The Germans are always hesitant to endorse financial aid, because they know that as soon as the stimulus payments start flowing, governments do not monitor their budgets as closely as they should. France has failed to meet its budget goal, and it is very likely that Spain will not meet theirs either.
The situation is dire for Spain, because the EU has already allowed us to stretch the deficit goal from 4.5% of GDP to 6.5% of GDP. Budget review data from the past several months have sounded the alarms. In the first seven months of the year, the debt/GDP ratio is even more than it was last year.
The main reason is that revenues are less than expected. Yesterday, the Bank of Spain cautioned that the nation will struggle to meet income targets if more money does not come by the end of the year. Montoro has a hard task in front of him. The analysts estimate that falling revenues could cut GDP by up to one percent. Another reason that Spain might not meet its goal is that 2012 tax cuts were applied and they won't be applied again.
Moreover, the tax system has shown signs of slowing down for a while. We have the weakest revenue potential of all European countries, perhaps because most taxes are levied against workers and producers, overall tax rates are high and the level of fraud and black market sales are surging.
Tax reforms have been delayed and will not be effective anyway if personal income tax rates from three years ago are reinstated. Montoro's plan is not likely to work, but he's wedded to it and it looks like he will in fact apply several 2014 taxes later this year in order to try and help pay down an ever-increasing budget imbalance.
