Spain belatedly joined the euro zone’s austerity bandwagon on Wednesday in response to a widening debt crisis as the European Commission sought an unprecedented right of prior review of national budgets.
Spanish Prime Minister Jose Luis Rodriguez Zapatero said Madrid would slash civil service pay by 5 percent this year, freeze it next year, cut investment spending and pensions and axe 13,000 public sector jobs in a drive to meet EU deficit targets.
“We have to make a singular, exceptional and extraordinary effort to reduce our public deficit and we have to do it when the economy is starting to recover,” he told parliament.
The announcement came two days after euro zone governments, the European Central Bank and the IMF agreed on a US$1 trillion rescue package to stabilize the euro in exchange for pledges by highly indebted countries to pare down their deficits.
The Portuguese finance minister said his government had picked a set of new measures for deeper spending cuts and would discuss them with the opposition before announcing them.
Portuguese Prime Minister Jose Socrates will meet the leader of the main opposition party yesterday to discuss the additional austerity measures, which the Cabinet may approve in a weekly meeting later the same day.
US President Barack Obama, who has intervened in the euro zone crisis because of risks to US banks and economic growth, telephoned Zapatero on Tuesday to press for “resolute action” to reform the Spanish economy, the White House said.
Spain enjoyed more than a decade of rapid growth fuelled by EU aid and low euro interest rates, and long boasted a healthy budget balance and low debt. But public finances were severely hit by the collapse of a construction bubble in the 2007-2008 credit crisis. The economy has lost competitiveness and unemployment stands at 20 percent.
After months in denial about the need for tougher measures, Zapatero announced an estimated 15 billion euros (US$19.05 billion) in additional savings this year and next, sparking anger from trade unions usually on good terms with his Socialist party.
In a drive to tighten fiscal discipline and prevent a re-run of Greece’s fraudulent statistics and ballooning deficit, EU Economic and Monetary Affairs Commissioner Olli Rehn unveiled proposals for greater budget coordination on Wednesday.
The key plank would make governments submit their draft budgets to Brussels for scrutiny and peer review by other member states before they are adopted by national parliaments. The Commission has no power to change national budgets but it would gain more time to influence the content upstream.
Rehn said it would enable the Commission and the European Parliament to “identify economic challenges for the EU and the euro zone” at an earlier stage and recommend changes.
However, it is a potential challenge to fiscal sovereignty and may face watering-down by euro heavyweights France and Germany.
The Commission also proposed a stricter use of existing sanctions, including a cut-off of EU funds to countries that violated the bloc’s budget rules.
In a first reaction, German Chancellor Angela Merkel said the proposals went in the right direction and were a means of transparency without being an attack on national budget rights. But she said changes to the EU treaty were still needed to enforce the bloc’s budget discipline rules more strictly.
French Finance Minister Christine Lagarde suggested on Tuesday that each government should put its stability and growth program — a three-year fiscal plan — to a parliamentary vote before sending it to Brussels. That could make it harder for EU officials to unpick budget measures.
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