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Spain claims victory in EU deficit tussle

Spain's Prime Minister Mariano Rajoy makes his speech during a campaign rally in Almeria, March 10, 2012.

Francisco Bonilla/Reuters/Francisco Bonilla/Reuters

Spain has agreed to demands from its euro zone partners that it limit the country's budget deficit this year to 5.3 per cent of gross domestic product, but claimed victory in its political tussle with the European Union after winning some concessions.

"Spain is completely committed to the budget adjustment," Luis de Guindos, Spain's economy minister, said Tuesday, adding the new target set in Brussels "will be accepted by the government."

On Monday, euro zone finance ministers had rejected Spain's unilateral deficit target of 5.8 per cent of GDP, which Prime Minister Mariano Rajoy boasted two weeks ago was a matter of national sovereignty, and cut it by half a percentage point. That will mean extra spending cuts or tax raises of about €5-billion, on top of the €15-billion already expected in the budget later this month.

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However, the outcome of the negotiations is being interpreted as a victory in Spain because EU leaders softened the original target of 4.4 per cent of GDP agreed with the former, Socialist government of Jose Luis Rodriguez Zapatero.

Olli Rehn, the EU's senior economic official, also accepted Mr. Rajoy's arguments that the incoming centre-right government had inherited a big deficit overshoot in 2011 from its predecessors and risked deepening an imminent recession if it imposed too much austerity.

"The Spanish government has won this battle," Jose Manuel Garcia-Margallo, foreign minister, told the Cadena Ser radio station Tuesday. EU leaders, he said, had treated their Spanish counterparts as serious interlocutors. "They gave us the maximum possible."

Mr. Rajoy and his government have always said they will cut their public sector deficit to 3 per cent of GDP by 2013, in accordance with EU rules, and both sides reaffirmed this in Brussels.

Spain has not yet said exactly how it plans to meet the deficit targets because it has delayed setting a budget until after the March 25 election in Andalusia, a region that Mr. Rajoy's Popular party hopes to win from the Socialists before another round of nationwide austerity.

Economists and analysts say that if Spain cuts spending or raises taxes too abruptly, it risks pushing the economy into a downward spiral in which the economy shrinks and higher tax rates will not translate into more tax revenue for the state.

"We remain concerned that it will be very difficult for Spain to achieve this level of fiscal consolidation, especially given that the economy has already moved into recession," Barclays Capital said in an analyst's note Tuesday.

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