Austerity drive to be forced on Spain after deficit larger than first expected

Spain will be forced to make massive cutbacks next year to bring its budget into line with strict new EU rules, despite missing targets for two years, eurozone ministers decided last night.

They are expected to finally sign off on the second Greek bailout on Wednesday, after German politicians in the Bundestag vote on it.

The money will be put into an escrow account with creditors having preferential access before money goes to fund the Greek state. This arrangement will remain until the government introduces this rule into law.

However, much of the meeting was spent grilling the Spanish economy minister Luis de Guindos about the country’s economy. The centre right government came to power earlier this year and announced the deficit was bigger than expected.

He said: “Spain’s position is that two things have changed. The first — last year there was a deviation of 2.5% in the public deficit, and secondly — that the circumstances in terms of economic growth have changed significantly.”

The country’s deficit was 8.5% last year compared to the 6% target, and this year Spain was to cut its deficit to 4.4% of GDP, but said it would instead aim for 5.8%.

The government said it still aimed to bring the deficit to 3% of GDP next year, and ministers approved a list of extra measures in terms of higher taxes and budget cuts to reach the target.

However, there was some scepticism among other finance ministers that this was achievable, especially given the slower economic growth than originally forecast.

Last month the commission said it expected the Spanish economy to contract by 1%, compared to the previous forecast where the country’s growth was expected to be 0.7%.

Attitudes to the Spanish situation varied, with the French and German ministers appearing to be conciliatory and understanding.

Michael Noonan said that “new governments should be given a certain amount of flexibility”.

However, the outspoken Austrian finance minister Maria Fekter espoused the view that “everyone has to stick to the targets”.

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