Spain on collision course with Brussels over budget deficit targets

European commission accuses Spain of 'serious deviation' after PM Mariano Rajoy sets deficit target of 5.8% rather than 4.4% agreed

Spain is on a collision course with the European commission after Brussels fired a warning shot at the austerity wracked country for planning to overshoot its budget deficit targets.

In an early test for the EU's new fiscal regime, the commission said Madrid was engaged "in a serious deviation" from previous pledges after Mariano Rajoy, Spain's new conservative prime minister, confirmed the government would fail to meet a budget deficit target this year of 4.4% of gross domestic product agreed earlier with Brussels. Rajoy has set a new target of 5.8% for this year after revealing that last year's deficit was 8.5%.

The stand-off between the European authorities and Spain, a vulnerable party in the eurozone's debt crisis, came as Greece raced against the clock to sign up willing creditors for writing down half of its debt to private lenders.

Athens has until Thursday evening to conclude a debt swap with its private creditors, reducing its obligations by €100bn as a central element in its new €130bn bailout accord with the eurozone.

It remained unclear on Monday night whether some 90% of Greece's private creditors would volunteer for the deal by Thursday, casting uncertainty over the prospects for the bailout.

But the International Institute of Finance, representing around half of the creditors, said its members would accept the terms, while Athens threatened to invoke legal clauses to force others to follow suit.

"Our target is near universal participation," Evangelos Venizelos, the Greek finance minister, said. "Whoever thinks that they will hold out and be paid in full is mistaken," he told Reuters.

With the fate of the Greek bailout hanging in the balance, but likely to go ahead, eurozone finance ministers are to hold talks on Friday once they have learned the participation rate in the "haircuts" being suffered by Greece's private creditors.

While Greece's position should be clarified this week, other challenges to the EU's fiscal dilemmas are bubbling away, ready to erupt.

In recession, wrestling with runaway unemployment rates that are the highest in Europe, and already embarked on huge spending cuts, the Spanish government appears to be up against a European commission keen to make full use of its new powers.

The commission has already ordered Belgium to slash its spending and threatened to withhold hundreds of millions of euros in funds to Hungary unless Budapest sticks to its budgetary pledges, making it more difficult to show leniency towards Madrid.

The Netherlands is also heading for a confrontation after its finance ministry warned that deficit reduction targets had gone awry. A report by the economic consultancy Lombard Street Research said the Dutch would be better off outside the euro after a decade of low growth. The report said the rising cost of supporting bankrupt European countries, which it put at between €1.3 trillion and €2.4tn by 2015, would force the Netherlands to accept much lower standards of living.

Amadeu Altafaj, a spokesman for Ollie Rehn, the monetary affairs commissioner who under the new rules has the right to police national budgets, said: "All member states should continue to respect their commitments according to the rules … They should meet agreed budgetary targets and stand ready to pursue further consolidation measures if needed.

"Let's shed all the light on what happened in Spain in 2011 because it's a serious deviation. We need to know the origin of this deviation, the nature of this deviation."

But Rajoy is asserting national sovereignty over the new EU rules. At an EU summit on Friday when he signed up for the eurozone's binding new fiscal pact, Rajoy failed to let other EU leaders know of his budget revision. He bragged that it was none of their business.

"I'm not going to tell the other presidents or heads of state about the deficit figure that will be included in our budget," he said. "I don't have to. It's a sovereign decision. I'll tell the (European) commission in April."

The fiscal pact and new laws on "economic governance" enacted last year have been criticised as representing an assault on democratic choice in EU countries and as a restriction on sovereignty.

The new rules have largely been written in Berlin, but even among Germany's allies in the euro crisis countries are bristling at the constraints on their freedom of manoeuvre.

The Dutch, fiscal hawks strongly aligned with Germany throughout the crisis, are also at risk of breaking the rules. Faced with a deterioration in the public finances that could see the Netherlands also penalised for excessive deficits, the minority coalition government of Mark Rutte on Monday launched weeks of negotiations on spending cuts.

The populist eurosceptic, Geert Wilders, who props up the government in parliament in return for policy concessions, called for a referendum on staying in the eurozone.

source:http://www.guardian.co.uk/business/2012/mar/05/spain-collision-brussels-budget-deficit-targets