EU Commissioner for Economic and Monetary Affairs and the Euro Olli Rehn on Monday signaled that he might seek to ease Spain’s targets for cutting its budget deficit next month, in a retreat from the “austerity-first” policy demands driving the Spanish economy into recession.
EU officials will make a decision on the best pace for Spain’s budget consolidation process when they deliver a scheduled assessment of the program next month, Rehn said at a press conference in Madrid.
“If there has been a serious deterioration in the economy, we can propose an extension of a country’s adjustment path,” Rehn said as he sat alongside Spanish Minister of Economy and Competitiveness Luis de Guindos. “That’s what we did last year in the case of Spain.”
Spain’s economic contraction accelerated in the final three months of last year as the austerity program dictated by EU officials bit into domestic demand and eliminated 850,000 jobs during Spanish Prime Minister Mariano Rajoy’s first year in office.
That program will need to be intensified if Spain is to meet its target for this year, the Bank of Spain said in a report last week.
The Spanish government probably missed its goal of lowering the budget gap to 6.3 percent of GDP last year, Spanish Minister of Finance and Public Administrations Cristobal Montoro said last month. This year’s target is 4.5 percent.
GDP probably fell 0.6 percent in the fourth quarter, twice the pace of contraction in the previous three months, the central bank said.
The Spanish National Statistics Institute will publish the first official estimate of fourth-quarter output tomorrow.
“It is important that there is an appropriate and growth-friendly mix of expenditure cuts and tax increases,” Rehn said.
He said he could not confirm if last year’s budget gap exceeded 7 percent and said the EU will update its assessment on Feb. 22.
Rajoy is seeking to avoid a full bailout as a slump in the eurozone’s fourth-biggest economy enters its fifth year, undermining efforts to meet EU targets.
The European Central Bank’s pledge to provide support to nations struggling has brought down borrowing costs, easing the pressure on Rajoy.
That shift must not lead to the government slowing the pace of economic reform, Rehn said.
“The labor market reform is indeed crucial,” he said. “It is also important that Spain will continue and intensify the work to make it easier for businesses to start up and operate and compete throughout the country.”