Spain’s Inaction Threatens Economic Growth, EU Sanctions

Spain’s newly-installed government has come under fire for overstating last year’s deficit figures and delaying austerity measures ahead of a regional election, and could now be facing sanctions and fines for violating a European Union agreement.

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The European Commission believes the new government, led by Prime Minister Mariano Rajoy, purposely inflated deficit figures for 2011 to make the current year’s data look better in comparison. Meanwhile, the commission says Mariano’s government has not adequately addressed the deterioration in public finances expected in 2012, which poses a risk to long-term growth.

The commission is likely to take action against Spain’s government by adopting sanctions, according to an official who spoke on condition of anonymity, and could potentially fine Madrid for failing to meet its deficit goals. Any sanctions or fines would be separate from a commission report on macroeconomic imbalances, which is also expected to single out Spain.

In April 2009, Spain breached the European Union’s 3-percent-of-GDP deficit limit, and has since been under what’s known as excessive deficit procedure, along with 22 other members of the EU. Madrid could face fines of up to 0.1 percent of its economic output for not cutting its deficit.

Spain has delayed until late March the presentation of its 2012 budget, a move the commission thinks is risky. Rajoy and his economic minister, Luis De Guindos, say they need the commission’s forecasts before they can draft a new budget, but sources in Brussels and Madrid say the true reason for the delay is to put off austerity measures until after regional elections in Andalusia, in southern Spain, on March 25. Mariano’s center-right People’s Party is expected to win the Andalusian elections for the first time since 1982.

Spain plans to implement its new budget as soon as possible, maintaining that it will reduce the deficit to 4.4 percent this year. But the growth outlook makes that look highly unlikely — the Bank of Spain expects the economy to shrink 1.5 percent this year — especially if officials are correct in stating that the new budget may not be in place until June. Spain must stimulate growth as well as reduce spending, and soon, if it is going to meet targets.

Spain may successfully lobby for more time to reduce the deficit, but EU officials say Rajoy is now counting on the new, less favorable economic forecasts to secure a softer budget-deficit goal as well.

The commission forecast in November that Spain would have a deficit of 6.6 percent of GDP in 2011 and 5.9 percent in 2012, based on an assumption of 0.7 percent GDP growth in each year, but with the economy expected to shrink this year, Spain’s deficit commitments of 6 percent for 2011 and 4.4 percent for 2012 now look unattainable.

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To contact the reporter on this story: Emily Knapp at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com

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