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March 3, 2012

Spain To EU: No Can Do

As European heads of government assembled to sign the super-strict fiscal treaty the Germans insist on, Spain’s prime minister came with an announcement for the group: Spain plans to break the rules in year one.

Under the agreement, Spain is supposed to slash its budget deficit this year to 4.4 percent of GDP, but Prime Minister Mariano Rajoy says it just can’t be done. Because of deceptive bookkeeping and sloppy practices by the outgoing Socialist government, and various tricky dodges by spendthrift Spanish regional governments, last year’s deficit was much worse than believed, and Rajoy doesn’t see how Spain can make up the difference this year.

He’s probably right, but this is bad news for Europe.  First, it means that Spain is closer to the edge than believed. The plan has been to isolate Greece’s problems from the rest of the zone.  But if Spain is this much worse closer to the cliff’s edge than was expected, Europe’s debt woes could just be beginning.

Second, and even more troubling, Spain’s defiance of the new budget rules could sink Europe’s new fiscal governance system before the ship leaves port. Under the (still unratified) fiscal treaty that theoretically will govern the financial conduct of the euro’s member states, countries that don’t meet their deficit targets face heavy fines. The trouble is, imposing heavy fines on struggling Spain would worsen the very financial crisis the zone is trying to head off.

If Brussels finds Spain in contempt of the new rules and levies huge fines, Spain is that much closer to bankruptcy and the eurozone crisis gets worse. But if it rewrites the rules at the first sign of trouble and gives Spain a pass, the new European fiscal system loses all credibility. If rules can’t be enforced, what good are they?

European monetary policy is in a state of advanced meltdown and European leaders are flat out of ideas. With France’s Socialist Party presidential candidate Francois Hollande growing more strident about the faults of the fiscal treaty and more committed to reopening negotiations as he consolidates his lead in the polls, it seems more and more likely that the chicken wire and spit now holding the system together will be falling apart by midsummer.

Posted in Economics & Business, Europe, Quick Takes
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  • Kris

    In these troubled times, one finds humor where one can. For example:
    “We overspent even more than we thought, so we can’t cut back as much.”
    “If you don’t meet your deficit target, you will be fined.”

  • Jim.

    Call it what you will — the Blue Model, Eurosocialism — we are seeing its collapse.

    It will not survive the decade.

    It may not even survive the year.

  • Corlyss

    BBC asked for listener reaction to the new, new, new, new fiscal pact Fri. when it was announced. Unfortunately the comments were closed by the time I got home. Here’s what I would have put in : HAHAHAHAHAHAHAHAHA

  • Jeremy, Alabama

    This is what happens when a responsible, diligent, hard-working group is joined to a relaxed, dependent, welfare-and siesta-loving group: the hard-workers are called Nazis, or greedy, while the takers announce that austerity cannot be achieved.

    Pull the plug. It turns out that austerity is the natural condition, unless one works to achieve the opposite.

  • Eurydice

    Of course. And as more veils are lifted and new debt-to-GDP numbers are calculated, we’ll find that Greece wasn’t some kind of exception that can be removed by a lumpectomy. And now that even the IMF is making noises about how growth is more important than austerity, what does that mean for the austerity hounds?

    As for imposing fines for bad behavior, this isn’t new. The EU has been fining members since day one for various transgressions – for budget targets, for agricultural overproduction, for labor and immigration issues, for environmental issues and various consumer and commerce issues. I don’t think people realize how much of the member states’ activities are dictated by the EU. These fines can be appealed, so there’s a constant backlog of cases. A couple of weeks ago, Greece was returned 35 million Euros for a wrongfully applied agricultural fine from back in 2005. I suppose this is a good way to keep all those lawyers and bureaucrats employed.

  • Eurydice

    @#4 – Well Jeremy, the truth is somewhere in between “welfare and siesta-loving groups” and “greedy Nazis.” The system of sticks and carrots that the EU has devised to create the Eurozone has caused profound dislocations within the member states. For example, agricultural subsidies, penalities and quotas have transformed Greece from an exporter of food to an importer. Greece even has to import lemons and onions, of all things. I’m sure there are social scientists out there who’ll enjoy many years of studying the effects of EU engineering.