Bank recapitalisation agreed

Mr Rompuy said the deal was a "breakthrough"
Mr Rompuy said the deal was a “breakthrough”

Spain has received a lifeline from Europe as the direct recapitalisation of it’s banking sector was approved in the final hours of a long summit in Brussels.

German Chancellor Angela Merkel appeared to yield on tough reforms in exchange for rescue money after saying earlier that her country would not put up any more cash.

The European Council president, Herman Van Rompuy, said the decision was a “breakthrough that banks can be recapitalised directly”.

Spain had requested that any bailout be directed to the banks as it did not want to increase the government debt, and this decision appears to be exactly what they wanted.

The new agreement makes it clear that the EU’s existing bailout fund will put up the money until the new fund, the European Stabilisation Mechanism (ESM), becomes operational.

Eurozone leaders agreed to begin implementing the rescue plan by 9 July but warned that it could be the end of the year before the money become available.

Spanish newspaper El Pais reported that Mariano Rajoy didn’t want to comment on the agreement when he left but he was visibly satisfied. Italian PM Mario Monti recognised that the discussion had been “hard and full of moments of tension”, but that it had been worth it also adding that Italy did not intend to apply for a bailout.

German chancellor, Angela Merkel, said she was “very satisfied that we took good decisions on growth”.

The 17 leaders of the eurozone also agreed to a joint banking supervisory body and the full 27-member European Union agreed to a general long-term plan for tighter budgetary regulations and political union.

Spain agrees new deficit target

Mariano Rajoy
Rajoy claimed victory over deficit target

Brussels has set a new deficit target for Spain and Mariano Rajoy’s government have accepted it, claiming a victory after winning some concessions.

The target for this years budget deficit is now 5.3% of GDP, slightly lower than the 5.8% target that Rajoy set last month without consulting EU officials.

Following the decision Spain’s economy minister, Luis de Guindos, said “Spain is completely committed to the budget adjustment,” and that the new target “will be accepted by the government”.

The new target is half a percentage point lower than Rajoy was hoping for and this means an extra five billion euros must be saved via spending cuts or tax increases. This is on top of the 15 billion euros of savings already expected in the upcoming budget.

Rajoy is claiming a political victory despite EU ministers rejecting his 5.8% target, which he said was a matter of national sovereignty, as the original target passed from Brussels was 4.4%, previously agreed by Zapatero’s socialist government.

The prime minister argued that his government had inherited a large deficit overshoot when they were elected in November and risked another recession if he imposed too much austerity, an argument which the EU’s senior economic official, Olli Rehn, accepted.

Spanish foreign minister, José Manuel García-Margallo said “The Spanish government has won this battle.”

He added that EU leaders had taken the Spanish arguments seriously saying “They gave us the maximum possible.”

The Spanish government have previously said that Spain will cut their public sector deficit to 3% of GDP by 2013 and this was reiterated in Brussels.

Sr. Rajoy has yet to announce how he intends to meet the target as the national budget has been postponed pending the outcome of the regional election in Andalucía, due later this month. The region is currently under socialist rule.

Economists and analysts say it will be difficult for Spain to reach it’s target without increasing the risk of a second recession. Too many spending cuts or tax raises could push the economy downwards, increasing unemployment which, in the long run, will not increase tax revenue for the state.

“We remain concerned that it will be very difficult for Spain to achieve this level of fiscal consolidation, especially given that the economy has already moved into recession,” Barclays Capital said on Tuesday.

EU inspectors examine Spain’s finances

The European Commission (EC) has sent inspectors to examine Spain’s finances after the deficit for 2011 came in much higher than expected.

Spain’s deficit for 2011 was 8.5%, 2.5 points above the 6% that the European Commission was expecting.

Madrid also failed to meet it’s 4.4% target finishing the year at 5.8%.

Amadeu Altafaj, the EC spokesman on economic and monetary affairs, said “Technicians of the European Commission have been in Madrid this week to collect information on the (2011) public accounts,”

“It is a normal practice in all countries under an excessive deficit procedure,” he added.

Monetary Affairs Commissioner, Olli Rehn, has requested more details of the budget for 2011 and the final figures as some officials in Brussels have privately suggested that Rajoy’s new government may have overestimated the deficit for political reasons.

Deputy Prime Minister, Soraya Saenz de Santamaria, said the government have provided all information requested by the Commission.

“We gave them as much information as we could, with the maximum transparency… Not only did we give the data they asked for but also the mechanisms we’re putting in place so that these circumstances don’t happen again,” she said at a press conference.

Commission President, Jose Manuel Barroso, said he believed Spain would present a 2012 budget “fully in line with EU budget rules”.

The commission are insisting that Spain present a budget based on the 4.4% target adding that there will be no discussions on relaxing it until May.

