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According to an interview in a Barcelona newspaper over the weekend, Budget Minister Montoro has urged the EU to give Spain some breathing room with respect to the achievement of its fiscal targets. This morning’s Q4 GDP figures confirm that such a reappraisal is urgent. The economy contracted by 0.3% in the final quarter of 2011 and the Bank of Spain expects that GDP will decline by 1.5% this year. This is in contrast to the 2.3% growth assumption that was embedded in the previous fiscal deficit target for 2012 of 4.4%. With the deficit last year well above target at 8% of GDP, there is very little realistic prospect of the government meeting this 4.4% objective. The new government of Prime Minister Rajoy has already announced a package of fiscal measures worth EUR 15bln, although the full budget will not be revealed until March. There is also the question of how the critical Andalusian regional election in March will affect Rajoy’s appetite for further fiscal austerity.
Europe will need to cut Spain some additional slack, because to chop the fiscal deficit so savagely in a recession is extremely dangerous and risks condemning the country to depression-like conditions.
