Spain is right to abandon a suicidal 4.4% deficit target

By Juan Pedro Marín Arrese, in Madrid | Mervyn King sharply pointed out that banks are global in life but turn national in dying. The opposite can be applied to deficit targets. When you enjoy a comfortable budgetary position, you are able to fix them at your own wish. Brussels may get the sulks if you go beyond certain limits and fall into excessive overruns. But it can do very little to twist your will in practice. The scenario changes dramatically if you happen to be in trouble. Brussels will mercilessly impose on you a set of stringent conditions threatening to let you adrift in case you might deviate from them.

Who determines whether you are in trouble? The market is the one, of course. You may run a substantial deficit as the US, or the UK, and yet escape any censure.

Spain, for all its current budget discomfiture, has far from piled a debt position spinning out of control. Even if it faces a significant risk premium that feeds into higher than warranted interest rates, markets do not seem to be particularly worried about its prospects. Massive liquidity injected by the ECB helps to subdue any concern on its appalling budget record.

The Spanish prime minister is right to abandon a 4.4% target that would wreak havoc on economy. With a rate of activity reckoned to fall by 1.7 % this year, it would be suicidal to depress it still further by slashing public expenditure beyond any reasonable measure. Guardians of fiscal orthodoxy will be forced to accept that fact. But should financial instability re-emerge, pushing Spain into deep waters, they are up to impose a hard cure of austerity no matter the damage inflicted. Deficit targets are a national matter, as Mr Rajoy claims. So far markets believe the long-term budgetary situation to be broadly sustainable.

* Juan Pedro Marín Arrese is an economist.