Spain's Two Finance Ministers Clash on Budget as Economy Shrinks

 

Economy Minister Luis de Guindos said Spain is sticking to its deficit goal even as the economy shrinks, underlining a rift in the month-old Cabinet over whether the nation can halve its shortfall during a recession.

De Guindos said Spain's government has an "absolutely inescapable commitment" to austerity, when asked whether he agreed with Budget Minister Cristobal Montoro's call on Jan. 22 for the European Union to ease Spain's 2012 deficit goal to take the shrinking economy into account.

Spanish Prime Minister Mariano Rajoy divided the Finance Ministry in two after coming to power in December, putting People's Party veteran Montoro in charge of the budget and giving de Guindos, a former Lehman Brothers Inc. banker, responsibility for the economy. Rajoy didn't make either of them deputy prime minister, as the last two finance chiefs were, saying he would oversee economic issues himself.

"It's a trial of strength to see who's really in charge of economic issues, and Rajoy will just let it happen," said Ismael Crespo, a political scientist at the Fundacion Ortega- Maranon research institute in Madrid, who was head of the state polling unit when the PP was last in power.

"Montoro is speaking more to the public and Guindos is speaking more to the foreigners," he said in a telephone interview. Economy Contracting.

Spain's government needs to rein in its borrowing costs and convince investors it can cut the euro region's third-largest budget deficit even as the economy enters its second recession in two years. The Bank of Spain said today the economy contracted in the fourth quarter and may shrink 1.5 percent in 2012, adding to pressure on Rajoy, who won the Nov. 20 election on a pledge of creating jobs.

Budget Minister Montoro, a 61-year-old public-finance professor and lawmaker for Seville, said on Jan. 22 the EU should ease Spain's budget target of 4.4% of GDP this year as the goal was set by the previous government, which expected the economy to grow 2.3%. The deficit amounted to 8% of GDP last year, overshooting the 6% target.

"If Brussels doesn't adapt the stability program to the new scenario of a recession, it won't be realistic and not only will Spain sink but the whole of Europe," Montoro said in an interview with La Vanguardia newspaper in comments confirmed by a Budget Ministry spokeswoman.

Asked about the comments yesterday as he arrived at a meeting of euro-region finance ministers in Brussels, de Guindos, 52, said: "What I'm telling you is that the commitment of the Spanish government to austerity is without a doubt very superior to that of the previous government."

De Guindos, who described Montoro as his "mentor" and "friend" when he took over as minister in December, holds a news conference today in Brussels after the EU finance ministers meeting ends.

The comments yesterday weren't the first time the pair has given differing messages in the past week. De Guindos, who is not a member of parliament, wrote in the Wall Street Journal on Jan. 19 that budget cuts were "not a choice."

The same day Montoro was quoted as telling the Financial Times Deutschland newspaper that the nation may miss its budget goal.

The two gave conflicting reports of the 2011 deficit on Jan. 2, as de Guindos said the overshoot may have been even greater than the government's first estimate.

Montoro's comments yesterday also clashed with those of Deputy Prime Minister Soraya Saenz de Santamaria, who said on Jan. 20 that the government was "determined" to meet the existing target. A spokesman at the prime minister's office, who declined to be named in line with policy, had no further comment on Montoro's remarks yesterday.