Spain Versus the Budget Inquisition
The EU's legalistic focus on deficit numbers is to no one's benefit.
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The ink isn't dry on Europe's new pact for common fiscal governance, but some of the signatories are already challenging the new rules out of Berlin—er, Brussels. Spain is the offender this time, but others will soon follow. As they do, we'll find out whether the pact will safeguard the common currency, or merely enshrine bad economic policy into law.
Spanish Prime Minister Mariano Rajoy's crime against Europe's Budget Inquisition was to raise his country's 2012 deficit target to 5.8% of GDP from 4.4%. (Madrid's deficit ended 2011 at 8.5% of GDP.) Mr. Rajoy says Spain's economic contraction has made fiscal consolidation tougher than expected, but insists his government will meet 2013's deficit goal of 3% of GDP.
This isn't exactly the first time a euro-area government has failed to meet its EU deficit obligations. But the timing of Mr. Rajoy's announcement last week, coming a day after he and 24 fellow EU leaders signed off on the new fiscal pact, makes his transgression a pointed one.
It's not clear whether Mr. Rajoy's breach will provoke the Commission to seek punishment. The text of the fiscal pact authorizes sanctions to be imposed against budget scofflaws. Then again, somebody in Brussels must be asking himself whether it really makes sense to penalize an excessive deficit by imposing fines that increase the deficit.
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Bloomberg
Prime Minister Mariano Rajoy
But regardless of the Commission's next move, the Spanish decision highlights the gap between the EU's aspirations for its fiscal union and reality. Spain is enduring an economic convulsion barely less serious than Greece's. Spanish unemployment, at 23.3% in January, is the highest in the EU; almost half of Spanish youth are out of work.
That's a sign that Spain, like the rest of Europe, needs pro-growth reform. And the good news is that Madrid has more room for budgetary maneuver than its Club Med friends, thanks to public debt of only 67.8% of GDP, one of the lowest ratios in the developed world. Add to that a little help from Mario Draghi, and the Spanish Treasury has already secured some 40% of its targeted borrowing for the year.
That puts the onus on Mr. Rajoy to deliver the right kinds of economic reforms. The Prime Minister deserves credit for pushing through unpopular changes to Spanish labor laws last month. Reducing the cost of firing employees makes it easier for employers to hire them.
But taxes in Spain remain too high, and Mr. Rajoy didn't help by imposing "temporary" levies a week after entering office in December. A paper published last week by the Washington, D.C.-based Cato Institute shows that Spain's marginal income tax rates are now higher at almost every income level than those of its Western European peers.
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One danger of fiscal union is that it will entrench bad economic policies and make good ones harder to put into action. Sound national fiscs are an important component of a successful monetary union. But there's no better way of improving the overall budgetary picture than by growing the overall economy. For that, Spain needs lower tax rates, less regulation and more incentives to invest—whatever the mandarins in Brussels, Berlin or Paris might say.
http://online.wsj.com/article/SB10001424052970203458604577265071009361432.html
“Los dos guerreros más poderosos son paciencia y tiempo.” (León Tolstoi)