With more debt than predicted in 2011 and less growth on the 2012 horizon, Spain is uncertain of its ability to adhere to the deficit reduction plan that the EU created and has asked the EU to relax its deficit objective, allowing Spain to more easily afford to enact policies that stimulate economic growth.
As a result, the Spanish government is confident that the EU could soften their requirement by around one percentage point. The European Commission considered this doing so after publishing its GDP and CPI figures yesterday. Although the figures were negative, they were not as catastrophic as expected. Having inherited a budget imbalance from the former government in late 2011, Spain should have closed the year with a 6% deficit, but it is estimated that it exceeded this level by two points. The deficit was actually 8%.
Goals for 2012 and 2013 are 4.4% and 3.0%, respectively. But with the extra two percentage points added to the deficit inherited last year, experts warn that those levels will be hard to achieve. Especially since the IMF predicted that the Spanish economy will contract between 1.0% and 1.7%.
What seems inevitable is that in 2013 Spain will be able to reduce the debt/GDP ratio to 3%, which with any reprieves in 2012 would necessitate additional adjustments for the next year and makes it logical to spread out the unexpected two percentage points over the course of both years. The EU thinks that strategy is reasonable.
However, Vice President of the European Commission, Olli Rehn, warned yesterday that before lowering Spain's deficit requirement we will have to wait until official 2011 deficit figures are confirmed in April and for the 2012 budget to go to Parliament on March 30. Only then can the EU evaluate a proper course of adjustments and acknowledge Spain's explanation about the unexpected 2% increase to their 2011 deficit.
