Irony, thy name is Spain
Last week, 25 of 27 nations signed a new fiscal compact establishing penalties for nations exceeding 3% deficits beyond 2013. A day later, Spanish Prime Minister Mariano Rajoy—a signatory to the pact—boosted Spain’s 2012 deficit target to 5.8% of GDP from 4.4%.
Ironic, no doubt. Yet while Mr. Rajoy’s timing could be surprising, the details surely weren’t. Spain—a country that’s implemented noteworthy reform and has had good success in the bond markets recently—ran a deficit of 8.5% of GDP in 2011. Since Q4, economic conditions there haven’t exactly been great. And now, it seems government GDP forecasts have caught up to data and markets: The government now projects slight contraction in 2012—the primary driver of the increased deficit target.
So Spain isn’t exactly cutting a new profligate, freewheeling path. Regional budgets—a big driver of recently elevated deficits—will not be adjusted. In fact, Rajoy was quick to note Spain still targets a 3% deficit by 2013—thereby avoiding the EU’s fines. (As an aside, why EU leaders thought it would make sense to force a country with an above-target deficit to spend more on fines is beyond us.)
Some suggest this will “test” the EU’s budget plan, since a similar situation would subject Spain to fines post-2013. Yet EU leaders were quick to step back from this idea, noting they’d look at the underlying cause—and if Spain’s been “blown off course by events outside its (the government’s) control,” the transgression could be forgiven. But excluding the likes of North Korea, virtually no government directly controls GDP. In theory, Greece could argue its elevated deficits the past few years were partly out of the government’s hands. (Not exactly the sitting government’s fault the past 60 years of socialism have resulted in a less-than-competitive economy.) Eurozone finance ministers gather Thursday, and they’ve suggested Spain will be on the docket for discussion. Our suggestion: Think more about the concept of the penalty than Spain’s deficit.
Ultimately, when you consider Spain’s reforms and the characteristics of its debt, it doesn’t seem likely Madrid will be home to a Greek redux any time soon.
Tempest in Budapest
On Wednesday, the European Commission (EC) gave Hungary one month to amend two controversial laws. Unless Hungary restores the data protection authority’s independence and abandons plans to force 274 judges’ early retirement, legal action will follow. Which seems likely—a ruling party spokesman has already said Hungary will take a “determined” stand in court.
Still in flux is Hungary’s central bank law. In January, Prime Minister Viktor Orban promised to amend the law, which would merge the bank with the financial regulatory agency and let Parliament influence monetary policy, but the government hasn’t provided a draft. The EC has asked for a status update, and Hungary’s economy minister responded with a request for the EC’s amendment proposals.
But whether action follows remains to be seen. Given Hungary’s defiance over the judicial and data protection laws, it’s tough to imagine legal threats alone make it cave on the central bank law. Remember, Orban’s a nationalist with a heavy fascist tilt—placating the “international Left,” as he calls Brussels, isn’t high on his to-do list. When he said Parliament would amend the central bank law, he was in bailout negations with the EU and IMF, who said Hungary wouldn’t get assistance if the law held. But those talks were shelved indefinitely when Hungary’s financial situation improved a bit. Without that need for urgent aid, there’s likely little incentive to adjust the law. But the EC likely won’t back down either, so expect more jousting from here.