Insight

Rajoy's rebellion

General Policy
  • Spanish Prime Minister Mariano Rajoy went to Brussels last week to announce that Spain would not meet its deficit reduction targets for 2012. After a week of negotiation, Spain has talked its European partners into accepting a target of 5.3% instead of the previous 4.4% commitment.
  • At face value, the Eurozone’s new system of fiscal discipline appears to have fudged its first major test of will. But the combination of inflexibility and weak enforcement in the Eurozone’s new rules is likely to ensure that this is only the first such compromise.
  • Nevertheless, Rajoy has been at pains to say that Spain believes in tough European budget rules. Rajoy is still proposing the toughest austerity package of any major European economy. He is still proposing to cut more spending in a year than Mario Monti aims to cut in three in Italy.
  • The most important thing about his modest rebellion may be that he did it not just in the name of economic reality, but of Spanish sovereignty. Rajoy is calculating that Spaniards will live with austerity, but not with austerity imposed from Brussels or Berlin. For advocates of closer fiscal union in the Eurozone, this is a reminder of the political problems ahead.

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