More strain in Spain

Spain is in a very knotty financial situation currently, one that will take a desperately long time to rectify. Not helping its predicament are signs that the economy is back in recession. According to the Bank of Spain, growth will contract by 1.5% this year. For those ministers responsible for putting Spain back onto a more solid fiscal footing, their task is rendered even more difficult by the fact that achieving a deficit target for this year of 4.4% of GDP is almost impossible given the 8% shortfall recorded in 2011. Although Prime Minister Rajoy has already announced a package of measures worth EUR 15bln, we will need to wait for another couple of months before a comprehensive budget is presented.

Worryingly, it would appear that there is already some friction between the two ministers charged with righting the government’s parlous balance sheet. Last week Budget Minister Montoro called for the EU to relax the 4.4% deficit target for 2012, arguing that it was unrealistic. However, yesterday we had the Economy Minister, de Guindos, claiming that the new government had a very strong commitment to austerity. Last week, Deputy Prime Minister, Saenz de Santamaria, declared that Spain was determined to achieve the existing target.

It is just possible that these are not necessarily conflicting positions. Spain’s new government does appear quite committed to fiscal consolidation, but there is a growing recognition that it cannot pull back too sharply or it risks sending the economy into a death-spiral not unlike Greece. Europe must cut Spain a little slack.