One eurozone official said that the commission could accept it if the target could not be reached due to worse than expected growth but only if all efforts to reach it had been made first.

Spain will miss 2012 deficit target

Mariano Rajoy speaking in Brussels
Spain will miss target, says Rajoy

Spanish prime minister, Mariano Rajoy, has told Brussels that Spain “will miss” their 2012 deficit target, putting the country at risk of sanctions from the European Union.

The announcement was made shortly after the prime minister had signed a new fiscal agreement with fellow EU leaders. The pact is supposed to ensure all member states’ commitment to disciplined finances and the prevention of debt build-ups that many blame for the crisis.

Spain is in an increasingly difficult position with unemployment levels still rising and a fall in economic output, making the EU imposed target of 4.4% “almost impossible”.

Sr. Rajoy, who’s PP party swept to election victory in December, made no apologies for his comments, saying that the 2012 deficit target was not realistic, given the country’s economic problems.

However, Rajoy said Spain still plans to cut its deficit to 3 per cent in 2013, bringing the country back in line with the new fiscal rules. He said that his government was committed to austerity.

Rajoy expects this years deficit to be 5.8% of GDP, a fall from 8.5% in 2011, but still above the 4.4 per cent it had previously agreed with the EU.

Meanwhile, in Madrid, Economy Minister Luis de Guindos announced the 1.7% GDP contraction forecast and said the economy is expected to shrink further in the first two quarters of 2012 and possibly the third, before beginning to pick up. The minister blamed slowing domestic consumption, high oil prices and a slow in the world economy.

He also added that unemployment will rise over the short term as recent labour reforms passed by the new government will take time to have any noticeable effect.

Spain asks Brussels for easier target

According to reports, Spanish Prime Minister, Mariano Rajoy, has told European officials that the debt reduction target of 4.4% will be impossible to meet and has asked to raise the target to 5%.

Officials said Spain is likely log a deficit of 8% for 2011, two points above its target of 6%. In 2010 the figure soared to 9.3 percent.

Government sources say Spain’s savings and reforms will strengthen the economy, which is still suffering from the bursting of the real estate bubble in 2008. Some say the country will enter a new recession in this quarter after only recently recovering from the recession of 2010.

Today experts are expecting the European Commission (EC) to announce revisions to the eurozone growth forecasts following the implementation of spending cuts, tax increases and job losses across the member states.

Finance minister Luis de Guindos said that Spain’s request to lift its debt targets would not appear unusual because there is likely to be a “general reconsideration of targets across the whole of the EU”.

An official said that Spain and other countries may want to use the economic data to get their targets reduced but Brussels was “unlikely” to give in to requests for change so soon.

The ongoing crisis was evident over the weekend when Spain saw 1.5 million protesters across the country objecting to drastic labor reforms recently announced.

EU Employment experts coming to Spain

youth unemplyment
Spain has highest unemployment in EU

The President of the European Commission, Jose Manuel Durao Barroso, has announced that he will be sending employment experts to Spain to help develop a plan of action to battle the “big problem” of youth unemployment.

Almost half (48.7%) of 18-24 year olds in Spain are unemployed with the figure being over 50% in the Malaga region. Spain currently has the highest unemployment in the EU, more than double the rate in Germany.

The initiative will involve the creation of “action teams” including employers, Spanish unions and the Government, but will also be rolled across other EU countries with high unemployment including Greece, Portugal and Italy.

The European Union executive’s spokeswoman, Pia Ahrenkilde, said “We must act now, and in the short term, to do more to combat the urgency of youth unemployment. It is unacceptable to have these very alarming rates of youth unemployment in some Member States”.

The experts will “visit each of the countries concerned in February, for one or two days, to identify where the EU contribution could be useful to help develop a youth employment plan”, she added.

European aid to the value of 10,700 million euros has been assigned to Spain up to 2013, and the action teams will consider the best way to spend this money in order to increase employment.

“One of the objectives of these ‘action teams’ should be to agree on how to accelerate and, where necessary, redirect these uncommitted funds”, Ahrenkilde explained. Also they will “review the priorities of existing programs in order to have more impact on measures for young people and job creation in SMEs”, she added, going on to say that “there are no new funds” for fighting youth unemployment.

The ‘action teams’ aim to create the action plan by mid-April.

Prime Minister, Mariano Rajoy, responded by saying he was quite prepared to send his own experts to Brussels to accelerate the implementation of this initiative.

The plan was agreed and endorsed by EU leaders at the summit on Monday.

“…for one or two days” – is that enough to fix such a huge problem? To me this sounds like some EU executives fancy a holiday around Europe. What can they really do in two days? Watch this space for yet another failed EU initiative.