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Spain risks joining Greece at bottom of deficits class

Source: Financial Times - Tue 2th Feb 2010

Elena Salgado, the normally sprightly Spanish finance minister, could not disguise her discomfort when she announced an austerity plan designed to slash successive budget deficits and restore the country's credibility on international markets.

She had good reason to be uneasy. The table of figures she presented on Friday showing Spain's "fiscal consolidation path" through €50bn of savings over four years had some embarrassingly blank spaces for projected budget deficits in 2010, 2011 and 2012.

Spain, the empty boxes tell us, wants to reduce its total public sector deficit from 11.4% of gross domestic product in 2009 to the European Union target of 3% of GDP in 2013, but is not sure if it can - or how to do it.

Central government intends to play its part, but budget cuts need the support of autonomous regions, local authorities and trade unions. They may not co-operate.

It is bad enough that investors have lost faith in Greek economic policy but, if the eurozone is to remain intact, it is essential that Spain swiftly restores order to its public finances.

As one of the "big four" eurozone economies - with Germany, France and Italy - Spain is four times as large as Greece, five times the size of Ireland and six times that of Portugal.

Yet Spain's immediate prospects are dismal. It is the only big developed economy not expected by the International Monetary Fund to record year-on- year growth in 2010. It is forecast to shrink 0.6%.

The divergence from the rest of Europe is remarkable. Yesterday a closely watched survey showed that overall eurozone manufacturing grew in January at its fastest rate in two years. In Spain, however, activity declined for the 26th month running, according to the Markit eurozone manufacturing purchasing managers' index.

None of this would be too alarming for Spain's European partners - or for the sovereign bond investors who pushed up the cost of Spanish borrowing last week - if the Socialist government of José Luis Rodríguez Zapatero, the prime minister, had got to grips with its fiscal crisis.

It has done nothing of the sort. From the start of the crisis almost two years ago until the present day, Mr Zapatero and his cabinet have not only spent freely on emergency job creation plans but they have also been persistently over-optimistic on Spain's economic prospects, which makes the task of persuading Spaniards to make the necessary financial sacrifices particularly hard.

Ms Salgado's 2009 budget deficit figure of 11.4% of GDP, for example, was almost 2 percentage points higher than the official estimate of 2 weeks earlier.

Even her incomplete deficit reduction plans depend on economic growth forecasts - rising to about 3 per cent a year in 2012 - that some independent economists regard as unrealistic. So it is that, however unfairly, Spain is lumped together with Greece at the bottom of the eurozone class.

Because Spain entered the crisis with its budget in surplus and its financial system in good health, Mr Zapatero and Ms Salgado are able to point out that its accumulated government debt is well below the European average and is expected to peak at a manageable 74% of GDP in 2012.

It was "shocking", Mr Zapatero complained with some justification at the World Economic Forum in Davos, that Spain should be criticised by the likes of the US, the UK and Germany when it had so far avoided spending a cent of state money on bank rescues and had seen one of its own strong banks - Santander - pick up some of the pieces of the weakened British banking system.

Unfortunately for Spain, that does not answer the question now topmost in the minds of investors and economists interested in Europe: can Spain control its budgets and become competitive again within the constraints of the single European currency?

Mr Zapatero insists it can - "We are a serious country and we fulfil our promises," he said in Davos - but he and Ms Salgado still have much to prove.

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