Spain as Test for European Fiscal Pact 'Has Failed'

Spain was the first test of the euro zone's determination to impose tight discipline in its new fiscal regime, and it has failed, Juergen Stark, a former executive member of the European Central Bank's board, told CNBC on Friday.

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E.U.

Earlier this month Spain found itself in a standoff with the European Union after it announced that it was revising its budget deficit target upwards for this year from a previously agreed upon 4.4 percent of gross domestic product to 5.8 percent.

Officials in Brussels finally agreed to let the country aim for a deficit of 5.3 percent of GDP.

The new fiscal treaty agreed to by 25 of the European Union's 27 members sets tougher terms for countries that exceed their debt and deficit limits, in a bid to make members of the euro zone introduce tough reforms needed to rein in public borrowing.

"It was considered to be the game changer, and I still hope that it will be the game changer, however the first test has failed. The first test was Spain," Stark told CNBC in an interview on the sidelines of the Ambrosetti workshop, an annual gathering of economic experts in Italy.

Later on Friday, the Spanish government will revealdeep austerity measures to try to dig the country out of debt, despite a crippling strike that took place on Thursday.

But analysts say that Spain, which entered recession earlier this year and which has an unemployment rate of more than 22 percent, is unlikely to hit even the upwardly-adjusted budget deficit target.

Ministers made a compromise on the Spanish request "not to deliver what they had committed to", he said.

"I think this is not a good signal for the future, but I still hope that it [the fiscal compact] will change the attitudes of governments in the euro area."

'Moral Hazard'

The main problem is that countries in the euro zone need to adjust their economies, Stark said, and parliaments need to be able to push through painful reforms in order for real progress to be made.

He said that the so-called "firewall" – a combination of the euro zone's temporary rescue fund known as the European Financial Stability Facility (EFSF), and the permanent European Stability Mechanism (ESM) fund – exists only to avoid or limit contagion in the case of another "accident" in the euro zone. The firewall will not solve the euro zone’s problems, he said.

"We talk about billions now, on the European side but also on the side of the [International Monetary Fund]. Is this a solution, to add new figures to this discussion?" he asked.

Finance ministers in the euro zone are likely to approve an increase in the firewall's firepower, boosting it to around 940 billion euros ($1. 25 trillion) from the current 500 billion euros, according to Reuters, which quoted a draft statement by the ministers.

The ECB has made bold decisions, "in real time," in order to keep markets calm during the crisis, and those decisions were "appropriate," said Stark.

He agreed with the central bank's Long-Term Refinancing Operations but said he "did not expect" the low rates of 1 percent at which they were provided, nor the volume of the operations. He added that the ECB might actually act as a deterrent to structural reforms, as it risks being seen as the solution to the debt problems rather than as an aid for exceptional situations.

"The ECB has helped to buy time, but the issue is, to buy time for what purpose?" said Stark, who resigned last year in September from his post for personal reasons, amid speculation that he did not agree with the ECB's bond-buying program.

"This can also create moral hazard. The ECB is there, the ECB will help in any case, so why to adjust the fiscal position, why go ahead with structural reforms which, in many cases, will be painful?"

He also said more transparence was needed in the medium term about the voting decisions made by individual members of the ECB's Governing Council.