Tags: EU | Rehn | deficit | Spain

EU's Rehn Sees Spanish Deficit Cuts Hurting 2014 Economic Growth

Friday, 03 May 2013 09:42 AM

The European Commission said Spain’s budget deficit, currently the widest in the European Union, will increase in 2014 unless the government implements further austerity measures that may damp the nation’s growth outlook.

“Taking into account the additional measures of fiscal consolidation required to underpin the budgetary target for 2014 may lead to a downward revision of growth compared with the current forecast,” EU Economic and Monetary Affairs Commissioner Olli Rehn told reporters in Brussels.

Rehn said the commission’s forecasts released today don’t factor in Spain’s most recent budget plan. Gross domestic product is seen shrinking 1.5 percent this year before growing 0.9 percent in 2014, the commission said. The budget gap will narrow to 6.5 percent of GDP in 2013 and then widen in 2014 to 7 percent.

While the commission is due to issue a full assessment of Prime Minister Mariano Rajoy’s plans on May 29, Rehn reiterated the premier’s request for two more years to reorder Spain’s public finances is “reasonable.” The government approved measures on April 26 that focus on boosting growth to end a six-year slump in the euro region’s fourth-largest economy.

Budget Plan

The government aims to shrink its budget shortfall to 6.3 percent of GDP this year from 10.6 percent last year, and to 5.5 percent in 2014 in order to reach the EU limit of 3 percent of GDP by 2016. Excluding aid to recapitalize Spain’s banks, the shortfall was about 7 percent last year. The government has cut its growth estimates as it sees output contracting 1.3 percent this year before expanding 0.5 percent in 2014.

After implementing the toughest austerity measures in Spain’s democratic history, Rajoy ruled out another value-added tax increase or reduction in public wages even as he extended a temporary income-tax increase and announced environment-related levies.

International Monetary Fund Managing Director Christine Lagarde said she supported the plan, further encouraging officials in Brussels and Berlin to back away from austerity-first policies. The commission sees Spanish unemployment rising to 27 percent this year from 25 percent in 2012 before falling to 26.4 percent in 2014. The government predicts a peak of 27.1 percent this year.

The yield on Spain’s 10-year benchmark bond fell below 4 percent today for the first time since October 2010. That compares with a euro-era high of 7.75 percent in July before the European Central Bank pledged to defend the single currency. The ECB cut its benchmark lending rate yesterday to a record low 0.5 percent to try to spur the euro-region economy out of recession.

The commission cut its forecasts for Spain’s public debt burden, while predicting borrowing will top the euro-region average in 2014 for the first time in the currency’s history. Debt will surge to 91.3 percent of GDP at the end of the year from 84.2 percent in 2012 and to 96.8 percent next year, it said. That compares with previous forecasts of 95.8 percent of GDP for 2013 and 101 percent for 2014.

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The European Commission said Spain's budget deficit, currently the widest in the European Union, will increase in 2014 unless the government implements further austerity measures that may damp the nation's growth outlook.
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Friday, 03 May 2013 09:42 AM
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