Euro zone finance ministers have pressured Spain to make deeper budget cuts, as they gave their final approval to a second bailout for Greece today, in a first test of stiffer deficit rules designed to prevent the region's debt crisis from flaring back up.
Spain's forthcoming budget was the prime focus as the ministers met in Brussels yesterday after Madrid declared this year’s deficit will be higher than the EU target. They also took stock of Greece’s huge debt restructuring last week, said euro group president Jean-Claude Juncker.
Given the ongoing effort to toughen the enforcement of EU budget rules in the fiscal treaty, the unilateral declaration by Spanish prime minister Mariano Rajoy is seen in European circles as an act of bad faith. In question now is whether other member states agree to relax this year’s target and whether next year’s target can be sustained in that event.
Greece, the source of the currency area's debt crisis, swapped its privately held bonds at the weekend for new, longer maturity paper with less than half the nominal value, a move that cut its debts by more than €100 billion.
The euro zone ministers today gave the final political go-ahead to a €130 billion package that aims to finance Athens until 2014. The decision will be formalised by junior officials tomorrow.
"As agreed, new official financing of €130 billion will be committed by the euro area and the IMF for the period 2012-2014," Mr Juncker told a news conference today. Thanks to a high take-up of the bond swap offer, Greece's debt would fall below a target of 120 per cent of GDP in 2020, reaching 117 per cent, from 160 per cent now, he said.
Some countries are already resisting any leeway for Spain, saying it is important to demonstrate the EU’s newly reinforced budget-surveillance system works in practice. All governments were obliged to maintain their fiscal targets, said Austrian minister Maria Fekter.
Obliged under an EU-approved plan to cut the budget deficit to 4.4 per cent this year and to 3 per cent in 2013, the Spanish government wants more headroom in a budget due next month, while maintaining the target for 2013.
European officials remain sceptical, saying the agreed plan was credible, but Spain insists its situation has worsened since its formulation last year. “From 2.3 per cent growth, we are going to have a fall in economic activity of 1.7 per cent,” economy minister Luis de Guindos told reporters in Brussels last night.
Mr de Guindos met his German counterpart, Wolfgang Schäuble, in the hours before the ministers gathered. “Spain’s commitment to the fiscal rules is absolute,” he said. “What Spain is going to do today is going to explain the figures for the close of 2011 and simultaneously we are going to present our consolidation and reform efforts for 2013.”
While insisting Spain would not become a second Greece, Mr Schäuble gave no indication as to whether Europe would agree to relax the budget targets. “Spain has made great progress," he said. "Financial markets also see it that way, but of course we’re all still on a tough path. But the experiences and developments of the past weeks and months show we are on the right path and we’re all determined to continue this path successfully."
Other countries expressed mixed views.
Minister for Finance Michael Noonan was open to the Spanish approach but French minister François Baroin said there was no alternative to the austerity course. "They’re a new government and they will make their case, obviously, and I expect that there will be a discussion later in the evening on that," Mr Noonan said. "I have no foreknowledge of what the positions will be, but it seems to me that new governments should be given a certain amount of flexibility."
Mr Baroin said Spain and other countries with a contracting economy or high deficit must focus on reducing deficits and making savings. "There is no other path. Any other line doesn’t take into account the reality of the world economy today."
European stocks advanced as investors turned their attention to a Federal Reserve policy meeting and a report on American retail sales after euro area finance ministers signed off on the second bailout for Greece. The Stoxx Europe 600 Index gained 0.6 per cent to 266.41 by 8.07am in London.
Additional reporting: Reuters/Bloomberg
