Cristóbal Montoro, Spain's Minister of the Economy, proposed to Prime Minister Mariano Rajoy that Spain raise its debt goal by one percentage point to 5.4%. And in a recent interview with the German newspaper Financial Times Deutschland, Montoro expressed his doubts about Spain's ability to meet current budget objectives for 2012.
The situation is not surprising considering that economic forecasts have deteriorated swiftly, Spanish regional governments cannot reign in spending and unpaid invoices are still surfacing. Spain could be tempted to ask the EU to adjust their agreement terms about deficit reduction, especially now that Europe is discovering the devastating effects that austerity policies are having on growth as compared to countries such as the United States.
It is even possible that Germany and France, in the framework of their wispy plans for energizing business activity, will reconsider the pace of cutbacks for peripheral countries. This would be the wrong course to take.
On multiple occasions, Rajoy has promised that Spain would meet its deficit goal. Yesterday Spain's vice president highlighted his determination that this happens. How credible will Spain look if we break our word precisely when we are trying to bring money back to the eurozone? Markets would not accept any more extensions or forgiveness. Most important, there is some room for Germany and the European Central Bank to support a cutback policy. They can finance European funds and approve a more aggressive monetary policy that would ameliorate an increasingly recessionary spiral from further damaging the European economy.
