European Commission may give Spain a little more time for deficit cuts

Guest post by Jimmy Kane

EC ready to help Spain
Officials are ready “to consider” giving more time

Spain can breathe a little easier if the European Commission decides to give the country more time to meet its budget deficit rules while battling with an ever-deepening recession.

Commission officials are reportedly ready “to consider proposing an extension of the deadline to correct the excessive deficit by one to 2014,” Olli Rehn, the Economic and Monetary Affairs Commissioner said during a news conference in Brussels.

So far, Spain has the third-largest budget gap in the entire euro zone, comparable to Greece’s situation. Yesterday Prime Minister Mariano Rajoy repeated a plea for European authorities to support his government’s efforts as the yield on Spain’s 10-year benchmark bond jumped 22 basis points to 6.67 percent.

On the other hand, Economy Minister Luis de Guindos said that the yield premium investors demand that they should hold Spanish 10year debt over their similar maturity German bonds (which, by the way, reached a euro-era record of 540 points today) isn’t a sustainable option.

Rajoy, who has held power since December, pledged in March to reduce overspending by cutting the budget deficit to 5.3 percent of the GDP. The equivalent of 3.6 percent is what’s been overspent this year alone, but the limit set by the EU for all other euro zone members is a mere 3 percent, a number Rajoy hopes to meet by 2013. The shortfall last year reached 8.9 percent. Rajoy’s People’s Party administration is stepping up these sorts of austerity efforts even with the economy itself set to contract 1.7 percent this year.

Why would the Commission agree to more flexibility? It’s only under the condition that Spain can effectively “control the excessive spending at the subnational level, especially by the autonomous regions.” Additionally, Spain will need to present a solid 2013-2014 budget plan.

The European Commission said in a staff report that the policy plans Spain has submitted so far “lack sufficient ambition” as the nation hasn’t done nearly a large enough overhaul of their labor rules and its tax system. The recommendation is for Spain to raise environmental and consumption taxes while at the same time, reducing tax advantages, such as the favorable fiscal treatment of residential housing.

Miguel Angel Fernandez Ordonez, better known as the Bank of Spain Governor, said meeting deficit targets will be “tremendously arduous” as projected tax receipts may come in lower than anticipated and spending might even be higher than planned.

Jimmy Kane is an avid traveler and Spanish real estate hobbyist. When he’s not traveling or studying the Spanish property market, he maintains a telecommunications website called Cable in Dallas, Texas.