it was unfair to group it together with some of the other overspenders.

"You cannot of course compare us to other countries, because when you see the confidence on the financial markets, confidence is very high," he said before the meeting.

More on this topic

Banks seek ECB reprieveBanks seek ECB reprieve

ECB hits out at bank bonusesECB hits out at bank bonuses

Draghi’s talk of stimulus weakens euro, boosts sharesDraghi’s talk of stimulus weakens euro, boosts shares

Eurozone economy is not far from recession this yearEurozone economy is not far from recession this year

More in this Section

Supreme Court to hear appeals over Boris Johnson’s suspension of ParliamentSupreme Court to hear appeals over Boris Johnson’s suspension of Parliament

Boris Johnson’s ‘ambush’ in Luxembourg makes headlinesBoris Johnson’s ‘ambush’ in Luxembourg makes headlines

David Cameron says Nicolas Sarkozy helped him see dying father for last timeDavid Cameron says Nicolas Sarkozy helped him see dying father for last time

Low-cost arthritis drug could treat patients with blood cancers – studyLow-cost arthritis drug could treat patients with blood cancers – study


Lifestyle

Make-up artist Terry Barber reveals the secret to pulling off the bold lip look.This is how to make black lipstick work in real life, according to a catwalk make-up pro

Off to the Japan? After a trip to Tokyo, Ella Walker outlines the best things to eat between matches.These are the dishes to try if you’re going to Tokyo for the Rugby World Cup

It still surprises me as I am achingly private and do not enjoy being at the centre of attention.This Much I Know: Actor Aislin McGuckin

Bride Geraldine O’Donovan felt as wonderful as she looked on her big day — knowing she was supporting a cause close to her heart as she donned her wedding gown.Wedding on the Week: Supporting a cause close to their hearts

More From The Irish Examiner