Until Spain’s new budget shows austerity muscle, Brussels must tread carefully

By Juan Pedro Marín Arrese, in Madrid | Once again Spain is riding the storm. The sharp reduction witnessed in risk premium over the last months is vanishing. A sharp budget deficit coupled with gloomy growth prospects and soaring unemployment rates are melting confidence down. Claims on a rather subdued debt position fail to impress markets. Fear that financial situation might end up in a plight is deeply ingrained.

Worries on the lack of control over regional budgets are far from dispelled by promises to usher in a stiffer discipline on them. Results can only be judged on delivery. In the meanwhile, few believe that central government will be able to curb regional expenditure in a substantial way. Its readiness to bear all the brunt from last year deviation and to bail out any failing public authority, transforms  pledges to redress imbalances into largely overdone assurances.

Madrid clash with Brussels over the deficit target has turned to be an ill-judged move. It is due to fuel a spell of mistrust over Spanish accounts reliability in the worst potential scenario. The European Commission should refrain from taking action that might be interpreted as putting into question Spain’s figures. But Madrid is bound to avoid any doubt on its determination to follow to the line a solid fiscal consolidation path.

The incoming budget, to be tabled on Friday, will provide a clue on that firmness of purpose. Should it falter to deliver a staunch reduction in expenditure, credibility on attaining the deficit target will be severely jeopardised. And one fails to see how that goal might be achieved unless tough measures are taken to slash significant outlays like unemployment benefits, pensions, health services or civil servants salaries. They amount to hard decisions for any government in place. But failure to do so might unravel any hope to escape from utter discomfiture.