Spanish Standoff Over Budget Cuts Continues

The disagreement between Spain and the rest of the euro zone over its budget deficits shows no sign of resolution after euro zone finance ministers called on Spain to revise its budget plans.

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The dispute is quickly becoming a test of the euro zone’s ability to impose targets on individual countries.

Newly elected Spanish Prime Minister Mariano Rajoy less than two weeks ago flouted Brussels-imposed budget deficit targets of 4.4 percent of GDP this year. He stated that the new Spanish target would be 5.8 percent.

The Eurogroup of euro zone finance ministers said Monday that the country’s target would now be 5.3 percent.

The group said in a statement: “The timely correction of the excessive deficit should be ensured by an additional frontloaded effort of the order of 0.5 percent of GDP, beyond what has already been announced by the Spanish authorities so far, and by an early adoption and strict implementation of the new mechanisms in the Budget Stability Law on the monitoring and control of budget compliance at different levels of government. The Spanish government expressed its readiness to consider this in the further budgetary process.”

Spain’s deficit for 2011 was much worse than expected at 8.5 percent – 2.5 percentage points higher than planned. The country is struggling with the after-effects of a housing bubble that burst spectacularly during the credit crisis, leaving its banking system in trouble. Spain’s unemployment rates are the highest in the euro area, and it is facing recession this year.

As the euro zone’s fourth-largest economy, its survival is even more vital than that of Greece, which has dominated the markets in recent months.